One of the UK's largest buy-to-let bank is in deep trouble. The Bradford and Bingley has just issued a surprise profits warning. Understandably, investors were not happy. The share prices is down around 25 percent so far today. Since the beginning of the year, it has fallen 76 percent.
The reason for the loss of investor confidence is easily understood - it is their balance sheet that causes so much concern.
The bank is deeply implicated in the buy-to-let bubble. With arrears rising, and collateral values collapsing, the bank must be causing sleepless nights over at the FSA. A staggering 58 percent of its mortgage lending went to the buy-to-let brigade. A further 22 percent of lending went on self-certified loans.
The arrears picture is also awful. The lender revealed that its annualised bad debt impairment charge has more than quadrupled from £23m to £108m after just four months of the year. Moreover, everyone knows this number can only get worse as the buy-to-let market collapses further.
The bank also had to take another £89 million of writedowns on its credit market assets. So far, the B$B has written off around £300 million. Despite these catastrophic losses, the bank still has a £944 million exposure to so-called "toxic assets.
The problems at the Bradford and Bingley are just the end result of years of reckless lending. If banks fuel a housing bubble, should anyone be surprised that it runs into difficulties when the bubble collapses?