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Major banks in new crisis
Nick Goodway, Evening Standard2 Jun 2008
Britain's banks faced a black Monday today as a £4 billion shares sell-off was prompted by a major lender warning of plunging profits.
Bradford & Bingley's drastic trading statement said more customers will fall into arrears and at one point it was forced to suspend shares. When trading resumed they fell by 25 per cent to 66p - dragging down the value of the "big five" banking giants.
B&B, the country's biggest buy-to-let lender, said it expected profits to be badly hit because house prices were falling far more than expected.
The former building society is planning a rights issue to raise money because it is struggling to obtain cash in the credit crunch.
Today it slashed the price of the shares it will sell in the offer - prompting two other banks with a similar strategy to issue "don't panic" pleas to investors.
HBOS and the Royal Bank of Scotland are both trying to raise a total of £16 billion through rights issues. Their shares both fell sharply. HBOS - currently seeking £4 billion - dropped 34p to 366p. RBS, whose £12 billion rights issue closes this Friday, fell 5p to 2231/2p. Alliance & Leicester, also a former building society, dropped 201/2p to 4043/4p.
Analysts were particularly concerned that profits at Bradford & Bingley depended so much on buy-to-let mortgages, which are now seen as hugely risky to financial institutions.
The lender confirmed it was selling 23 per cent of its business to private equity firm Texas Pacific Group to raise £179 million. It said it had racked up an £8 million pre-tax loss in the four months to the end of April after suffering a further £89 million hit from the credit squeeze and a £36 million charge from increasing arrears.
Meanwhile, RBS said that buy-to-let mortgages made up only one per cent of its UK mortgage business while HBOS said "current trading remains satisfactory".
However, RBS's black Monday misery was compounded as the Office for Fair Trading said it was investigating whether it had colluded in price-fixing with Barclays in the provision of loan products to professional services firms.
Barclays said it contacted the OFT in March after it became aware that certain members of the professional services team in its commercial banking operation had "been approached from outside Barclays in a manner which we regarded as inappropriate".
These concerns were sparked by alleged approaches from RBS to Barclays over sharing information such as the cost of loans to legal and accountancy firms, according to a newspaper report. Barclays has applied for leniency, meaning it could be spared a fine if the OFT uncovers any wrongdoing. An RBS spokesman said: "As the OFT has stated, they are in the early stages of an investigation.
We are, as always, co-operating fully with the regulatory authorities and it would therefore be inappropriate to comment further."
Despite today's bad financial forecast, there was no sign of the kind of run on Bradford & Bingley which took place at Northern Rock last summer.
City analysts said that Northern Rock was forced to apply for emergency funding from the Bank of England and ultimately nationalised because it relied on the wholesale money markets for its funding.
Bradford & Bingley's chairman Rod Kent, who took over the day-to-day running of the bank today after its chief executive Steven Crawshaw resigned through ill health yesterday, said: "Part of our more realistic look forward is to reduce our expectations for house price performance, we assume they are going to go down more." Until today the City had expected the company to report profits of £250 million this year. Now it looks as though it will be lucky to make £150 million. In the first four months of the year it lost £8 million.
It also slashed the price of its planned fundraising from its existing shareholders. Less than three weeks ago it said it would sell them new shares at 82p each to raise £300 million. Today it cut the sale price of the new shares to existing investors and Texas Pacific to 55p. These moves will raise a total of £400 million of new cash for the bank - but were the spark for the sell-off of other banking shares.
Other firms planning rights issues were also hit, with almost a third being wiped off the value of Johnston Press, the regional newspaper group which was asking for a massive cash injection through a shares sale.
Bradford & Bingley with more than threemillion customers had almost £23 billion of savers' money at the end of April meaning it does not have any immediate liquidity crisis. But with its reliance on lending to landlords it is seeing the downturn in the housing market faster than many of its rivals. Buytolet purchasers have virtually stopped buying new properties because they cannot make the sums work when house prices are falling.
That was reinforced today when the Bank of England said that the number of mortgages approved in April was at the lowest level for 15 years.
Reader views (2)
The bets are now on! N rock, B&B who's next? HBOS or RBS! Um HBOS is UK sub-prime suspect! This has nothing in the UK to do with american subprime, its all to do with UK subprime. Min 10% deposit 4 times income = UK prime mortgage any thing else is UK Subprime. HBOS mortgages have not been affected by the credit crunch as most of their mortgage money comes from savers money. This is even more unsound in today's climate than N Rocks business model was last year. They have lent so much on non prime mortgages that most of their recent mortgages will now have negative equity. So the depositors / savers money is lost and because of the credit crunch they now cannot cover savers trying to withdraw their savings. No lender will lend HBOS the money to cover savers money! Bye Bye soon HBOS!
- Mark, Dorset, 02/06/2008 23:25
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Pity any Bradford & Bingley mortgage holders who fall into arrears - I doubt that their new American 23% shareholder takes any prisoners.
- Barry, Barnet, Herts, 02/06/2008 18:37
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