Banking |
|
Your Money > Banking Articles > Bradford and Bingley...
|
|
By Sarah Modlock
It is completely understandable to be anxious about problems with big banks. Once viewed as unquestionably solid and unshakeable, we now know they are not invincible. The trouble with the recent Bradford & Bingley situation is that the circumstances may not be easily understood my many people and consequently seem scary. So just what is going on and should savers and borrowers be worried? Hopefully the following will demystify and reassure... What's the background? As recently as the end of 2006, Bradford & Bingley was on a spending spree. Its mortgage lending was expanding through the purchase of loans from other mortgage companies. This included buying up to £12bn worth of mortgages, spread over three years, from GMAC, the finance arm of General Motors that specialised in buy-to-let mortgages. Just a few months later it bought a further £2bn of loans from another lender, Kensington, to be spread over two years, again, buy-to-let mortgages, as well as 'prime self-certificated' loans, where the borrowers did not have to provide much evidence of their earnings, or their ability to repay their loans, to get the mortgage in the first place. Despite the huge sums involved, the bank seemed to be proceeding with due care, taking on the loans in monthly tranches, after scrutinising them to make sure they were "in line with strict credit parameters." But it is possible that this scrutiny was not adequate because the bank has revealed that arrears among the acquired loans, especially those from GMAC, have turned out to be far worse than expected. This February there were expectations that the bank would not have such traditionally healthy profits this year. In April it denied reports surfacing in newspapers that it was planning to go to the stockmarket to raise extra cash to see it through the credit crisis. What went wrong? As Britain's biggest buy-to-let lender, Bradford & Bingley was always going to feel the credit crunch as one of the lenders that took a higher proportion of its funding from wholesale money markets rather than savers. Despite trying to woo savers in recent months, the bank's share price had already tumbled 35% this year before the latest developments. In May, the firm said it would launch a rights issue in an attempt to help offset some of its weakening investment, having only a month earlier denied it would be seeking to raise funds. On 1 June, the bank's Chief Executive Steve Crawshaw quit "due to a serious cardiovascular condition". His departure unfortunately came a day before a trading update and reports confirmed the bank would issue a profit warning and was trying to raise £300m to boost its balance sheet. How bad is it? Pre-tax profit fell to £126m in 2007 from £246.7m the year before and the bank revealed a high level of bad debts - higher bills have put many homeowners under financial strain and by the end of April, 8,333 of the bank's borrowers - 2.16% of all its mortgage customers - were in trouble, with arrears of three months or more, or in the throes of being repossessed, a rise of 35% since the end of last December. Bradford & Bingley's bad debt sheet is far worse than the industry average, which stood at just 1.1% in the second half of last year. Of the mortgages that were bought up from other lenders, 4.47% - £400m worth - are now in arrears. Their value is even greater, at just over 5% of the total sum lent by GMAC and Kensington. Add to this the hefty £600m of its own loans that could very well fail and £15m lost through mortgage fraud and you have a nasty black hole. Is it another Northern Rock? In short, no. In its trading statement, it says it can fund itself into 2009 despite problems in money markets. However, there is speculation that the lender could be a takeover target as its shares plunge by more than 90%. What is the bank doing? It is putting together a £400m cash injection. This will be raised by selling a 20% stake to US private equity giant Texas Pacific Group for £150m. The remaining £250m will come from a 'rights issue' of new shares to existing investors. A rights issue allows a company to raise money and shareholders are attracted to invest more money by being offered discounted shares, in this case 55p reduced from 82p. Shares are offered in proportion to existing holdings, so if you own 10% of the old shares you are offered 10% of the new ones Is my money safe with Bradford & Bingley? There is no indication whatsoever that the bank is at risk of going under and the investment of Texas Pacific will certainly help. If you have savings in any UK bank remember than in the unlikely event of a bank going bust the first £35,000 on deposit is guaranteed by the Government under the Financial Services Compensation Scheme. Those with savings of more than £35,000 may want to split this between different institutions to take full advantage of this protective safety net. Is my mortgage going to cost more? Your fixed or tracker rates willl almost certainly run their course but the standard variable rate is likely to rise. The big test will come when fixed deals expire and customers find that they have much less choice and rates have gone up since they last looked around. But this is relevant to all lenders, not just Bradford & Bingley. If you took out a high loan-to-value ratio and have little or no equity in your home then you will find it tricker still to re-mortgage. Start shopping around well in advance of your existing deal running out. What about my windfall shares? Hindsight is a wonderful thing and of course the 850,000 or so customers who received 250 windfall shares each when Bradford & Bingley floated in December 2000 may wish they had sold them a year ago at a high of £435.5p. Sell now and you will take a bath but may avoid ending up losing yet more cash if things get worse or hang on and take a chance that the banking sector may recover. Of course, many traders believe this is the ideal time to buy, while shares are cheap. The choice is yours. Are any other banks in queer street? It's no secret that Royal Bank of Scotland and HBOS also plan rights issues, hoping to raise £12bn and £4bn respectively. Banks worldwide are raising funds in a similar manner to plug losses. Useful links: |
| ||||||||||||||