Bank shares hit after Bradford & Bingley warning

By Holly Williams, PA
Monday, 2 June 2008

Bank shares fell again today after a profits warning from the embattled mortgage lender Bradford & Bingley, which saw its price tumble as it confirmed it had agreed to sell a 23-per-cent stake to private equity.

B&B saw its share price tumble 25 per cent in the FTSE 250 Index, although it finished the day at 16 per cent down. Meanwhile shares in Halifax Bank of Scotland fell by 14 per cent, while rival Alliance & Leicester declined 5 per cent and Barclays and Lloyds TSB both shed more than 4 per cent.

B&B announced a deal to sell a fifth of its shares to Texas Pacific Group (TPG) - one of the world's biggest buy-out groups - in return for £179 million in funding.

It warned it faced increasing levels of arrears and said underlying profits for the first four months of this year amounted to £56 million, compared with £108 million in 2007.

The company also scaled back its recently-announced rights issue, with shareholders now being asked to raise £42 million less at £258 million.

The developments come a day after B&B said chief executive Steven Crawshaw had stepped down for health reasons.

B&B said it had swung into the red in the first four months of the year after suffering a further £89 million hit from the credit squeeze and a £36 million charge as more borrowers fell behind with their repayments.

It reported pre-tax losses of £8 million for the period, although it said underlying profits stood at £56 million, down from £108 million last year.

The lender reported a significant hike in arrears levels - at 2.16 per cent against 1.63 per cent for accounts three months or more in arrears - and cautioned that arrears will continue to rise amid the declining housing market and economic uncertainties.

But it stressed today that its savings and lending businesses "remained sound".

B&B chairman Rod Kent, who has taken on the role of executive chairman until a replacement for Mr Crawshaw is found, said: "The last few weeks have been challenging for Bradford & Bingley and this is a disappointing trading update, reflecting a more difficult market environment.

"I understand shareholders' disappointment. Nevertheless, I am delighted to welcome TPG as a major strategic investor in Bradford & Bingley. With a strengthened capital base and the skills that TPG will bring, I am sure we can develop the business to exploit the opportunities available in our markets in the medium term."

The deal with TPG will see B&B raise less cash from its investors, although the new plan will see more in total pumped into the lender - now around £400 million.

B&B is also offering investors the chance to buy discounted stock at 55p a share - down from the previously planned 82p-a-share cash-call.

B&B has been hit hard by the credit crunch, with its funding put under the spotlight following Northern Rock's demise.

It previously raised more than a quarter of its capital through the wholesale money markets, which have dried up amid the crisis.

Northern Rock ran into trouble for its heavy reliance on wholesale credit; however, B&B's funding troubles are not on a scale similar to those which crippled the now nationalised lender.

The group has moved to raise capital and reduce its reliance on credit markets since the credit squeeze took hold.

It sold £4 billion in loans to boost cash reserves, and has switched focus to lower-risk lending and increased savers' deposits, taking in £1.9 billion during the first quarter of this year.

However, the West Yorkshire-based company has seen shares slump to their lowest point since the former building society listed on the London market in 2000 amid recent concerns over funding.

B&B has also suffered a knock to profits as the housing market downturn has affected the buy-to-let mortgage sector.

Increases in the number of borrowers falling behind in mortgage repayments has also put a squeeze on profits, as has the soaring cost of borrowing on wholesale money markets.

Last year, B&B made pre-tax profits of £336 million, but this year analysts had predicted a figure between £160 million and £200 million, a range which the company now believes is too high.