What next for Bradford & Bingley?

Bradford & Bingley branch

The news that Bradford & Bingley's profits have taken nearly a 50% hit in the first four months of 2008 may have set alarm bells ringing for many people. After all, it wasn't that long ago that we all witnessed the run on Northern Rock that resulted in its nationalisation.

But should we be worried? And what does the fall in profits  and its rights issue mean for customers and shareholders of the former building society?

What has actually happened?

Bradford & Bingley's profits for the first four months of 2008 were £56 million - compared to £108 million in 2007. This fall of nearly 50% is largely the result of the credit crunch, which has not only made lending more expensive for banks but also reduced the amount of lending banks are willing to do.

In order to improve its capital position, Bradford & Bingley plans to raise additional capital of £400 million - £258 million through a rights issue and £179 million from Texas Pacific Group (TPG), a US private equity investment firm that has bought a 23% stake in the business.

However, in July TPG pulled out of the deal, leaving Bradford & Bingley with little choice but to raise the full £400 million through shareholders. 

As part of the rights issue, all shares will be issued at an offer price of 55p per share.

All well has having seen its profits dented, Bradford & Bingley has also reported an alarming rise in the percentage of its mortgages that are three months or more in arrears, from 1.63% at the end of last year to 2.16%.

One of the reasons for the rise is a mortgage book Bradford & Bingley bought off another buy-to-let lender, GMAC. It says the book has produced “higher than expected arrears”.

Although Bradford & Bingley says it has already cut back its purchases from GMAC, it is committed to buying around £2.1 billion of GMAC mortgages by the end of next year.

Is this another Northern Rock?

Unlike Northern Rock – which was forced to ask the Bank of England for emergency funding to support its business model – Bradford & Bingley is making moves to strengthen its capital position to ensure its finances are healthy enough to withstand what looks set to be a tough year for mortgage lenders.

The advice to borrowers and savers with Bradford & Bingley is not to panic. Many of the big banks are also doing rights issues to obtain additional funding from their shareholders.

What does it mean for customers?

As explained above, there is no suggestion that Bradford & Bingley will suffer a similar fate to Northern Rock, and there is no need to panic.

If you are a borrower with Bradford & Bingley then the advice is to continue to meet your repayments in full and on time.

If you are a saver with Bradford & Bingley, then the same applies. All retail deposits with British regulated banks are protected by the Financial Services Compensation Scheme (FSCS) – this means that should a bank go bust, the first £35,000 of your savings is covered.

Savers only face losing their money if they have more than £35,000 in an account.

If you do have more than £35,000 to save and want to ensure all your funds are covered by a deposit-protection scheme, then you should consider opening another competitive account and transferring anything over £35,000 across.

What about investors?

Bradford & Bingley’s share price took a dive after the announcement – falling by 30% at one point during 2 June.

At the time, the advice from The Share Centre was to avoid any rash action.

Graham Spooner, investment adviser at The Share Centre, said: “Although it does reflect the dire state of the buy-to-let market we do not think this is another Northern Rock situation.

“[The 30% fall in share price] along with the relatively small discount on offer to investors in the rights issue - new shares at 55p and ordinary shares at 64p - leads us to continue to be negative about Bradford & Bingley for the short-term at least, and we urge investors to wait until the last minute before making their decision to act on the rights issue in the hope that the share price will settle down.”

Many investors are unhappy with the way Bradford & Bingley has communicated its issues. At one point it flat denied a rights issue was on the horizon, later admitting a £300 million one was in the pipeline.

Then, on 2 June, it restructured the deal, instead planning to raise £258 million from existing investors and unveiled the offer from TPG to take a 23% stake in the business, thus becoming its largest shareholder.

Unsurprisingly, many retail investors are confused, while institutional investors are unhappy about the lender agreeing the deal with TPG without offering them first refusal.

However, the deal with TPG should send a signal of confidence to investors. The US private equity firm is known to be picky about where is invests its cash, and it has stated it sees an opportunity for Bradford & Bingley in the future.

This vote of confidence might convince some investors to buy up Bradford & Bingley shares – especially as these have fallen in price since the deal was announced. However, this approach is probably for those investors prepared to take a risk as the share price could fall further, and broker sentiment is still to “sell” Bradford & Bingley, according to Hemscott.

The outlook for the housing market still looks uncertain, and it is possible that mortgage lenders like Bradford & Bingley face a rocky road ahead.

Tim Steer, manager of the New Star UK Alpha Fund, says that while banks look cheap, the credit crunch is not over yet.

"The Bradford & Bingley news is an example in point, here's a business that's suffering not because of sub-prime fallout but because trading is poor in the UK," he adds. "This helps to illustrate the point that a little scrutiny can go a long way in the current market conditions. The FTSE All Share is down around 7% so far this year, whilst the FTSE 100 has fallen by around 1% in the last year - not a great deal in other words."