A confident statement and dividend hike emerged from buy-to-let lender Bradford & Bingley today. So why have the shares slumped so much?
There's nothing much to worry about at Bradford & Bingley
(LSE: BB.)
, at least according to the management.
Despite mortgage arrears jumping by 42% last year, bad debts trebling and headline profit almost halving, the UK's biggest buy-to-let lender claimed today that the underlying business is both strong and has done well in a difficult year.
Bursting with confidence, B&B has upped the dividend by 5%.
But having shed some 17% after the announcement, the shares now stand on a 10.5% yield. Does Bradford & Bingley know something we don't, or is the lender riding for a fall?
The mortgage provider increased lending by 27% last year, including a 24% advance in the number of self-certified mortgages. ‘Statutory' profit for 2007 fell 29% to £126m, though B&B reported that ‘underlying' pre-tax profits had improved 5% to £351m.
Mind you, this figure was reached after excluding a whole range of nasties totaling over £225m, including 'treasury asset impairment' - that's bank speak for the ubiquitous US subprime write down - of £94m, and what is gloriously described as "hedge ineffectiveness", i.e. things that weren't worth as much as the lender previously thought they were, of £24m.
Bradford & Bingley also took a chunky £58m hit on the sale of most of its commercial property portfolio.
Cynics would say that it's quite easy to declare higher profits if you subtract all the areas where you've incurred losses.
'Fraid I would tend to agree with them. Banking is about taking not only the smooth but also the rough. And there was quite a bit of the latter last year. Compared with 2006, bad debt charges soared three times higher at £22.5m, while ‘three month plus' arrears cases leapt up 42% to 6,170 from 4,337.
Though apparently, again, that's nothing to worry about. Partly because the lender was expecting such an increase and partly because the Bank of England's interest rate hikes were responsible for some of the damage. So that's OK then...
...Leading to the obvious question: what about the future?
And here Bradford & Bingley is very Zen.
Accepting that today's mortgage scene provides a 'unique set of challenges and opportunities', B&B reckons that its own specialist areas 'remain strong' with buy-to-let continuing to grow faster than overall secured lending as tenant demand is at a five-year high.
Hence the divi lift to an uncovered 21p per share.
Once more, I'm not in synch with all this bonhomie. Nor, it seems, are the company's shareholders. The stock price lost fully 17% today as investors reacted badly to the statement, taking the 12-month decline to 58%. And, as I said earlier, putting Bradford & Bingley on a 10.5% yield.
Normally, returns at that level aren't sustainable. Either the share price rises or the dividend gets cut.
What's more, the Royal Institution of Chartered Surveyors continued to be gloomy about the housing market this morning.
With my own medium term view of British house prices being anything but optimistic, I know where my money is.
And it's not with B&B.
