Bradford & Bingley slumps to a £27m half-year deficit but, judging from the state of its mortgage arrears, there are more losses ahead.
Ouch! It’s been a six-month period that shareholders in Bradford & Bingley (LSE: BB.) will want to forget. Its share price collapsed, its chief executive had to leave due to ill health and a rights issue had to be revised twice to raise the funds necessary to prop up its finances.
Today’s interim results gave investors the opportunity to inspect the carnage in more detail. A profit of £180m for the same period last year has become a £27m loss. The interim dividend will drop from 6.7p to 3p and be paid in shares rather than cash, as seems to be the fashion this year.
Losses keep mounting
These results mark a considerable deterioration from the numbers presented at the time of the rights issue. These covered the first four months of the year and showed a loss of £8m. Since then, the bank has had to write an additional £30m off its investments due to the credit crunch and taken a further £40m hit against mortgages that may not be repaid. Included in the latter was £18m relating to an organised mortgage fraud, just to add to its woes.
As with many other banks, the losses coming from investments that have been written down due to the credit crunch should be coming to an end. Going forward, it will be bad debts against the company’s mortgage book that will become more significant as more and more borrowers struggle to maintain their monthly payments. Indeed, Richard Pym, B&B’s new chief executive and former head of Alliance & Leicester (LSE: AL.), reckons the profit and loss pain will continue for the remainder of 2008 and 2009.
Analysing those arrears
Bradford & Bingley’s total mortgage book stands at £42bn. It’s worth looking at this in two ways, firstly by what type of mortgages these are and secondly from where they originated.
Of the total mortgage book, about 60% is buy-to-let, 20% is self-certified (where borrowers do not have to prove their income) and 20% are classed as other.
Arrears of three months or more on buy-to-let mortgages have doubled to 2.3%. This is shocking given that it is the bank’s core business. It’s twice the average for the industry according to the latest figures from the Council of Mortgage Lenders. Arrears on self-certified and other loans are even higher at 3.8%.
Bradford & Bingley has acquired loans from other mortgage companies in recent years. These are a mixture of buy-to-let, self-certified and sub-prime mortgages and together account for almost 20% of its mortgage book. Arrears here are running much higher than those loans originated by Bradford & Bingley itself. Acquired arrears have leapt from 2.8% to 5.7% over the last 12 months.
Unfortunately, the bank is committed to buying more of these mortgages. A £1.3bn deal with Kensington has been extended by two years to April 2011. An agreement with GMAC-RFC to buy a minimum of £350m per quarter until the end of 2009 is currently being renegotiated. Although Bradford & Bingley reviews the loans when they are taken on, to make sure they conform to its lending criteria, it’s clear quite a few nasties have slipped through the net in the past.
Even if you strip the acquired loans out of the analysis, the rate of arrears on Bradford & Bingley’s core mortgage book is both very high and rising sharply compared to other lenders. The bank intends to improve the way it manages arrears, identifying problem loans much earlier than it does at present. Despite these efforts, it’s an ugly picture and it’s only going to get uglier over the next year or so.
What next for investors and savers?
B&B’s shares have sunk from £4 to 50p in just over a year. After the rights issue, there are 1.45bn shares in issue so its present market value isn’t far short of £750m. Management clearly isn’t expecting a ‘normal’ year in terms of profitability until 2010 making it hard to assess the business’s prospects.
Prior to the credit crunch, profits were almost £200m after tax. Assuming £150m can be generated going forward and a price earnings ratio of ten is applied to this, it suggests a market value twice today’s level. Although the bank is now quite well funded and has an experienced management team, to me that simply isn’t enough upside to compensate for the level of risk the shares offer.
That said, a takeover must be on the cards at some point. Part of Bradford & Bingley’s problem is its higher funding costs. A larger bank, with lower funding costs, should be able to squeeze much more profit from its £40bn+ mortgage book.
If you’re a saver with Bradford & Bingley then things look quite a bit brighter.
The bank already has £22bn of savers’ money on deposit and will want to build on this amount. To do this it will have to continue to offer high rates on its savings accounts for the next few years. Although we were apparently reluctant to put money in during June and July, with the negative press surrounding the rights issue, August has seen a rebound in deposits. Savers are quick to forgive it would seem!
You can buy shares via Motley Fool Sharebuilder and pay commission of just £1.50 a trade.
