Bradford & Bingley losses bowl customers into a tight spot

Those two bowler-hatted gents from Yorkshire, Mr Bradford & Mr Bingley have got themselves into a right old pickle. This week the bank issued a profits warning after admitting it has lost a staggering £8m in the first four moths of this year. To put this into context it made £108m in the equivalent period last year.

If this wasn’t bad enough its chief executive has resigned, citing health problems, and not surprisingly Bradford & Bingley’s shares went into free fall, at one point losing up to a quarter of their value.

Bradford & Bingley (B&B) savers could be forgiven for feeling jittery: the run on Northern Rock has left many savers far less confident about the security of British banks, and any hint that an institution is in trouble could cause a similar run on funds.

But customers should rest assured that such comparisons look for the moment wide of the mark. Although there are similarities between Northern Rock and B&B – both are former building societies that have had their fingers burned by the credit crunch – there are significant differences.

For starters B&B’s main problem is bad debt. Its profits have evaporated because too many of its borrowers are falling behind on mortgage repayments – particularly in the buy-let market where it is a leading player. In contrast Northern Rock suffered a severe liquidity problem, forcing it to go cap in hand to the Bank of England for emergency funding to keep it afloat.

There has been no suggestion that B&B could go under, despite its current problems, so savers have not been forming mile-long queues to withdraw their money.

In fact the whole Northern Rock debacle may have served to educate about the safety of bank deposits. The Government has strengthened the Financial Services Compensation Scheme, so now your first £35,000 of cash savings are guaranteed in the unlikely event of a bank going bust. But as events at Northern Rock have shown, even when a bank does run into problems – and it is hard to imagine the problems being much more severe than they were at the Rock – regulators and Government will bend over backwards to ensure savers do not lose out.

As a nationalised institution Northern Rock is paying some of the most competitive savings rates around and offers savers a cast-iron guarantee that all deposits will be guaranteed in full by the Government. Surely if another bank got into similar difficulties the Government would offer the same level of protection?

But I guess while savers remain mistrustful of banks at present, they are probably equally as sceptical about politicians. So if you are of a nervous disposition and you have more than £35,000 in the bank it makes sense to split it between different institutions to take full advantage of this safety net. Remember some banking groups – such as HBOS – only have one banking license so will only protect £35,000 across its various brands.

Mortgage customers remain largely unaffected by the B&B announcement, although most brokers expect that their mortgage deals to be less competitive in future. This will affect those coming to the end of a fixed or discounted deal who need to remortgage. Those worst hit will be homeowners with little or no equity in their home, who are unlikely to be offered a deal elsewhere. This could account for a fair few B&B borrowers, given that the bank offered some of the most competitive mortgage deals for those with just a 5 per cent deposit.

The real losers look set to be B&B shareholders. And of course many of these are B&B savers and borrowers.

When the company floated in December 2000 all mortgage and savings customer received 250 free shares, which were then priced at 257p. One year ago these shares were trading at almost twice this level, at 435.5p. At the close of play on Monday the shares were valued at just 67p. It is estimated that almost 850,000 former customers still cling onto these windfall shares, and have seen their value of this nest-egg plummet from more than £1,000 a year ago to just over £160 this week.

Shareholders now have the opportunity to buy more shares, at a reduced price, through B&B’s rights issue. Like HBOS and RBS the bank is raising further funds by selling additional shares to its existing shareholders. If you take up the offer, and prices rise again subsequent gains could help offset current losses.
But this is a big if. Some analysts may argue that bank shares look like fantastic value for money at present, given how far and how fast share prices have fallen. Could the current problems at B&B be the low water mark in the market?

But those that take a glass half empty view will no doubt see this as an exercise is throwing good money after bad. Many of these same analysts punted Northern Rock shares as a bargain when they were trading at less than 100p. But once the bank was nationalised this paper became virtually worthless.

By Emma Simon

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