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Spotlight: Bradford & Bingley
Analysis: B&B 2008 accounts and report
Jim Moore
31.03.09 16:32
Bradford & Bingley would have reported a huge loss for 2008 without nationalisation as it emerged that its bad loans have soared by a factor of more than 20 - with worse to come.
Despite the continuing deterioration of bank's finances, it still maintains it should be able repay the £18.4 billion owed to the taxpayer.
Remarkably, B&B said it turned a profit of £134.3 million in 2008 against £126 million the previous year.
However, that figure was artificially boosted by a one-off gain of £216.3 million on the forced sale of B&B's deposit book to Banco Santander's UK arm, Abbey, for £612 million.
It was also fattened by the interest-free debt and guarantees provided by the taxpayer, which were provided to secure the bank's funding requirements after the sale of the deposits. The stricken bank will not have to pay interest charges of £115 million that would normally be due on this money. B&B would have been more than £200 million in the red without these factors.
The figures are contained in the company's annual report, filed at Companies House this week. They illustrate the dramatic deterioration in its loan book last year.
In 2008, B&B set aside £507.7 million to cover losses on bad loans - more than 20 times the 2007 figure of £22.5 million. It also reported a £120.3 million loss on "financial instruments" compared to a £6.5 million profit the previous year.
The bad debt provision includes £173.9 million to cover suspected cases of fraud and £70 million of estimated losses on future sales of repossessed homes as a result of falling house prices.
The bank has already booked a £65.5 million loss through selling some of the 1,503 homes it repossessed last year, of which 1,012 were owner-occupied and a further 491 were buy-to-let properties.
Last year, arrears of more than three months soared to 4.6% of loan accounts representing 16,712 cases and £2.4 billion of loans, compared to 1.6% the previous year (5,610 cases, £731 million). The company predicts that the position will inevitably deteriorate throughout this year and into 2010.
Cash call crisis
B&B collapsed and was taken into state ownership at the end of September, less than three months after investors - many of them small shareholders - had contributed £401 million in a rights issue designed to keep the bank afloat.
Prior to the cash call it had already disposed of £4 billion of "non-core lending portfolios" and increased retail deposit balances by £2.1 billion during the first four months of last year. A further £2 billion of committed, secured financing had been raised on the global debt markets.
The troubled cash call - first mooted last May - was restructured on 2 June after a disastrous trading statement forced the bank to call on outside help from US private equity firm TPG. The situation further deteriorated when TPG abruptly walked away shortly after B&B's credit rating was cut by Moody's. Rather than opting to close its doors or call on regulators for help, B&B took the decision to restructure its rights issue again.
B&B insisted that withdrawals from depositors - worried about their savings - "stabilised" in August after investors had handed over their cash.
But it said: "A succession of external events in the first half of September materially affected public confidence in the banking system, particularly in mortgage banks."
These included, it said, the collapse and effective nationalisation of US insurer AIG and mortgage companies Fannie Mae and Freddie Mac; the downgrading of lender Washington Mutual to "junk bond" status; the collapse of Lehman Brothers; and the announced takeover of HBOS by Lloyds TSB to form the Lloyds Banking Group (LLOY).
Moody's applied a further downgrade to Bradford & Bingley's ratings on 16 September. Fitch Ratings and Standard and Poor's followed suit on 23 September. Four days later, the Financial Services Authority told B&B it no longer satisfied the "threshold conditions for operating as a deposit taker".
Over that weekend, the bank was effectively nationalised with its deposits sold to Abbey and the rest of the bank taken into state ownership.
These events have proved highly controversial with investors, many of whom argue that they were misled into paying up. Some 1,600 of them are taking legal action.
The report revealed that the value of the bank's lending increased sharply in the run up to the rights issue - lending balances had grown to £42.2 billion by June 2008 compared to £40.4 billion at the end of 2007 before falling to £41.8 billion at the end of last year.
Pension scheme
As if that was not enough, the closed final salary pension scheme is facing a £10 million funding shortfall.
In the report, B&B said that as it winds its business down, repossessions would only be considered "as a last resort". The bank insists that it would not instigate proceedings against owner occupiers within the first three months of the customer going into arrears and will not take possession of a property within the first "six months".
B&B may also seek to find a third party to administer the rundown of its lending book and is encouraging people on fixed term mortgage deals to move lender before they are due to end. As such it has said it will waive "redemption" penalty charges usually imposed if people switch lenders in the midst of a deal.
The downside of this strategy is that less risky and profitable customers able to switch lender usually do so leaving the bank - and the taxpayer - with a rump of potentially toxic loans that it may prove extremely difficult to recover.
B&B said that after the Government bail-out it was now one of the Britain's "better capitalised banks".
The report also reveals that Steven Crawshaw, the former chief executive, was paid more than £1 million last year - even though he only worked for five months because of ill health.
The 47-year-old is reportedly suffering from a serious heart condition and is already receiving a £105,000 annual pension as a result.
Mr Crawshaw's total pay for 2008 is bolstered by £365,000 representing his basic salary in lieu of notice for the period up to 28 February 2009.
Richard Pym, his replacement has voluntarily agreed to cut his pay from £400,000 to £350,000, and given up a £187,500 bonus. He has moved from a two-year to a one-day notice period.
Have your say
The effective nationalisation of this former bastion of building societies has caused uproar among shareholders - and Interactive Investor hasn't forgotten about it.
Visit our Spotlight on Bradford & Bingley for coverage on its demise and feel free to tell us what else you'd like to know or see on B&B by emailing: ceo@iii.co.uk.
Have your say
The effective nationalisation of this former bastion of building societies has caused uproar among shareholders - and Interactive Investor hasn't forgotten about it.
Visit our Spotlight on Bradford & Bingley for coverage on its demise and feel free to tell us what else you'd like to know or see on B&B by emailing: ceo@iii.co.uk.