Lenders feeling the squeeze

Bradford & Bingley is the latest lender to issue a downbeat statement. Barney McCarthy finds out what it means for consumers

Getting on for a year since the credit crunch first reared its ugly head, there is no sign of it retreating any time soon. While there have been no other institutions suffering the scale of public ignominy that Northern Rock has endured, more mortgage lenders are starting to feel the pinch of an unforgiving economic climate. Bradford & Bingley (B&B) is the latest bank to be nudged into the spotlight after releasing a statement last week in which it issued a more cautious outlook for the year.

B&B launched a £300m rights issue last month, which means it offered shareholders the chance to buy a certain amount of extra shares, depending on their current holdings. The bank has now restructured the rights issue to £258m and the offer to shareholders has been reduced from 82p to 55p per share. This is partly due to investment firm TPG Capital taking a 23% stake in B&B. The trading figures released by B&B also pointed to a marked downturn in profits, with the first four months of 2008 yielding £56m in comparison to £108m for the same period last year.

The statement issued by the bank also pointed towards the rise in mortgage borrowers struggling to make their monthly repayments. At the end of April, over 8,000 of B&B’s borrowers (2.16% of all its mortgage customers) had fallen into arrears of over three months, compared to just over 6,000 at the end of last year. These figures may still seem relatively low, but they represent a 35% increase in just four months.

Bye buy

Although some of its own borrowers have run into problems making their repayments, B&B has suffered because it acquired mortgages from other lenders that didn’t perform as expected. Lenders have traditionally sold bundles or ‘books’ of loans to each other as investments, but 4.47% of the customers B&B have taken on have fallen into arrears – more than double the amount it has lent to itself that are currently facing such difficulties. Northern Rock’s problems were caused by a similar business model and B&B has said it will address this.

However, the bank is preparing for these difficult conditions to continue. In a statement to the London Stock Exchange, it said: “The board is cautious in its outlook for the year and believes that the economic conditions seen in the first four months will continue for the balance of the year. The tougher economic environment will continue to push arrears beyond the current level of 2.16%, although with stricter lending criteria and a reduced inflow of acquired mortgages, the board believes the overall increase in arrears for the remainder of the year should not be as steep as in the first four months.”

Those in the industry have reacted cautiously to B&B’s recent performance. Kevin Mountford, head of savings at Moneysupermarket, says: “The latest news from B&B will do nothing to ease the growing uncertainty in the market. It will challenge the nerve of its customers. Although a number of banks are suffering, as far as B&B is concerned, TPG’s interest could be seen as a positive indication that the worst is behind it, but customers will remain wary.”

If you have a mortgage with B&B there is no reason to worry unless you have fallen into arrears yourself, in which case you should contact them as soon as possible to sort out an alternative repayment plan. It is to be expected that banks will continue to lend less in coming months as first-time buyers struggle with affordability and tighter criteria – don’t be surprised if B&B isn’t the last to issue such a statement.