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Last Updated: Wednesday, 13 February 2008, 09:28 GMT
Bradford & Bingley profits slide
Bradford & Bingley branch front
B&B is the UK's biggest provider of buy-to-let mortgages
Lender Bradford & Bingley (B&B) has reported a sharp fall in profits after cutting the value of risky assets following the recent market turmoil.

Pre-tax profit almost halved to 126m in 2007 from 246.7m the year before, after the bank wrote down assets including those tied to US mortgages.

B&B's shares tumbled in London on the news, sliding 12% to 214.5 pence.

Banks worldwide have been reporting massive losses related to problems in the ailing US housing market.

The problems in the world's credit markets were set off by record default rates in the US sub-prime mortgage sector that lends to those with poor credit ratings.

Many of those loans had been lumped together, repackaged and sold on to banks as an investment with high returns.

'Challenges'

B&B said that if it stripped out what it termed "unusual and extreme external events" then underlying profits rose 5% to 351.6m.

It's the size of the losses on its [B&B's] exposure to sub-prime and structured finance that stand out
Robert Peston, BBC business editor

"There is no denying that today's market circumstances present the mortgage industry with a unique set of challenges and opportunities," B&B said.

"We believe the fundamentals that drive our specialist markets remain strong, and expect the buy-to-let market to continue to grow at a faster rate than the mainstream mortgage market," it added.

B&B said bad debt charges on its residential mortgages had trebled to 22.5m in 2007 as borrowers came under pressure.

It also said it lost 58m when it sold a portfolio of commercial property, and was dented by problems relating to housing association loans.

More to come?

BBC business editor Robert Peston said that B&B's earnings report contained a number of factors that should make people nervous about what it means for the banking industry as a whole.

He pointed out that cost of raising money for B&B has increased, so the difference between what it charges for loans and pays out for deposits and other forms of funding has shrunk.

Bradford & Bingley branch
Consumers are weighing up the impact of the banking crisis

Also the number of mortgage borrowers in arrears on their payments by three months or more has gone up by 42% to 6,170.

While it may be a relatively small proportion of its total loan book, the trend is disturbing, the BBC business editor said.

The most worrying part of the results, however, related to B&B's exposure to sub-prime loans and structured finance.

Just a few weeks ago, B&B said it did not expect to suffer any losses on related to the complex financial instruments that have created so many problems worldwide.

And the worry now is that B&B's losses hint at bad news ahead for larger banks such as RBS and Barclays, whose exposure to the problems in greater.

Cash flow

B&B said it faced no funding problems and had 2bn of agreed credit from key banks.

The bank added that customer deposits funded 60% of the loans made.

B&B's shares have suffered in the past from rumours that it might suffer similar problems to Northern Rock, which predominantly relied on loans from financial markets to fund its lending rather than savers' deposits.

SEE ALSO
Rival UK bank eyes Northern Rock
18 Dec 07 |  Business
Bradford & Bingley in 4.2bn sale
20 Nov 07 |  Business
B&B upbeat on buy-to-let outlook
26 Jul 07 |  Business

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