Page last updated at 23:22 GMT, Monday, 22 September 2008 00:22 UK

Why the B&B is subject to takeover speculation

By Ian Pollock
Personal finance reporter, BBC News

Bradford & Bingley branch
Investors and analysts have doubted the B&B's finances for some time

The latest bank to find itself the focus of attention from speculators is the Bradford & Bingley.

Several newspapers report that the Financial Services Authority (FSA) is so worried about the bank that it has been trying to line up a potential buyer to rescue it.

The bank denies it and the FSA is being very coy.

But there is no doubt the B&B is in a very awkward spot.

The former building society is heavily exposed to the now shrinking UK property market and last year was the UK's 8th largest lender of new mortgages.

Last month, it reported a loss of 27m for the first six months of the year, blaming this on a rise in bad debts and losses on its own investments in dud mortgage-related derivatives.


Investors in the B&B have had reasons to worry for many months.

The share price has collapsed from 3.00 a year ago, to 184 pence at the start of May and just 25p last week.

It had terrible problems earlier this year raising an extra 400m from its shareholders to boost its balance sheet and improve its solvency.

And last week the credit rating agency Moody's downgraded the bank's credit-worthiness.

It said the B&B was too exposed to buy-to-let and self-certification mortgages which together make up more than 80% of all its home loans.

And it said that its mortgage arrears have been rising much faster than those of its rival lenders.

Bad deal?

What makes the B&B's problem different from some of its rivals is a deal it struck in December 2006, which has turned out to be a pig in a poke.

Buy-to-let - 1.61%
Self-certified - 3.01%
Other - 1.68%
All - 1.78%
Source: B&B interim results, August 2008

Back then, in an effort to expand its mortgage business even further, it undertook to buy up to a maximum of 12bn worth of mortgages from the US owned mortgage lender GMAC-RFC.

This is the UK offshoot of the car maker General Motors, and in 2007 was the country's 11th biggest lender of new mortgages.

Those home loans would be bought by the B&B in quarterly tranches, worth a minimum of 350m per quarter, until the end of 2009.

There are now five tranches left, which means that the bank, now loss-making, is currently committed to spending a further 1.75bn to fulfil its side of the bargain.


The big problem is that these loans have been turning bad at an alarming rate.

Buy-to-let - 4.29%
Self-certified - 4.79%
Other - 6.37%
All - 5.11%
Source: B&B interim results, August 2008

The Bradford & Bingley first admitted the grim details back in June as it asked shareholders for more cash.

And in August, as it outlined the reasons for its half-year loss, it published an update.

This showed that the proportion of its own mortgage loans three months or more in arrears had risen to 1.78%, up from 1.2% at the end of 2007.

But the proportion of these "acquired" mortgages which had gone bad had risen from 3.04% to 5.11%.

As a result of the rising default rate, it wrote off 102m from the book value of all its home loans.

These "acquired" mortgages - mainly from GMAC-RFC - now make up about a quarter of all the home loans on the B&B's books and the deal with GMAC-RFC means there are many more in the pipeline.


Last month, the bank's new chief executive, Richard Pym, said he was in the process of trying to renegotiate the deal with GMAC-RFC.

Sign outside a B&B branch
The bank has been advertising heavily for new savers

He will obviously be querying the validity of the arrangement, given that the B&B said at the time it was struck that it hinged on the GMAC mortgage holders being as credit-worthy as its own customers.

There would now seem to be some obvious doubt about that.

So far, all that both sides will say is that "discussions are continuing".

One hope for the B&B is that GMAC, one of the biggest lenders of sub-prime mortgages in the USA, has run into big problems itself thanks to the implosion of the housing market in the USA and the credit crunch.

Over there, it has closed all its 200 mortgage offices and said it would sack 5,000 staff.

Here, the company stopped lending new mortgages to UK customers 14 weeks ago.

That means it may not be able to fulfil its side of the bargain and provide the mortgages that the B&B is contractually obliged to buy.

Thus both sides have a reason to strike a deal of some sort which may, in due course, relieve some of the B&B's burden.

But until a deal is done, and investors are informed, the bank might find itself in a tricky position.

Well capitalised?

Back in December 2006, announcing the purchase of the mortgages, the B&B said it was "delighted to cement the long term future of this excellent business relationship" with GMAC-RFC.

Over the weekend B&B stressed that it was "well capitalised".

That happens to be the same thing that HBOS said about itself last week, just before it fell into the arms of Lloyds TSB.

The point is that B&B may soon be rather less well capitalised if it has to make good its promise to pay up a further 1.75bn for mortgages it does not really want.

The former building society decided it wanted a more exciting life as a bank when it converted from being a mutually-owned lender back in December 2000.

As a result it also converted about a million savers into shareholders.

The potential downside of being a shareholder is becoming startlingly clear.

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