The Next Bank To Go Bust?

If the share price is anything to go by, it could be Bradford and Bingley... What does this mean for customers?

Events surrounding Bradford and Bingley have been a hot topic in recent times. Since the start of the year, its share price has fallen by over 90%. This has left it open to the question: will it be the next bank to go bust?

There's no doubt this year has been a catalogue of disaster for B&B. In June, the bank stole the headlines when shares were suspended for 18 minutes following a profit warning by the lender.

Revised rights issues and failed deals led to further doom and gloom in August, as it announced a £27million loss during the first half of this year.

And, to complete the triple whammy of bad news, just this week B&B announced it was cutting 370 jobs because of the continuing housing market downturn.

A buy-to-let-bullet?

The problem with Bradford and Bingley (B&B) is it prides itself as a specialist lender, with buy-to-let and self-certification mortgages forming the bulk of its mortgage book.

As Cliff D'Arcy explained, this buy-to-let model has never been put through its paces in a housing market downturn. Now the unpleasantries have hit the fan, B&B is haemorrhaging cash on some of its loans at an alarming rate.

Its in-house loans went bad at a rate of 1.78% by the end of June. Even worse, loans acquired from other lenders had a default rate of 5.11%.

And, with the credit crunch taking a firm bite out of B&B's balance sheet, rumours that it could be next in line for a bail-out have started to surface.

I should stress these are just rumours at the moment: the bank is still trading and has not gone bust.

However, earlier hopes that a `white knight' would come in and rescue the bank quickly have evaporated. Higher than average mortgage arrears rates and exposure to falling house prices make B&B an unappealing takeover target.

Credit crunch time

In the last month, the bank's creditworthiness has been downgraded by all three of the main credit ratings agencies which assess how robust institutions are.

Standard & Poor's downgraded Bradford and Bingley's short-term rating from A-2 to A-3, and Fitch Ratings also cut its forecast from BBB+ to BBB-. This follows a downgrade by fellow agency Moody's, which now rates its outlook for long-term bank deposits as Baa3/P-3.

In English, Moody's says that banks with this rating `offer adequate credit quality. However, certain protective elements may be lacking or may be characteristically unreliable over any great length of time.'

In addition, out of a scale that runs from A to E, the bank's financial strength is now rated as `D'. Moody's states that, `such institutions may be limited by one or more of the following factors: a weak business franchise; financial fundamentals that are deficient in one or more respects; or an unpredictable and unstable operating environment.'

Customer calculations

But aside from these lessons in the alphabet, what does this actually mean for the day to day banking?

Well, it's business as usual at B&B, which stated that none of its 337 high street branches will close as a result of the job losses.

I want to stress that it is very unlikely that savers in Bradford and Bingley would be allowed to lose their money, and even if disaster struck I still think the Government would step in to bail them out.

After all, how would Mr. Darling look if he heroically saved Northern Rock, only to leave Bradford and Bingley's customers to the lions?

However, if you are a still sceptical, or already have savings with B&B and are in two minds about whether you should withdraw them or not, remember the Financial Services Compensation Scheme (FSCS), which safeguards deposits of up to £35,000. 

So if you are concerned, don't panic. Take your time and shop around for the best savings account to move your money to. The market leader is Alliance & Leicester, which pays 6.6% - but there are interest penalties for withdrawals. A better bet might be ING, which pays 6.5% and allows penalty-free withdrawals.

Or if safety is more paramount than rate, there's always National Savings and Investments (NS&I) or Northern Rock, which are both 100% guaranteed by the government, with no upper limits.

A glimmer of hope? Or still on the ropes?

There is also some (slightly) good news on the cards. Under a new agreement with mortgage lender GMAC-RFC, (one of the lenders it was buying loans from), Bradford & Bingley will now only be obliged to buy up to £750 million worth of loans from the company as opposed to the potentially damaging £1.75 billion it had agreed to previously.

However, with shares slumping to 19.5p as at 10.00am this morning (and falling to new lows as I type), it's shareholders who should be particularly worried. After rumours of a white knight takeover sent shares up, they quickly slid down again as prospects of a suitor died.

If a takeover did happen, the worst case scenario could see shareholders wiped out, with the bank snapped up for next to nothing. In the mean time, shares continue to stumble as uncertainty remains about its future.

Watch this space.

More: The Fool's Guide To The Banking Crisis / The Financial Crash In Plain English