ANALYSIS:The British bank may be a minnow, but concerns surrounding it have even damaged Irish banks, writes Pronsias O'Mahony
CITIGROUP'S DOWNGRADE of Anglo Irish Bank and Bank of Ireland yesterday sparked a fresh wave of bloodletting on the Iseq, capping a miserable week for financial stocks.
Citigroup's move followed a decision by Wachovia, the US's fourth-largest bank, to make chief executive Ken Thompson walk the plank earlier in the week. Sentiment had not been helped by Standard & Poor's lowering its ratings on Merrill Lynch, Morgan Stanley and Lehman Brothers.
The main cause of concern, however, has been the botched rights issue at British buy-to-let specialist Bradford & Bingley (B&B), which fell 24 per cent last Monday after announcing a profits warning.
The severity of the downturn resulted in the Yorkshire bank selling almost a quarter of its business to a US private equity firm. It was also forced to restructure the already deeply discounted rights issue announced last month, with shareholders now being offered shares at 55p instead of 82p.
B&B shareholders, who have seen the stock lose more than 80 per cent of its value over the past year, have the small consolation that they're not the only ones suffering. Despite the fact that B&B is a comparative minnow, valued at just over £400 million (€500 million), the wider financial sector haemorrhaged on the news.
Banks were weaker across Europe, with HBOS, Anglo and Irish Life & Permanent all receiving double-digit drubbings during the week. Bank of Ireland suffered its worst one-day decline in 19 years, shedding 11 per cent in early trade on Tuesday.
Of particular concern is the rapidly deteriorating UK buy-to-let market. A new generation of amateur landlords emerged during the housing boom, with the number of buy-to-let mortgages jumping to 1.1 million from just 120,000 in 2000. Many of these are now in trouble, with a 52 per cent rise in the number of landlords who had not paid their loans for at least three months. Bad debts on self-certified loans - so-called "liar loans", as they allow people to get a bigger mortgage by falsifying their income - rose by 38 per cent.
Merrill Lynch's Manus Costello said HBOS had "27 per cent of its mortgage book in buy-to-let and self-cert mortgages", and Bank of Ireland was also one of the "top five players in this space".
NCB's John Cantwell said Bank of Ireland had "49 per cent of its £27 billion UK mortgage book in buy-to-let and self-certified mortgages" - exactly where investors do not want to be. Its bad debts are below average, although Cantwell cautioned that "we expect trends in arrears to deteriorate".
Anglo is also exposed to property, with an estimated 30 per cent of its lending in the UK area.
Texas Pacific Group investing at just 50 per cent of B&B's book value has given the impression of a cut-price desperation deal. The failure of B&B's rights issue is also a concern and has investors fearful that banks will find it more difficult to raise much-needed capital.
Bradford & Bingley's woes emerged just weeks after bullish commentary from the bank about its position. Hard on the heels of misplaced confidence from Northern Rock and Bear Stearns, it is hardly surprising that confidence in banking is low.
