Sydney, June 3, 2008 (ABN Newswire) - The essential soundness of the Australian banking system was highlighted yesterday in a speech to Federal parliament by Treasurer Wayne Swan, and by the rescue of a second major bank in Britain.

Not one Australian institution has run into problems because of the credit crunch: there's been a lift in bad debts related to poor lending decisions, but no disasters, unlike the US, Germany, France and Britain where Northern Rock mortgage bank was nationalised after a bailout.

Now Bradford and Bingley, another former British building society, converted to a specialist mortgage lender, has had to be rescued after almost failing.

B&B is the UK's largest lender to landlords and it said overnight that it will sell a 23% stake to US private equity group, TPG Inc. for almost 179 million pounds ($A388 million) after underlying earnings in the first four months of this year plunged 48%.

The company said in a statement issued in London that "Difficult economic conditions have led to a decline in net interest margin and increasing arrears". As a result underlying profit for the four months was 56 million pounds ($A118 million), compared to 108 million pounds ($A226 million) in 2007.

In fact BG&B lost 8 million pounds (around $A17.6 million) on a pre-tax basis, after one off items and another surprise write-down. The shares finished down around 25%, and dragged the rest of the UK banking sector lower.

In the US Morgan Stanley, Merrill Lynch and Lehman Bros saw their shares sold off after Standard and Poor's cut their credit ratings.



Goldman Sachs rating was reaffirmed by the ratings group has the investment banking industry on a negative outlook because of the possibility of another round of big write-downs and losses as US house prices continue to fall.

 

Wachovia, America's country's fourth biggest bank, sacked its CEO and Washington Mutual, the country's largest savings and loan and now controlled by B&B's rescuer, TPG, separated the roles of chairman and CEO in a telling move about allocating responsibility for running the bank. S&P put Wachovia on credit watch negative after the CEO's departure.



But the attention in banking was on B&B in London as analysts wondered why a poor result and rescue for a bank worth just half a billion dollars would attract so much attention.

B&B had been looking to raise 300 million pounds ($A620 million approx.) in an emergency rights issue to shareholders, but the shares plunged since the issue was announced in mid-May.

So much so that by last Friday it looked like the issue might not happen because the share price had fallen to just 6 pence above the 82 pence issue price, which would have placed the bank in an untenable position.

That raised questions about the viability of $US16 billion in capital raisings that the much larger, Royal Bank Of Scotland and HBOS (owners of Bankwest here). These deals are still happening but the size of the discount for the new issues has contracted sharply.

That's why it was essential to recapitalise B&B as quickly as possible and existing shareholders will have to wear a big dilution. 

Now Bradford & Bingley will raise 400 million pounds in total; from the issue and TPG's stake, compared to the 300 million pounds it originally planned in the rights issue that had been underwritten by Citigroup and UBS.

The cut follows the agreement to sell the stake TPG.

CEO Stephen Crawshaw resigned Sunday citing ill health and has been replaced temporarily by Chairman Rod Kent.

The rights issue gave investors the right to buy 16 shares for every 25 they own at 82 pence apiece. B&B will now offer 19 shares for every 25 at a price of 55 pence apiece.

The bank's shares have plunged 67% this year, valuing the bank at 545 million pounds (around $A1 billion), compared to more than $A2 billion a year ago. The shares have dropped by more than 35% since the rights issue was revealed last month.

That issue came a month after the bank and its management assured the market that it did not need new capital. It was in fact rejecting a media report which forecast the need for a capital raising new issue.

The British business media said the fact that B&B has now attracted a strategic private equity investor was "a piece of welcome news for the UK mortgage lender at a time when it has lost its chief executive and is in the throes of a rights issue", according to the Financial Times.

"It also gives B&B more capital at a time when house prices are falling and arrears are rising. Under Basel II banking rules, all mortgage lenders need to hold more capital against the same mortgage assets" The FT said.

"B&B remains a bid target, but this investment might help it buy time until the market turmoil is over, as TPG is in no hurry to sell.

"It would have been difficult for B&B to attract a bidder. Both HBOS and Royal Bank of Scotland, which at one time would have looked at B&B, are in the middle of their own capital raisings and so would be unlikely to use the proceeds to buy another bank."

The real story is that Britain's banking sector got mixed up with highly leveraged deals in the US and in its home market. All banks, with the possible exception of Lloyds TSB, have skeletons in their accounts which will be flushed out by the severe contraction in the UK home lending market.

TPG rescuing of B&B is the second bank of its kind the private equity group has rescued in the past three months. Earlier it led a $US7 billion rescue of Washington Mutual, America's biggest savings and loan institution which had lent badly, invested poorly, and wasted capital by the billions in doing so, and then trying to fix its problems without a full, honest accounting.

The contrast with Australia is telling and continues to be so.

Perhaps there is something in the four pillars policy and strong, but behind the scenes regulation by APRA, the lead regulator, and the Reserve Bank.

Of course a booming economy helps, but our banks, unlike previous booms, have avoided the disasters of commercial property, which created problems in the 1970s, 1980s and 1990s.


 

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