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Overshadowed by news of Royal Bank of Scotland's (RBS) rights issue was a trading update from Bradford & Bingley. This highlighted the kind of problems that are typical for most lenders at present: falling lending volumes, a net interest margin that's under pressure, and further treasury book write-downs.
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Faced with the prospect of higher wholesale funding costs, lenders have effectively choked off demand by raising mortgage interest rates and imposing conservative loan-to-value ratios. Fearful of the housing market slowdown spreading, the government has announced a bailout plan designed to keep mortgage banks lending. This involves the Bank of England acquiring mortgage-backed securities from banks in exchange for Treasury bills. It's expected that the Bank will swap £50bn of assets in this way during the first few months of the scheme. But it's not clear just how effective such state largesse will actually be.
"The move is not going to open the floodgates to new mortgage lending - nor is it likely to halt currently falling UK house prices," says broker Fortis. "The package is also unlikely to lead to lower mortgage rates as banks attempt to rebuild net lending margins from close to historically low levels." And while the broker thinks that it's conceivable that the package could free-up lending to non-mortgage borrowers, especially corporate borrowers, "the main driver of lower rates will be financial stability".
Possibly of more immediate significance to investors, then, is the question of who else might need to raise capital to strengthen their balance sheets. HBOS and Barclays are the names in the frame. Analyst Alex Potter of Collins Stewart believes that, should Barclays announce write-offs of a similar magnitude to those of RBS, then it would require over £8bn. He adds that "Basel II [the new international regulatory capital regime] will likely be depressing HBOS's capital ratios as UK house prices fall." Bradford & Bingley has again denied rumours that it is planning to raise fresh capital - but, then again, so too did RBS a few months ago.
The Bank of England's liquidity scheme is probably not going to neutralise the current outbreak of risk-aversion among the mortgage banks, who still face costly funding and a sliding housing market. So we reiterate out sell advice on HBOS (520p), (163p), (530p), as well as Lloyds TSB (440p), the latter because of its relative over-exposure to UK retail lending. Barclays has sounder long-term prospects but, given the nerves over fund-raising, we downgrade our buy advice to fairly priced (459p).
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
