Some Business news at Wednesday 1st April 2009
Analysis: B&B 2008 accounts and report
Jim Moore 31.03.09
Bradford & Bingley would have reported a huge loss for 2008 without nationalisation as it emerged that its bad loans have soared by a factor of more than 20 - with worse to come.
Despite the continuing deterioration of bank's finances, it still maintains it should be able repay the £18.4 billion owed to the taxpayer.
Remarkably, B&B said it turned a profit of £134.3 million in 2008 against £126 million the previous year.
However, that figure was artificially boosted by a one-off gain of £216.3 million on the forced sale of B&B's deposit book to Banco Santander's UK arm, Abbey, for £612 million.
It was also fattened by the interest-free debt and guarantees provided by the taxpayer, which were provided to secure the bank's funding requirements after the sale of the deposits. The stricken bank will not have to pay interest charges of £115 million that would normally be due on this money. B&B would have been more than £200 million in the red without these factors.
The figures are contained in the company's annual report, filed at Companies House this week. They illustrate the dramatic deterioration in its loan book last year.
In 2008, B&B set aside £507.7 million to cover losses on bad loans - more than 20 times the 2007 figure of £22.5 million. It also reported a £120.3 million loss on "financial instruments" compared to a £6.5 million profit the previous year.
The bad debt provision includes £173.9 million to cover suspected cases of fraud and £70 million of estimated losses on future sales of repossessed homes as a result of falling house prices.
The bank has already booked a £65.5 million loss through selling some of the 1,503 homes it repossessed last year, of which 1,012 were owner-occupied and a further 491 were buy-to-let properties.
Last year, arrears of more than three months soared to 4.6% of loan accounts representing 16,712 cases and £2.4 billion of loans, compared to 1.6% the previous year (5,610 cases, £731 million). The company predicts that the position will inevitably deteriorate throughout this year and into 2010.
Cash call crisis
B&B collapsed and was taken into state ownership at the end of September, less than three months after investors - many of them small shareholders - had contributed £401 million in a rights issue designed to keep the bank afloat.
Prior to the cash call it had already disposed of £4 billion of "non-core lending portfolios" and increased retail deposit balances by £2.1 billion during the first four months of last year. A further £2 billion of committed, secured financing had been raised on the global debt markets.
The troubled cash call - first mooted last May - was restructured on 2 June after a disastrous trading statement forced the bank to call on outside help from US private equity firm TPG. The situation further deteriorated when TPG abruptly walked away shortly after B&B's credit rating was cut by Moody's. Rather than opting to close its doors or call on regulators for help, B&B took the decision to restructure its rights issue again.
B&B insisted that withdrawals from depositors - worried about their savings - "stabilised" in August after investors had handed over their cash.
But it said: "A succession of external events in the first half of September materially affected public confidence in the banking system, particularly in mortgage banks."
These included, it said, the collapse and effective nationalisation of US insurer AIG and mortgage companies Fannie Mae and Freddie Mac; the downgrading of lender Washington Mutual to "junk bond" status; the collapse of Lehman Brothers; and the announced takeover of HBOS by Lloyds TSB to form the Lloyds Banking Group (LLOY).
Moody's applied a further downgrade to Bradford & Bingley's ratings on 16 September. Fitch Ratings and Standard and Poor's followed suit on 23 September. Four days later, the Financial Services Authority told B&B it no longer satisfied the "threshold conditions for operating as a deposit taker".
Over that weekend, the bank was effectively nationalised with its deposits sold to Abbey and the rest of the bank taken into state ownership.
These events have proved highly controversial with investors, many of whom argue that they were misled into paying up. Some 1,600 of them are taking legal action.
The report revealed that the value of the bank's lending increased sharply in the run up to the rights issue - lending balances had grown to £42.2 billion by June 2008 compared to £40.4 billion at the end of 2007 before falling to £41.8 billion at the end of last year.
Pension scheme
As if that was not enough, the closed final salary pension scheme is facing a £10 million funding shortfall.
In the report, B&B said that as it winds its business down, repossessions would only be considered "as a last resort". The bank insists that it would not instigate proceedings against owner occupiers within the first three months of the customer going into arrears and will not take possession of a property within the first "six months".
B&B may also seek to find a third party to administer the rundown of its lending book and is encouraging people on fixed term mortgage deals to move lender before they are due to end. As such it has said it will waive "redemption" penalty charges usually imposed if people switch lenders in the midst of a deal.
The downside of this strategy is that less risky and profitable customers able to switch lender usually do so leaving the bank - and the taxpayer - with a rump of potentially toxic loans that it may prove extremely difficult to recover.
B&B said that after the Government bail-out it was now one of the Britain's "better capitalised banks".
The report also reveals that Steven Crawshaw, the former chief executive, was paid more than £1 million last year - even though he only worked for five months because of ill health.
The 47-year-old is reportedly suffering from a serious heart condition and is already receiving a £105,000 annual pension as a result.
Mr Crawshaw's total pay for 2008 is bolstered by £365,000 representing his basic salary in lieu of notice for the period up to 28 February 2009.
Richard Pym, his replacement has voluntarily agreed to cut his pay from £400,000 to £350,000, and given up a £187,500 bonus. He has moved from a two-year to a one-day notice period.
Darling cuts business rate rise
BBC 31 March 2009
Alistair Darling says the move will help businesses in the downturn
Chancellor Alistair Darling has gone back on plans to increase business rates by 5% from 1 April.
Mr Darling said the rise was linked to the Retail Prices Index last year, but RPI inflation had now fallen to zero. He said businesses would face only a 2% rise this year and the remaining 3% would be smoothed out over the following two years. "I believe this will provide real and genuine help for businesses in this country," said Mr Darling.
He estimated that one-and-a-half million properties would gain from the change and £600m would be deferred.
Mr Darling's announcement applies only to England at present. However, the government said it would "engage with the Scottish, Welsh and Northern Ireland administrations to clarify the situation for ratepayers in respect of business property in Scotland, Wales and Northern Ireland". "I am very conscious of the fact that businesses in this country were faced with an increase to business rates of 5% simply because the increase in business rates is linked to the rate of RPI inflation last autumn, last September," Mr Darling said. "But RPI inflation has now fallen to 0% in the last month and it is expected that it will fall further than that."
The impending rise in business rates had been feared by many firms, which said they could ill afford to pay 5% more in the midst of a recession.
John Wright, chairman of the Federation of Small Businesses (FSB), welcomed Mr Darling's move, saying: "This is good news for small businesses, as far as it goes. This shows that FSB pressure has finally paid off."
Mr Wright said the government still had "more room for manoeuvre" on business rates, and called on Mr Darling to bring in automatic small business rate relief for eligible small firms.
For its part, the British Chambers of Commerce was less enthusiastic. Head of policy Kevin Hoctor said: "Staggering the cost is still an increase and it will be complex. Businesses will still be hit at a time when they have restricted cash-flow and growth."
Mr Hoctor said some firms could still go bust under the strain, adding: "This doesn't make any sense in an economic downturn. It will be business that drives the UK out of this recession, so I would urge government to find a way of supporting firms with these extra costs."
The Conservatives welcomed the move but said the government needed to do more to help businesses. "There are a range of other tax increases which will damage businesses in the UK including taxes on empty properties, the end of transitional relief and the vast tax increases on businesses in ports," said Caroline Spelman, shadow local government and communities secretary. "The government needs to go through them all and look at the implications," she added.
Businesses turn to MPs for help after banks demand homes as security
Suzy Jagger March 31, 2009
Britain's biggest banks are demanding that directors of small businesses put up their own homes as security to obtain basic credit facilities, The Times has learnt.
MPs have been inundated with pleas from entrepreneurs to step in and demand to know why the cost of securing ordinary borrowing facilities has soared and why lenders are insisting that directors offer their homes as security for renewing a corporate overdraft.
Evidence of new punitive lending terms comes amid a row over whether Britain's banks, which have been bailed out by or have received significant assistance from the taxpayer, are hoarding capital to shore up their balance sheets instead of passing on funds to help small businesses.
Michael Fallon, the Conservative MP and senior Tory on the Treasury Select Committee, told The Times: “I have taken up specific cases where lending facilities have come up for renewal and where the bank has insisted on much more onerous terms than a year ago. In such cases, the banks will renew lending facilities only in return for a higher fee or if directors agree to put their homes up as security. My constituents have asked that I write to the bank and demand to know why.”
Vince Cable, Treasury spokesman for the Liberal Democrats, said that over the past six months he had been asked to assist businessmen with the same lending issues. “I never used to get business people coming to my surgery at all, but increasingly I am being approached to write to bank chairmen to take up various issues for them, such as credit lines, demands for unreasonable security and tougher arrangement fees. This is a role I have not been asked to undertake as an MP before now and it is a significant shift. I've gone from no business people to several a week,” he said.
Other MPs have told The Times that there is continuing confusion over which banks have signed up to specific government finance initiatives for small and medium-sized companies and the terms and conditions of such programmes.
The Federation of Small Businesses said: “This is a major concern for us. Bank managers are a law unto themselves. While the banks' chief executives might have signed off on various government initiatives designed to help small business, further down the organisation, such as branch managers, know there is a recession and are asking for an arm and a leg in security for basic funding needs. We've told our members that, if they have exhausted other avenues, they should go to their MP.”
The federation was also worried that, of the £1.3 billion earmarked by the Government in January to be disbursed by banks to help small businesses, only £60 million had been extended to companies so far.
About 90 per cent of Britain's small and medium-sized businesses use one of the big four clearing banks — RBS, Barclays, HSBC and Lloyds Banking Group.
Peter Ibbetson, chairman of business banking at RBS, insisted yesterday that the state-controlled bank had not changed its lending criteria and had increased its corporate loan book last year by 10 per cent. However, one banker from one of the four, who declined to be named, said: “The days of cheap and easy credit are over.”
Japan's workers wax poetic about economy
Leo Lewis, March 31, 2009
White-collar workers are writing poems about the dire state of Japan's economy in a contest sponsored by an insurance company.
The annual Dai-Ichi Seimei poetry competition, where the average Japanese working man vents his spleen in verse, has revealed a mood of chronic dread and despair on the payrolls of the world’s second biggest economy.
Timed to coincide with the end of Japan’s financial year, the offerings of terse, 17-syllable senryu poems have captured just how miserable everyone feels. Cost-cutting, unemployment, penury and fruitless visits to “Hello Work” job centres are recurrent themes.
The tone is hardly surprising. As the books closed on fiscal ’08 today, Japanese were served another helping of terrible data on the economy and were offered only the slenderest thread of hope by the Government itself. On the eve of his departure for London and the G20 meeting, Japan’s dismally unpopular Prime Minister Taro Aso called for a further round of stimulus measures that government sources told The Times might amount to around £100 billion more in fiscal spending. The proposal, said analysts at Bank of Tokyo Mitsubishi UFJ, was “starved of detail”, but came with confirmation from the Prime Minister that the country was undoubtedly “still in a crisis”.
The figures released on Tuesday were unremittingly grim. Unemployment soared to a three-year high of 4.4 per cent in February and the monthly pace of decline in the jobs-to-applicants ratio was its quickest in over three decades. Housing starts tumbled by nearly 25 per cent from January levels, and household spending lurched downwards as more and more families prepare mentally for the possibility that one or more members will lose their jobs.
“I’d love to exploit the strong yen, but I haven’t got any”, ran one poem that made the competition shortlist.
The real problem, say economists, is that the same sense of hopelessness may also have worked its way up into the boardrooms. With one eye on the build-up to the G20 meeting in London and another on the seething economic turmoil at home, the Tokyo markets are on Wednesday bracing for the release of the Bank of Japan’s quarterly Tankan survey of business sentiment. Like the Daiichi poetry competition, the Bank of Japan survey represents only “soft” data, but its importance in fixing the direction of trading, say brokers, is paramount.
Unfortunately, for those investors hoping for some continuation of last week’s strong rally, the prognosis does not look good. The chief executives who answer the survey have been watching the same remorseless flow of bad economic news as their employees. They have seen exports plunge by nearly 50 per cent in February and have themselves been responsible for a dramatic slowdown in industrial production – measures that most analysts have applauded as a quick and decisive response to the drop in global demand.
Analysts in Tokyo told The Times that the February rise in unemployment was merely the foretaste of more acute increases still to come, with some predicting that the rate could surge to as much as 7 per cent by the end of the year.
So far, said BNP Paribas economist Hiroshi Shiraishi, Japanese companies have managed to ride the global downturn without spectacular job cuts: they have turned to a variety of measures like work-sharing programmes, and shorter working weeks in an effort to appear responsible. That, he said, will not be sustainable as the year rolls on and there emerges a realistic chance that Japanese companies may face a second year in the red. “Then we will see serious restructurings,” he added.
Mr Aso’s attempt to talk-up the prospects of an early recovery as fiscal 2009 dawns were equally lackluster. His talk yesterday of Japan’s rediscovering growth through exports of culture, animation, fashion and pop-music will do little to allay the concerns of the corporate leaders of an economy that makes its money from cars, electronics, machinery and engineering.
Nationwide gets £1.6bn to take over Dunfermline
Scottish mutual told members last year it had no sub-prime exposure
By Mathieu Robbins 31 March 2009
Nationwide, Britain's largest building society, took over the prime parts of the collapsed Scottish lender Dunfermline yesterday in return for a £1.6bn payment from the Government.
The healthier assets of Dunfermline, Scotland's largest building society employing nearly 500 people, have been transferred to Nationwide. These include £2.3bn-worth of retail savings accounts, about £200m of net wholesale liabilities, as well as £1bn of the healthier mortgages on Dunfermline's books.
British taxpayers, meanwhile, will take on £1bn worth of toxic assets from the balance sheet of the Scottish building society. The Government is also paying Nationwide £1.6bn to make up for the difference between liabilities and assets in the parts of Dunfermline that Nationwide is buying, in a deal that marks Nationwide's third rescue of a smaller building society in the financial crisis. The payment is due "essentially because we've taken on net liabilities of approximately £1.5bn," a Nationwide spokesman said.
The Government put the troubled Scottish lender up for sale over the weekend after saying that a full bailout was not in the taxpayer's interests. The development will do little to boost morale among financial services companies in Scotland, which has seen HBOS in effect rescued by a merger with Lloyds Banking Group, as well as the much-publicised problems faced by the former flag-bearer Royal Bank of Scotland.
Dunfermline's other assets, including toxic liabilities such as its commercial property book, will be placed into a government administration scheme. These are worth £1bn. However, the final liability to the taxpayer is expected to be much closer to £15m, after asset sales and the Financial Services Compensation Scheme are taken into account.
Dunfermline, which had been in talks with the Financial Services Authority since November in an attempt to survive, collapsed over the weekend as it succumbed to losses from its commercial property and residential loan books, which included sub-prime British commercial loans worth £650m and mortgages worth £150m bought from other banks, including GMAC and a unit of the now-defunct Wall Street bank Lehman Brothers.
As late as February last year, Dunfermline was saying it had no exposure to sub-prime loans.
Under the scheme both Dunfermline's chairman, James Faulds, and its chief executive, Graeme Dalziel, whose salary in 2007 was £290,000, will move on. Mr Faulds had stated as late as February 2008 in the building society's 2007 annual review for members that Dunfermline "has no exposure to sub-prime lending", in bold letters.
Gordon Brown, whose Kirkcaldy constituency in Fife is near Dunfermline's headquarters, said the building society should take the blame for its situation. "The Dunfermline Building Society is the author of its own mistakes: mistaken judgements, mistaken investments, mistaken policies," he said.
Dunfermline will be broken up, under a process conducted by the Bank of England over the weekend under the special resolution regime.
The accountancy firm KPMG has been hired as administrator for most of the business that the Government is taking, and will try to get what it can for taxpayers from the assets.
The Government has already needed to stage two bank rescue packages since October to help financial institutions rocked by the worst crisis in more than 70 years. It has nationalised Northern Rock and Bradford & Bingley and taken majority stakes in Royal Bank of Scotland and Lloyds.
The Chancellor, Alistair Darling, told Parliament yesterday that there was no other option for the Scottish mutual, due to the scale of the deterioration in its financial position.
Meanwhile Bradford & Bingley revealed yesterday that bad loans had cost it £508m last year.
S&P fears debt crisis for Europe's companies
By Ambrose Evans-Pritchard 31 Mar 2009
Standard & Poor's has warned that it may prove "extremely difficult" for European companies to roll over €565bn (£524bn) of rated corporate debt coming due by the end of the next year, raising the risk of a default crisis on low-grade bonds.
The agency said the deluge of bond issuance by governments struggling to cover deficits may "overwhelm investors" at some point this year
The rating agency said car manufacturers have already "burned through" much of their cash reserve, leaving them "glaringly exposed to the downturn". Oil and gas, utilities, and telecoms are all likely to face difficulty refinancing their debts.
Europe has been caught off guard by the sudden collapse of industrial production since September. The OECD club of rich states expects Germany's economy to contract by 5.3pc this year, and Russia's 5.6pc, with "risks skewed to the downside".
S&P fears that A and BBB rated companies may be shut out of the credit markets, with mounting danger if the recession drags on into next year. "We believe there is a real risk that the gradual pick-up in activity expected from the end of this year could quickly peter out. This would transform a "V" shaped recession into a "W" shaped one, where two episodes of declining output are separated by a short uptick in growth."
The agency said the deluge of bond issuance by governments struggling to cover deficits may "overwhelm investors" at some point this year and lead to a sharp spike in long-term bonds rates, perhaps by 75 basis points. This would cause a cascade effect across the spectrum of corporate debt.
The sudden slide in currencies across Eastern Europe has twisted the knife deeper for companies with euro and dollar debts, especially those geared to home sales.
Russian companies rated by S&P must roll over €58bn by the end of next year. They raised debt abroad because the Moscow bourse lacks a developed bond market. The problem is that so many borrowed on short maturities, betting that the oil boom would continue.
Projects have since come an abrupt halt across Russia. Developer Mirax has stopped construction on its 98-floor Federation Tower, billed as Europe's highest. The half-built skyscraper stands as a monument to recession on the Moscow skyline.
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