S&P’s places B&B on credit watch

Standard & Poor\'s has put Bradford & Bingley on credit watch with negative implications.

The ratings agency stated that the credit watch on the mortgage bank’s A-1 short-term counterparty rating is due to rising impairments, potential margin pressure and further markdowns, as well as continuing funding constraints.

Nick Hill, credit analyst at S&P’s, said these factors “may not be consistent with the current rating”.

According to S&P’s the performance of B&B’s core lending business is sound, but the bank made a small loss in the second half of 2007, as a result of write-downs on sub-prime exposures, impaired investments in structured investment vehicles, hedge ineffectiveness and a loss on disposal of its mortgage book.

The agency warned that B&B’s liquidity position, although sound, was not as strong as it expected after the sale of the various loan books.

It added that B&B’s net lending in the second half of 2007 exceeded expectations, despite a tightening in criteria and firmer pricing.

However, S&P’s stated that the £4bn sale of commercial mortgage and housing association loan books last November did not provide the liquidity benefit the agency was expecting.

S&P’s expects B&B’s liquidity and funding position to be supported by much lower loan growth in 2008, £2.5bn of new secured funding lines, and faster retail deposit growth. However, term funding remains challenging and the public securitisation markets appear unlikely to provide material funding for specialist lenders in 2008.

At the same time, although arrears levels have only risen slightly to 2.1% from 1.8% of the book, S&P’s noted impairment charges rose sharply to £17m in the second half of 2007, three times the level of the second half of 2006.

“Although none of these factors in isolation is likely to lead to a downgrade, their combination may not be supportive of an ‘A-1’ short-term rating,” said Hills.