UK bank Bradford & Bingley issued a stark warning on the state of the UK mortgage market yesterday and slashed the price of its emergency fundraising to secure a private equity lifeline, hitting bank shares across Europe.
In the bleakest outlook yet from a British lender - weeks after it last spoke to investors - B&B said it had tumbled to a loss for the first four months of the year and saw continued pressure on margins as funding costs remain high and the risk of customers defaulting on loans rises faster than expected.
The bank blamed a sharp deterioration in April and that was backed yesterday by official data which showed new home loan approvals in Britain fell to a new record low that month.
B&B's shares, which have already lost almost two-thirds of their value over the past year, slumped a further 32% to a record low of 60 pence yesterday.
The pain spread to banking shares across Europe, as dealers said B&B's troubles showed even cut-price rights issues could fail amid a lukewarm appetite to invest more after a torrid year for the sector.
Royal Bank of Scotland and HBOS, which also plan bumper rights issues, put out statements to say they continued to trade in line with their previous guidance.
B&B also announced plans for an outside lifeline as US private equity firm TPG Capital - also known as Texas Pacific - agreed to take a 23% stake in the bank in its first major UK bank investment. It will invest around £179m sterling to become the single largest investor in Britain's biggest buy-to-let lender.
The private equity group's surprise swoop mirrors moves by strategic investors to shore up US banks as financial institutions across the world have struggled with writedowns, the impact of the credit crunch and the prospect of recession.
TPG has positioned itself since the start of the crunch as a potential saviour for banks hit by sub-prime losses, striking a deal in April with US bank Washington Mutual.
The deal with TPG will add to B&B's planned cash call, announced in May but now trimmed to £258m, as the bank slashed the price in the face of the worsening outlook. It will now raise a total of £400m, net of expenses.
The bank also announced the highly unusual step of slashing its rights issue price to 55 pence, down from an initially planned 82 pence price for the 19-for-25 issue as its shares threatened to go 'underwater', or dip below the already discounted level.
B&B's unscheduled trading update gave no specific outlook for its 2008 headline profit, but it warned of weak margins and said writedowns on assets battered by the credit crunch had dragged it to a pre-tax loss of £8m in the first four months of 2008. Underlying profits halved to £56m.
It also said it expected deteriorating trends seen in the first four months of the year to continue.
In an alarming sign for UK mortgage lenders, it said arrears were rising and margins were set to be hit by higher funding costs, a drop in mortgage redemptions - which meant the bank was unable to pass on those costs - and by increased competition for retail savings.
The bank said arrears, an indication of possible future defaults, jumped in April, particularly for mortgages recently acquired from GMAC. It also said it had uncovered mortgage fraud which cost the bank some £15m.
B&B has been under pressure since it surprised investors in May with news of an emergency rights issue, a month after saying it had no plans to do so. It said at the time it had waited for markets to stabilise before going ahead with the cash call.
