Profits halved at UK mortgage lender

British mortgage lender Bradford & Bingley said today that profits virtually halved last year after an "eventful and difficult" period for the banking sector.

A host of write-downs, including £142.1m (€191m) on investments hit by the credit crunch, left the firm with pre-tax profits of £126m (€169.4m) - 49% below 2006.

The lender added that bad debt charges on its residential mortgages had trebled to £22.5m (€30.2m) last year amid more pressure on borrowers.

Despite the profits blow, B&B said key markets remained healthy, with tenant demand at its strongest level for five years continuing to buoy buy-to-let mortgages.

The group said it had largely weathered the storm in global credit markets during the second half of 2007 through a wider range of funding sources, as well as moves such as the sale of £4bn (€5.4bn) of loans in November last year to boost cash reserves, and concentrating on lower risk lending.

It said: "This proved very beneficial in September and October when the public wholesale markets were effectively closed."

B&B's position contrasts with the crisis at Northern Rock, which was heavily reliant on money markets to raise cash for lending and was hit by soaring borrowing costs.

The company saw a 7% rise in savers' deposits to £21bn (€28.2bn) last year and said mortgage lending rose 27% to £39.4bn (€53bn).

B&B added that its margins had declined slightly to reflect higher funding costs "given the more constrained environment" however and it raised the cost of its mortgages during the second half of last year.

It has also moved more cash away from the higher-risk investments which were at the centre of the financial turmoil last year into safer financial instruments.

The group's chief executive, Steven Crawshaw, said B&B had "performed well in a challenging year for the sector".

He said: "We believe the fundamentals that drive our specialist markets remain strong, and expect the buy-to-let market to continue to grow at a faster rate than the mainstream mortgage market."

The funding squeeze may also help shake out some of B&B's competitors in the market, Mr Crawshaw added.

"The withdrawal of other lenders from specialist markets provides us with opportunities to protect margins and continue our profitable growth in the future," he said.

The company also saw a 42% rise in borrowers three months or more in arrears to 6,170 last year - equalling more than 1.6% of its total mortgage book.

Shares in the group fell 12% today as the profits fall sparked a sell-off by investors. The news also hit rival lenders, with Alliance & Leicester the leading FTSE 100 Index faller in early trading.

Panmure Gordon analyst Sandy Chen highlighted the extent of B&B's investment losses and headwinds from weaker margins, lower lending volumes and rising bad debts.

He said: "There is a large gap between management's underlying earnings and actual statutory earnings. We have had a long-running disagreement with B&B about what items should be classified as exceptional. We see no reason to change our pessimistic outlook."