UK Mortgage and Commercial Banks Decimated by Bear Stearns Bust

By: Nadeem_Walayat

Panic selling of the financial sector gripped the stock market today following news of the bailout of Bear Stearns over the weekend. The FTSE ended the day down over 200 points. The banks hit the hardest were the mortgage banks followed closely by those with large mortgage backed bonds and derivatives exposure as the deleveraging of the $500 trillion market continues. The Bank of England stepped in to provide emergency lending of £5 billion which was oversubscribed by more than 5 times, and indication of the desperate state of the UK banks.

Royal Bank of Scotland (RBS)

RBS Fell nearly 9% to 304p, the bank is down 58% from its 12 month high of £7.20. The resulting yield of 15% seems unsustainable in the wake of further write downs expected.

The bank is still in the process of digesting its takeover of ABN Amro, which unfortunately brought several £ billions of losses in sub prime mortgages with it that has hit the RBS share price.

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HSBC

HSBC is one of Britain's strongest banks, that despite large losses of more than $20 billions in the US sub prime housing market, managed to increase profits by 10% to $24 billion due to surging revenues from its extensive asian operations.

This underlying strength is reflected than the fact that the bank's share price has managed to hold up well compared to many others, falling just 2% on the day to £7.46, and down 24% on its 12 month high of £9.72. The bank is expected to continue to outperform the banking sector despite expectations of further bad debt losses of another $20 billion.

Barclays

Barclays, in the light of its failure to take over ABN Amro was seen as a positive outcome in the light of the credit crisis and infact as a potential take over target itself. However, given the current high risk environment, take over talk has completely evaporated which is reflected in the fall of its share price today of nearly 10% to £3.92 and a fall of 50% from its 12 month high.

Barclays has estimated losses of $3 billion in its sub prime and derivatives related activity. This is expected to grow over the next 12 months by at least a further $2 billions.

Halifax Bank of Scotland (HBOS)

Britain's biggest mortgage bank crashed by 12.5% today to just £4.60 per share, that's a fall of 60% over the last 12months.

As the UK housing market tumbles the Halifax despite its size is going to come under increasing financial pressure. However, it 'should' survive and come out stronger at the other end of the crisis, perhaps in 2010.

Alliance and Leicester

A&L, a buy to let market specialist saw its share price plunge by over 7% to £4.75. The banks share price has fallen over 61% in 12 months. The bank has over the last 6 months attempted to move some way away from the buy to let market and has expanded its commercial banking operations which is expected to give some support to the bank going forward. However unlike many other UK mortgage banks the A&L does have sizeable direct exposure to the US sub prime mortgage market and therefore is at serious risk of seeking emergency funding from the Bank of England.

Bradford and Bingley

B&B ended the day at £1.93 down 3.6%. The bank is down 65% from its high of £5.40 and the earlier fall below £2.40 had seen the bank break below critical multi year support levels, a level that now is expected to act as a cap on the share price.

This bank most closely resembles Northern Rock in that of heavy reliance on the money markets and high degree of exposure to the UK's speculative buy to let mortgage market. Infact, Bradford and Bingley is Britain's biggest buy to let mortgage bank. Therefore the bank is at serious risk and expected to experience extremely difficult trading during the UK housing bear market that is just beginning.

The major UK Banks at most risk of failure are those with large mortgage books such as HBOS, A&L and Bradford and Bingley. The banks most likely to whether the downturn the best are those with far east exposure such as HSBC.

What's not mentioned are the smaller banks and a whole host of financial institutions that are heavily involved in the UK sub prime and buy to let mortgage markets that are near tipping points.

The impact on borrowers is being felt in the widening spread between the base interest rate and the mortgage rates offered to customers coupled with increased arrangement costs and much tighter lending criteria. This was first highlighted some 7 months ago UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth . The Banks of began withdrawing easy credit facilities during September 2007,(UK Mortgage Banks Call in the Loans - Housing Market Deflation) and even today more mortgage products vanished from the banks shelves in a deluge of press releases giving mere minutes of withdrawal notices.

The UK housing market is now down some 5% from the peak set in August 07, and is on course to meet the forecast target for a minimum 15% decline over 2 years. The consequences of this is for further strain on the market banks with no light at the end of the tunnel in sight. The risks are obvious that Northern Rock, and Bear Stearns will be followed by more bank failures and subsequent central bank bailouts which contributes towards a stagflationary environment.

The British Pound fell sharply on the increased risks of bank failures as the UK's financial sector is much larger as a percentage of the economy than virtually all other major industrialised countries, therefore the economic impact going forward will be much greater than consensus expectations.

By Nadeem Walayat

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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 120 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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