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B&B: banking omens

• Robert Peston
• 13 Feb 08, 08:05 AM

You would be forgiven for thinking 鈥渂anking crisis, what banking crisis?鈥� on a casual reading of .

So-called 鈥渦nderlying鈥� profit before tax is up 5% to 拢351.6m.

The dividend has been increased by the same percentage to 21p.

And the group鈥檚 capital ratios 鈥� the important measures of the strength of its balance sheet 鈥� have improved.

Since the B&B figures signal the beginning of the bank reporting season, should we all just breathe a sigh of relief and return to the traditional British sport of bashing the banks for allegedly making excessive profits?

That I think would be a bit premature.

Its actual pre tax profits, the number that the accounting rules determine as the proper one, actually fell and sharply.

In fact statutory pre-tax profit almost halved from 拢245m to 拢126m.

Ouch.

And here are some other disclosures by B&B, which ought to make us a little bit anxious about what its bigger brethren will reveal in the coming few weeks.

The cost of raising money for the bank has gone up significantly, so that its net interest margin 鈥� the difference between what it charges for loans and pays out for deposits and other forms of funding 鈥� has shrunk from 1.19% to 1.1%.

And it expects that margin to shrink further in the current year 鈥� which rather explodes the complaint against banks that they are failing to pass on the benefit of lower base rates to borrowers.

Also the number of mortgage borrowers in arrears on their payments by three months or more has gone up by a striking 42% to 6,170.

As a percentage of its loan book, these potential bad loans represent a relatively small proportion, just 1.63%.

But the trend is disturbing.

However it鈥檚 the size of the losses on its exposure to sub-prime and structured finance that stand out.

Just a few weeks ago, it did not expect to suffer any losses on its CDO and SIVs.

Now it鈥檚 disclosing 拢94.4m of impairment charges and a further 拢50m loss on a fall in the market price of derivatives built into an investment in 鈥渟ynthetic鈥� CDOs (don鈥檛 ask, please).

So that鈥檚 拢144.4m of losses that only recently it had not expected to incur.

What does that betoken for RBS and Barclays, whose exposure to CDOs is vastly greater?

Nothing good.

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