FTSE hit by bank sector worries

London stocks ended lower on Wednesday as Bradford & Bingley kicked off the bank reporting season in worrying fashion.

The mortgage lender revealed £225.6m of impairment charges related to structured investment vehicles, CDOs and other one-off losses and admitted it had been "an eventful and difficult year for the banking sector" due to turmoil in the credit markets.

Pre-tax profits for 2007 were £126m, down from £245m.

Analysts said the B&B figures were worst than expected and pointed to a difficult few weeks for the sector. Other leading UK banks report over the next few weeks.

James Hamilton, analyst at Numis Securities, said B&B's exposure to the buy-to-let market meant it had been particularly badly hit.

"We believe that the write down of SIV and CDO assets is a sign of the start of the correction in the global property bubble. We expect there will be a time lag between the property market weakening and buy-to-let investors realising that they have a terrible investment and sell," he said.

Sandy Chen at Panmure Gordon added: "We expect further charges on B&B's structured credits as the credit environment deteriorates further. Put this together with a weaker margin outlook, expectations of lower lending volumes, rising bad debts, and the prospect of tighter capital adequacy requirements, and we see no reason to change our pessimistic outlook for future earnings growth."

B&B lost 23.1 per cent to 187p, Alliance & Leicester fell 7 per cent to 559p and Northern Rock shed 9.1 per cent to 95½p, although larger lenders such as HBOS made modest gains.

Down almost 100 points early in the session, the FTSE 100 clawed back some of its losses as Wall Street opened higher. The benchmark index closed 29.9 points, or 0.5 per cent lower at 5,880.1.

Hopes of aggressive cuts in UK interest rates were dealt a blow as the Bank of England's quarterly inflation report warned that inflation could rise above 3 per cent.

"The quarterly inflation report indicates that only limited further reductions in interest rates are likely," said Howard Archer at Global Insight.

House builders were also lower as the Royal Institute of Chartered Surveyors' January survey revealed falling numbers of surveyors reporting house price increases, while the number of new buyers fell for the 14th consecutive month and at a faster rate.

Persimmon fell 2.6 per cent to 726p, while Taylor Wimpey lost 2.7 per cent to 173p.

The mining sector was also weak as takeover target Rio Tinto reported a 1 per cent rise in full-year underlying earnings. The company was upbeat about 2008, saying demand and commodity prices would remain high and raised its full-year dividend by 31 per cent to $0.84 a share.

Rio dropped 1.4 per cent to £54.45, while Vedanta Resources lost 3.4 per cent to £19.54 and Lonmin fell 1.1 per cent to £32.65.

British Energy led the FTSE 100 risers, up 9 per cent to 533p, as the nuclear power group reported better than expected core earnings in its first nine months of the year. The company proposed an additional dividend of 14½p a share, which was also at the top end of expectations.

"British Energy is the clearest value opportunity in the sector," wrote analysts at Cazenove. "Upcoming newsflow should be positive with an announcement on new nuclear partnerships expected by the end of March."