It was either now or what might have felt like never for Stephen Hester. Royal Bank of Scotland’s chief executive since 2008 is leaving later this year. Hester had to move on before the process to sell down the government’s 81 percent stake begins in earnest – or stick with the job for at least another five years.

December 2013, Hester’s scheduled departure date, is a natural cutoff point for the lender. When the former investment banker took over in the midst of the crisis, RBS’s loans were 154 percent of its deposits and it had 258 billion pounds of money-losing toxic assets. RBS’s turnaround programme is now drawing to a close, with deposits matching loans and the non-core asset beast all but slain.

Hester deserves credit for completing this first half of RBS’s cleanup job. He rarely received any. As the boss of an essentially nationalized lender with a large investment bank he regularly had to defend seemingly indefensible payouts to traders. The various crises suffered under his watch – attempted Libor fiddling and IT breakdowns – were largely relics of a previous era.

Yet it makes sense to appoint a new boss now. Prompted by the government’s focus on a privatization ahead of the UK election in 2015, the Treasury aims to start the stake sale process in spring next year. For investors to feel confident about buying in, they need a CEO who they believe will stick around for a while. Given that RBS’s share sale will probably be done piece by piece, this could take years. In the end, the bank’s majority shareholder was the main catalyst prompting Hester to either commit to the long term, which he could not, or go.

Heading off now is probably also better for Hester’s reputation – and personal finances. The need to act as a human shield meant he ended up taking only one of a possible five annual bonuses. Meanwhile, RBS’s lowly share price meant previous long-term incentive schemes failed to pay out. Rather than risk an even more abrupt exit, like Citi’s Vikram Pandit last year, he can now dodge getting embroiled in the debate over how RBS should be sold and at what price. Given his status as a target for the anti-banker lobby, that’s probably better for all concerned.

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By George Hay

LONDON, June 7 (Reuters Breakingviews) – Partnership’s
(PA.L: Quote, Profile, Research) IPO pricing isn’t as conservative as it looks. The
insurer’s shares started trading on June 7 over 20 percent above
the 385 pence at which it finally listed – which was near the
top of the range. With the offering oversubscribed almost 10
times, it might look like the advisers left too much on the
table. Yet the pricing could also just reflect how heavily
Partnership’s future growth depends on its much-vaunted set of
mortality data.

Investors salivate over Partnership for understandable
reasons. An aging UK population means that the general annuity
market should grow 50 percent to 21 billion pounds by 2016,
according to consultancy Oliver Wyman. The sub-category of
so-called “non-standard” annuities, which somewhat ghoulishly
specialises in higher risk groups like heavy smokers or patients
at death’s door like cancer sufferers, should grow 80 percent to
8.1 billion pounds by the same date. Only a third of annuities
are currently non-standard, but this could potentially rise to
well over a half.

Because Partnership executives have been compiling data on
non-standard annuities for well over a decade, the firm is
favourably placed to pick up a big chunk of this growth. The
detail of who tends to die, and when, allows the company to
price annuities at optimum rates without exposing it to
excessive longevity risk. If it can continue to exploit this
enviable barrier to entry, the IPO price – only 11.7 times
expected 2014 earnings, just below the average for the UK
insurance sector – looks cheap and explains investors’ interest
in all things morbid.

The catch is that Partnership’s 56 percent compound annual
growth rate in operating profit between 2010 and 2012 has been
noticed. The advantage could erode if other insurers with deep
pockets offer the same annuity rates and are ready to suck up
losses to muscle in to the market.

That is a long-term risk, as is – at least from the
company’s financial viewpoint – improvement in the medical
treatment of serious diseases. In the short term, investors know
Partnership has a headstart. They also know that a bigger player
could also try to buy the company in the future. Hence the
firm’s bumper opening day pop.

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CONTEXT NEWS

– Shares in Partnership Assurance Group rose to 470 pence on
its first day of trading, more than 20 percent above the 385
pence level at which the insurer priced its initial public
offering on June 7.

– The IPO price, near the top of the 325 to 400 pence range,
values the company at 1.54 billion pounds. It was nearly 10
times oversubscribed, with U.S. and UK long-only investors
accounting for 75 percent of the book, according to a person
familiar with the situation.

– Reuters: London float values Partnership Assurance at $2.4
bln [ID:nL5N0EJ0FK]

– For previous columns by the author, Reuters customers can
click on [HAY/]

(Editing by Pierre Briançon and Sarah Bailey)

((george.hay@thomsonreuters.com))

((Reuters messaging:
george.hay.thomsonreuters.com@reuters.net))
Keywords: BREAKINGVIEWS PARTNERSHIP/

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and the Reuters sphere logo are registered trademarks and trademarks of
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(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)

By George Hay

LONDON, June 6 (Reuters Breakingviews) – The gory details of
SNS’s nationalisation will leave Cypriots hopping mad. The Dutch
bank has finally unveiled its 2012 accounts, five months after
being bailed out. They show how lucky SNS’s senior creditors
were to be spared a Cyprus-style bail-in.

At the beginning of the year, SNS was in just as dire
straits financially as Cypriot peers like the Bank of Cyprus
BOC.CY and Laiki CPBC.CY. After loading up on 7 billion
euros of duff real estate loans – half of which were to flaky
developers – non-performing loans on its real estate book had
almost doubled in a year to an eye-watering 34 percent. Raising
the expected losses on these to near 50 percent helped push the
bank to a 972 million euro loss for 2012 and a 1.6 billion euro
loss in the first quarter of 2013.

So the Dutch government put 2.2 billion euros of fresh
equity into SNS. That meant only subordinated bondholders had to
take losses – being “bailed in” – to the tune of 1.1 billion
euros. Senior creditors were left to be paid back in full. When
Cyprus’s banks needed new capital, the government couldn’t
afford it. Uninsured depositors are facing losses of between 60
and 100 percent.

The Dutch finance minister that presided over the SNS
rescue, Jeroen Dijsselbloem, was also the Eurogroup boss who
banged the drum for savage losses during the Cypriot bail-in. He
had better hope SNS is now fixed. Luckily, the bank has a 14.9
percent core Tier 1 capital ratio to withstand further losses.
If that isn’t enough, Dijsselbloem will have the chance to show
just how committed he is to the principle of burden-sharing.

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CONTEXT NEWS

– Reuters: SNS Reaal sees no need for more state funds
despite more losses [ID:nL5N0EI0EP]
- For previous columns by the author, Reuters customers can
click on [HAY/]

(Editing by Chris Hughes and David Evans)

((george.hay@thomsonreuters.com))

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Keywords: BREAKINGVIEWS SNS/

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and the Reuters sphere logo are registered trademarks and trademarks of
the Reuters group of companies around the world.

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By George Hay

LONDON, June 4 (Reuters Breakingviews) – The UK government
needs to stop dithering over the Co-op (CPBB_p.L: Quote, Profile, Research). Weeks after a
six-notch downgrade to junk status and a self-imposed shuttering
of new corporate lending, the mutual is still waiting for the UK
regulator to nail down how much capital it needs. The continued
uncertainty increases the risk that corporate deposits walk.

It’s not surprising that Co-op savers are jittery. Stressing
Co-op’s loan book to endure the kind of Doomsday-style losses
suffered by Lloyds Banking Group (LLOY.L: Quote, Profile, Research) in Ireland – including
91 percent non-performing real-estate loans – would mean a
capital shortfall of 777 million euros to maintain a core tier 1
ratio of 7 percent under Basel III capital rules, according to
Morgan Stanley.

But this could be raised via a sale of Co-op’s life and
general insurance arms, and retaining earnings this year and
next. So bondholders and depositors would be spared a
Cyprus-style bail in.

Of course, this scenario requires the regulator to give
Co-op more time than it has given peers to reach the required
capital strength. But it’s hard to see why it wouldn’t. Unlike
European neighbours, the UK sector is overly reliant on
private-sector banks with mutual lenders relatively
under-represented.

Much depends on how big the Co-op’s capital hole really is.
So long as it is well short of 1 billion pounds, a so-called
liability management exercise – polite talk for repurchasing
outstanding bonds at a discount – could just be an add-on that
raises further capital. Holders of Co-op’s 1.3 billion pounds of
subordinated debt could be made an offer to sell out at slightly
above the 60 to 70 percent of face value where the bonds trade.
But if the hole is bigger, the exercise would become more
important, and some kind of coercion could be needed.

The regulator may feel that the Co-op’s relatively plentiful
liquidity – over 10 percent of its assets are cash – and a handy
900 million pounds of cheap Funding for Lending liquidity means
it has time to play with. It’s a big buffer, which may explain
the government’s seeming lack of urgency in fixing the
situation. But a depositor run would make things much tougher.
It should get a move on.

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CONTEXT NEWS

– Some local authorities have withdrawn funds from the
Co-operative Bank since the UK mutual suffered a six-notch
downgrade by Moody’s in May, according to a person familiar with
the situation. The moves were reported first in the Financial
Times on June 1.

– However, some funds had been re-deposited with the bank at
higher rates of interest, the person added.

– Co-op drew down 900 million pounds of cheap liquidity from
the UK’s Funding for Lending Scheme in the first quarter of
2013, Bank of England figures revealed on June 3.

– Reuters IFR: Britain’s Co-op Bank targets bondholders to
plug shortfall [ID:nL5N0EF23R]

– For previous columns by the author, Reuters customers can
click on [HAY/]

(Editing by Chris Hughes and Sarah Bailey)

((george.hay@thomsonreuters.com))

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Keywords: BREAKINGVIEWS CO OP/

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and the Reuters sphere logo are registered trademarks and trademarks of
the Reuters group of companies around the world.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

Cyprus has a liquidity problem. It has been barely two months since depositors of the two largest lenders of this small island state, Bank of Cyprus and Laiki, learned they were to face losses of 60 to 100 percent on the part of their deposits exceeding 100,000 euros. Yet Nicosia’s streets haven’t been savaged by furious rioting, nor have the banks fallen victim to visible panic. The harm is more pernicious: capital controls are slowly smothering a domestic economy already hit by a heavy dose of austerity.

It doesn’t look obvious at first. Controls have been relaxed in stages since March. Businesses can now make cashless payments of up to 300,000 euros without supplying documentation, while permitted cashless transactions from one bank to another have been increased to 15,000 euros and 75,000 euros for households and businesses, respectively.

Yet a major problem lies beneath the surface. Imagine a fictional Cypriot business manufacturing car parts, Aphrodite Autos. And imagine that in mid-March, just before the bail-in, it had 1.1 million euros on deposit at the Bank of Cyprus, to provide a decent buffer against uncertainties such as a price hike of raw materials, which, in Cyprus, are mostly imported.

After the bail-in, Aphrodite Autos is in a tight spot. It still has the 100,000 euros of deposits that were insured. But the million euros that were uninsured are now down to 100,000 euros. 375,000 euros are definitely being turned into Bank of Cyprus shares of as yet uncertain value. Another 225,000 euros are also at risk of being bailed in. Finally, the remaining 300,000 euros have been summarily frozen too.

That’s bad enough. But Aphrodite Autos can’t even get its hands on all of the 200,000 euros of deposits it can theoretically access. Imagine that half of this is in the form of a one-year, fixed-term deposit maturing in June. When it does, the current capital controls mean that the firm is only allowed to turn 20,000 euros into ready cash. The other 80,000 has to be rolled over.

This is a big problem, because many of the importers Aphrodite Autos deals with now don’t trust the banking system and insist on being paid in newly-scarce cash. Payments by cheque take five days to settle if they involve two different banks. Meanwhile, companies and individuals alike are forbidden to manage this by opening new accounts in other banks.

Quantifying the effect of all this is tough without hard data, but it’s clear that many healthy firms could end up going bust. The longer capital controls endure, the more liquidity crises will hit businesses, according to OEB, a Cypriot employers and industrialists’ federation. Jittery consumers prefer to wait and demand has fallen off a cliff, according to a senior Cypriot businessman.

The Cypriot central bank could try to take one step out of the morass by taking Bank of Cyprus out of resolution. There are signs of progress: the Cypriot ministry of finance is planning to appoint a new management team and reconnect BoC to cheaper conventional eurosystem funding within days, according to a person familiar with the situation. And central bank data imply that the new BoC could end up with a core Tier 1 ratio of well over 15 percent if 60 percent of its uninsured deposits are bailed in. If that is deemed sufficient to withstand future losses, BoC can unfreeze the other 30 percent of uninsured BoC deposits.

That probably won’t happen. The central bank is reluctant to take BoC out of resolution until an independent third party values its assets – which could take months. And if capital controls are relaxed, resentful BoC depositors will withdraw their funds, and BoC could collapse.

Economists like Marios Zachariadis suggest that Cyprus could discourage mass withdrawals by slapping a punitive tax on BoC money leaving the country. The idea is that a one-off charge of, say, 25 percent could discourage a Cypriot stampede. Rates could be reduced for those who keep their money in Cyprus longer, or who bring it back within a predetermined timeframe.

But that looks like replacing one set of capital controls with another. And deposits might just drain out of BoC into fellow Cypriot banks. The ECB might agree to supply emergency liquidity assistance, and the Cypriot central bank could lean on other domestic banks to lend the money back to BoC on the interbank market. But both carry big legal or practical risks.

The most likely scenario is that BoC’s uninsured deposits remain frozen while capital controls are slowly relaxed. Then Cypriot GDP, which fell over 4 percent year-on-year in the first quarter, will plummet further. Unless the Troika helps solve Cyprus’s credit crunch, the 8.7 percent drop in GDP it had forecast for 2013 will prove far too rosy.

(The author is a Reuters Breakingviews columnist. The
opinions expressed are his own)

By George Hay

LONDON, May 27 (Reuters Breakingviews) – Cyprus has a
liquidity problem. It has been barely two months since
depositors of the two largest lenders of this small island
state, Bank of Cyprus and Laiki, learned they were to face
losses of 60 to 100 percent on the part of their deposits
exceeding 100,000 euros ($129,278). Yet Nicosia’s streets
haven’t been savaged by furious rioting, nor have the banks
fallen victim to visible panic. The harm is more pernicious:
capital controls are slowly smothering a domestic economy
already hit by a heavy dose of austerity.

It doesn’t look obvious at first. Controls have been relaxed
in stages since March. Businesses can now make cashless payments
of up to 300,000 euros without supplying documentation, while
permitted cashless transactions from one bank to another have
been increased to 15,000 euros and 75,000 euros for households
and businesses, respectively.

Yet a major problem lies beneath the surface. Imagine a
fictional Cypriot business manufacturing car parts, Aphrodite
Autos. And imagine that in mid-March, just before the bail-in,
it had 1.1 million euros on deposit at the Bank of Cyprus, to
provide a decent buffer against uncertainties such as a price
hike of raw materials, which, in Cyprus, are mostly imported.

After the bail-in, Aphrodite Autos is in a tight spot. It
still has the 100,000 euros of deposits that were insured. But
the million euros that were uninsured are now down to 100,000
euros. 375,000 euros are definitely being turned into Bank of
Cyprus shares of as yet uncertain value. Another 225,000 euros
are also at risk of being bailed in. Finally, the remaining
300,000 euros have been summarily frozen too.

That’s bad enough. But Aphrodite Autos can’t even get its
hands on all of the 200,000 euros of deposits it can
theoretically access. Imagine that half of this is in the form
of a one-year, fixed-term deposit maturing in June. When it
does, the current capital controls mean that the firm is only
allowed to turn 20,000 euros into ready cash. The other 80,000
has to be rolled over.

This is a big problem, because many of the importers
Aphrodite Autos deals with now don’t trust the banking system
and insist on being paid in newly-scarce cash. Payments by
cheque take five days to settle if they involve two different
banks. Meanwhile, companies and individuals alike are forbidden
to manage this by opening new accounts in other banks.

Quantifying the effect of all this is tough without hard
data, but it’s clear that many healthy firms could end up going
bust. The longer capital controls endure, the more liquidity
crises will hit businesses, according to OEB, a Cypriot
employers and industrialists’ federation. Jittery consumers
prefer to wait and demand has fallen off a cliff, according to a
senior Cypriot businessman.

The Cypriot central bank could try to take one step out of
the morass by taking Bank of Cyprus out of resolution. There are
signs of progress: the Cypriot ministry of finance is planning
to appoint a new management team and reconnect BoC to cheaper
conventional eurosystem funding within days, according to a
person familiar with the situation. And central bank data imply
that the new BoC could end up with a core Tier 1 ratio of well
over 15 percent if 60 percent of its uninsured deposits are
bailed in. If that is deemed sufficient to withstand future
losses, BoC can unfreeze the other 30 percent of uninsured BoC
deposits.

That probably won’t happen. The central bank is reluctant to
take BoC out of resolution until an independent third party
values its assets – which could take months. And if capital
controls are relaxed, resentful BoC depositors will withdraw
their funds, and BoC could collapse.

Economists like Marios Zachariadis suggest that Cyprus could
discourage mass withdrawals by slapping a punitive tax on BoC
money leaving the country. The idea is that a one-off charge of,
say, 25 percent could discourage a Cypriot stampede. Rates could
be reduced for those who keep their money in Cyprus longer, or
who bring it back within a predetermined timeframe.

But that looks like replacing one set of capital controls
with another. And deposits might just drain out of BoC into
fellow Cypriot banks. The ECB might agree to supply emergency
liquidity assistance, and the Cypriot central bank could lean on
other domestic banks to lend the money back to BoC on the
interbank market. But both carry big legal or practical risks.

The most likely scenario is that BoC’s uninsured deposits
remain frozen while capital controls are slowly relaxed. Then
Cypriot GDP, which fell over 4 percent year-on-year in the first
quarter, will plummet further. Unless the Troika helps solve
Cyprus’s credit crunch, the 8.7 percent drop in GDP it had
forecast for 2013 will prove far too rosy.

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(Editing by Pierre Briançon and Katrina Hamlin)

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(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)

By George Hay

LONDON, May 22 (Reuters Breakingviews) – Britain’s new bank
capital tsar is all bark and no bite. Back in November, the Bank
of England’s Financial Policy Committee warned that UK lenders
could be looking at a 50 billion pound capital hole. On May 22
it emerged that Lloyds Banking Group (LLOY.L: Quote, Profile, Research) and Royal Bank of
Scotland (RBS.L: Quote, Profile, Research) won’t actually need to raise any new capital at
all. It’s not a great start for the new regulatory framework.

The FPC, a panel of central bankers and economists headed by
BoE governor Mervyn King, is supposed to identify
macro-prudential risks to UK financial stability – housing
bubbles, for example. Its judgment back in November that banks’
risk-weighted asset calculations might not be sufficiently
conservative, and that they might not have fully provisioned
against future loan losses or regulatory fines, was reasonable
enough. That said, it seemed to stray into the domain of the
banks’ new direct regulator, the Prudential Regulation
Authority, which is also part of the BoE.

The FPC followed up its analysis in March, saying the
capital hole was only 25 billion pounds. The explanation for the
reduction was that the BoE was only formally requiring banks to
achieve a 7 percent core Tier 1 ratio under tough new Basel III
rules.

But now the PRA has declared that RBS and Lloyds at least
can hit the targets by restructuring their businesses. All of
sudden, the need to raise capital externally has disappeared.

There are two problems with this. One is that other European
banks like BNP Paribas (BNPP.PA: Quote, Profile, Research) and Intesa SanPaolo (ISP.MI: Quote, Profile, Research)
already sport 10 percent core Tier 1 ratios, so UK banks hardly
look robust in comparison. The other is that following an April
letter from the UK Chancellor George Osborne to the BoE
implicitly warning not to overburden banks during the recovery,
the FPC looks like it has been overruled.

True, as banks like Lloyds and RBS shed non-core assets they
should be able to get up to continental levels in a few years.
But in letting the 50 billion pound figure out the bag, the FPC
has implied that this pace is too slow. It would have been
better off washing UK banks’ dirty linen behind closed doors.

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CONTEXT NEWS

– Royal Bank of Scotland and Lloyds Banking Group both said
on May 22 that they would not have to raise new capital or
contingent capital but could meet their capital requirements by
restructuring their businesses and growing capital organically.

– RBS said it would continue to change the size of its
Markets division, dispose of non-core assets and partially list
its U.S retail arm. The bank added it was making assumptions as
to RBS profitability and regulatory capital model developments
ahead of Basel III rules in Europe becoming effective.

– RBS and Lloyds shares were up 2.6 and 2.1 percent
respectively at 1140 GMT on May 22.

– Osborne letter to King, April 29:
here‬

– Reuters: Lloyds says won’t need to issue new equity, CoCos
[ID:nL6N0E30JV]
- For previous columns by the author, Reuters customers can
click on [HAY/]

(Editing by Chris Hughes and David Evans)

((george.hay@thomsonreuters.com))

((Reuters messaging:
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Keywords: BREAKINGVIEWS BRITAIN/BANKS

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expressly prohibited without the prior written consent of Reuters. Reuters
and the Reuters sphere logo are registered trademarks and trademarks of
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The authors are Reuters Breakingviews columnists. The opinions expressed are their own

BT’s free sports gambit is an attempt to out-Sky Sky. The UK telco on May 9 surprised investors by offering new broadband users the chance to watch live Premier League soccer for no extra charge. The 2 percent, 6 percent and 12 percent drops in the share prices of BT, BSkyB and smaller competitor TalkTalk may look like an extreme response to the move, but they reflect rational fears of a price war.

BSkyB and BT are the biggest players in neighbouring businesses, which are growing ever closer. BSkyB’s fiefdom is pay-television. It has 68 percent of the UK market, according to Enders Analysis. BT, the former telecoms monopoly, has a market-leading 30 percent share in broadband. But bundled TV and Internet access deals means BSkyB’s share of broadband is now 22 percent, with cable firm Virgin Media  on 21 percent and low-cost TalkTalk on 19 percent, according to industry website thinkbroadband. So like BSkyB before it, BT is trying to gatecrash its main rival’s core market. The idea is to boost average revenue per user (ARPU) and stop customers from switching.

BT’s land grab isn’t guaranteed to work. BSkyB viewers used to plentiful live Premier League soccer matches probably won’t leap at BT’s smaller offering. TalkTalk customers generally want the cheapest broadband and free TV packages. With each company addressing slightly different customer bases, the market may overestimate the chances of mass customer migration.

That said, price-conscious BSkyB broadband users who aren’t football obsessed will make a small saving by switching to BT, according to Citi research. And the market reaction is probably focusing not on BT’s new deal but on the wider competitive response. The risk is of tit-for-tat price cuts that are great for consumers, but bad for shareholders. As BT’s strong results on May 10 showed, it has deep pockets should it come to a fight.

France provides an extreme example of how badly these battles can hurt. Internet service provider Iliad moved into mobile last year with a disruptively cheap service. That has already hacked 10 percent off France Telecom’s domestic mobile ARPU, and this could fall another 13 percent in 2013. UK telecoms and media investors may be jittery, but they aren’t being irrational.

(The authors are Reuters Breakingviews columnists. The opinions
expressed are their own)

By Peter Thal Larsen and George Hay

HONG KONG/LONDON, May 10 (Reuters Breakingviews) – Britain’s
principled approach to banks’ holdings of sovereign debt could
have a perverse outcome. The watchdog has taken the sensible
step of demanding that lenders expect big losses if government
bonds default. That helps fix one of the biggest flaws in
measuring bank capital. But pan-European rules mean that risky
euro zone debt is excluded from the precautions.

The proposals, outlined by the Bank of England’s Prudential
Regulation Authority in March, aim to fix one of the most
contentious areas of measuring bank capital: the treatment of
government bonds. For years, regulators treated all sovereign
debt as if it was all low-risk. The euro zone crisis has exposed
the folly of that approach.

But even new Basel III capital rules don’t fully address the
problem. That’s because big banks calculate risk on the basis of
past experience, and sovereign defaults are still rare. The
danger is that government bonds will continue to receive lenient
treatment. That would further confirm investors’ suspicions that
bank capital ratios cannot be trusted.

So the PRA has stepped in. It says banks should assume that
sovereign bonds will lose at least 45 percent of their value in
a default. Plugging this figure into risk models will raise RWAs
and reduce capital ratios. HSBC’s RWAs were $19 billion higher
at the end of the first quarter as a result of the shift.

The problem is that the PRA’s approach is at odds with the
European Union’s interpretation of Basel, which states that all
bonds issued by European Economic Area governments in their
local currency should receive a zero risk weighting. Under the
EU’s “maximum harmonisation” provisions, Britain is not allowed
to toughen up the rules by itself.

It’s not the first time Britain has run into this problem:
the UK government’s plans to make banks hold bigger capital
buffers has also met with resistance from Brussels. Unless
Britain can persuade its European partners to adopt its
approach, risky sovereigns like Portugal, Spain and Italy are
excluded from the PRA’s new rules, while U.S. Treasury bonds
aren’t. That gives UK banks an incentive to hold more euro zone
debt, and penalises those lenders with large operations in other
parts of the world. A sensible policy looks to be creating a
perverse outcome.

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CONTEXT NEWS

– HSBC on March 7 reported that risk-weighted assets
increased by $19 billion bin the first quarter of 2013 as a
result of changes to risk models imposed by UK regulators.

– The changes affect the way banks calculate the riskiness
of sovereign debt they hold. The Bank of England’s Prudential
Regulation Authority said in a consultation document published
in March that it wanted banks to assume government bonds would
lose at least 45 percent of their value in the event of a
default.

– Imposing a higher Loss Given Default increases the
risk-weighting that banks apply to holdings of government bonds.
This raises their risk-weighted assets (RWAs) – a key part of
the measure of bank capital – and makes capital ratios appear
lower than under the previous approach.

– However, the PRA’s approach clashes with the European
Union’s Capital Requirements Directive, which states that bonds
issued by governments in the European Economic Area should carry
a zero risk weighting.

– Under a provision known as “maximum harmonization”, member
states are prevented from adding their own extra safety to EU
rules.

– HSBC’s total risk-weighted assets at the end of March were
$1,098 billion, down from $1,124 billion at the end of December.

– Standard Chartered said in its 2012 annual report that the
changes increased its RWAs by $3.5 billion by December 2012.

– HSBC first quarter results: link.reuters.com/gyf97t

– UK Prudential Regulation Authority consultation paper: link.reuters.com/fyf97t
- For previous columns by the author, Reuters customers can
click on [LARSEN/]

(Editing by George Hay and David Evans)

((peter.thal.larsen@thomsonreuters.com))

((Reuters messaging:
george.hay.thomsonreuters.com@reuters.net))
Keywords: BREAKINGVIEWS DEBT/

(C) Reuters 2012. All rights reserved. Republication or redistribution of
Reuters content, including by caching, framing, or similar means, is
expressly prohibited without the prior written consent of Reuters. Reuters
and the Reuters sphere logo are registered trademarks and trademarks of
the Reuters group of companies around the world.

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)

By George Hay

LONDON, May 8 (Reuters Breakingviews) – Sainsbury’s (SBRY.L: Quote, Profile, Research)
has taken another baby step towards becoming a real bank. The UK
supermarket chain confirmed on May 8 that it would buy out
Lloyds Banking Group (LLOY.L: Quote, Profile, Research) from their 50:50 joint venture,
but continued to shy away from offering the main products that
banks offer – current accounts and mortgages. The apparent
timidity could be a holding strategy.

Getting into retail banking proper makes sense for the
group. Operating margins in supermarket retailing are less than
5 percent. Royal Bank of Scotland (RBS.L: Quote, Profile, Research) and Lloyds were at 38
and 37 percent, respectively, in 2012. With an established brand
and a big property estate, Sainsbury’s has the potential to be a
strong new entrant, and it doesn’t carry the bad debts of
established players. While it outperformed rival Tesco (TSCO.L: Quote, Profile, Research)
in 2012, the group could also do with diversifying.

Sainsbury’s official line is that it can diversify
organically. It reckons full control of its savings and personal
loans will enable it to bolster the number of its supermarket
customers buying financial products – currently just 5 percent.
That justifies a long-term strategy of building its own bank
platform over the next four years, instead of relying on Lloyds’
know-how.

There’s a better reason to hold fire. The UK current
accounts market has long been dominated by a few big players.
Newcomers face dauntingly high barriers to entry, but there have
been encouraging recent signs that regulators want to tackle the
oligopoly by opening up the payments system, the shadowy
plumbing that banks need to be able to offer in order for
current accounts to process multiple transactions like standing
orders and direct debits.

To become a real bank right now and build the right
platform, Sainsbury’s would have to splash out a big part of the
capital expenditure it wants to spend on new store space. If an
ongoing government consultation can find an alternative way for
new entrants to plug into the payments system, that investment
might prove superfluous.

Add in the movable feast of UK bank capital requirements and
a current review of the domestic mortgage market, and there’s a
case for waiting. When the fog clears, Sainsbury’s should turn
circumspection into action.

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CONTEXT NEWS

– Sainsbury’s on May 8 announced revenue for the 52 weeks to
March 16 of 25.6 billion pounds, up 4.6 percent, and a 6.2
percent jump in underlying pre-tax profit to 756 million pounds.

– The firm, which has a 16.8 percent share of the UK grocery
market, also confirmed it would buy out Lloyds Banking Group’s
50 percent stake in Sainsbury’s Bank for 248 million pounds.

– Sainsbury’s said that like-for-like sales in 2013/14 would
grow between 1 and 1.5 percent, after sales excluding fuel grew
at 1.8 percent in 2012/13.

– Justin King, the supermarket’s chief executive, said he
saw himself staying at the firm for several more years.

– The UK government published its consultation of reforming
the UK bank payments system on March 26. It closes on June 25.

– At 1100 GMT, Sainsbury’s shares were trading at 383 pence,
down 3.3 percent.

– Reuters: CEO King commits to Sainsbury’s after beating
forecasts [ID:nL6N0DP0TO]

– Reuters: Sainsbury’s seeks full control of banking arm
[ID:nL6N0DO0UH]
- For previous columns by the author, Reuters customers can
click on [HAY/]

(Editing by Pierre Briançon and David Evans)

((george.hay@thomsonreuters.com))

((Reuters messaging:
george.hay.thomsonreuters.com@reuters.net))
Keywords: BREAKINGVIEWS SAINSBURY/

(C) Reuters 2012. All rights reserved. Republication or redistribution of
Reuters content, including by caching, framing, or similar means, is
expressly prohibited without the prior written consent of Reuters. Reuters
and the Reuters sphere logo are registered trademarks and trademarks of
the Reuters group of companies around the world.