RBS and Barclays: not monolithic on monolines
— Margaret Doyle is a Reuters columnist. The opinions expressed are her own —
Barclays thinks the insurance it has against its “impaired assets” is worth twice as much as RBS seems to believe. It’s hard to see how both could be right.
On May 7, Barclays said that it expects to get 76 percent of any claim made against its “monoline” insurers. The following day, RBS said fat chance — we think it’s 35 percent. They may not have the same insurers, but they are also coming from the problem from different angles.
Unlike Barclays, RBS is already attached to the government teat. Because RBS has taken a huge capital injection from the state, chief executive Stephen Hester had much less to lose than his counterpart at Barclays John Varley in admitting that things are looking grim.
For Barclays, it makes more sense to take losses only as fast as you earn enough to cover them.
Moreover, RBS has also already agreed to join the government insurance scheme. RBS said that around 75 or 85 percent of the 4.9 billion pound headline hit in the first quarter was to assets that will end up in the government’s Asset Protection Scheme (APS). RBS has to take 19.5 billion in losses before it calls on the government purse. These numbers show that it has already chalked up around 4 billion of that first loss.
Moreover, that huge figure excludes 755 million pounds of trading asset write-downs. That means the bank’s total losses for the quarter were 5.6 billion pounds.
RBS’s 51-page report also reveals the details of another banking farce. It has 31 billion pounds-worth of bonds outstanding. The market is sceptical about RBS’s ability to repay this, and has marked the bonds down accordingly. In this quarter alone, that market write-down equates to more than 1 billion pounds. RBS has taken this as a “profit”.
Hester himself rightly flags up that there are more headwinds to come. There will be further losses as the recession deepens.
Net interest margins are likely to remain compressed. While the banks may get away with what they term asset pricing (higher interest charges on our loans), it will be a while — if ever — before their funding costs return to pre-crunch levels.
Longer term, regulators will demand that banks set aside more capital against the loans that they make, thus depressing equity returns.
Hester may think there is mileage in being frank. But he should be careful. After all, RBS has not agreed final terms on the APS with the government. Having seen these numbers, it may decide that RBS should be forced to pay harsher terms.