The Great Debate UK
By Kathleen Brooks. The opinions expressed are her own.
Standard Chartered is the latest UK-based bank that seems to be getting it in the neck from our friends across the water. Firstly, there was Barclays and the Libor scandal, then there was HSBC which was fined for allowing drug-trafficked money from Mexico to go through its system and now there is Standard Chartered which is charged with “wilfully misleading” the New York Department of Financial Services and clearing $250 billion of Iranian transactions through its U.S. operation.
Two can be a coincidence, but three in as many months? Since the news on Standard Chartered broke there has been a torrent of investors, politicians and even some in the media who have queried whether this is just an attempt by Washington to discredit London and re-establish New York as the world’s financial centre.
There are three reasons why I don’t think this is so. Yes, the Standard Chartered case in particular, is sensationalist to say the least. The newly established New York Department of Financial Services and its head, Benjamin Lawsky, are trying to make a name for themselves on the world stage with this case. However, the recent attacks against some UK banks suggest that regulation is on the increase in the U.S. and financial services are in the firing line. This isn’t just going to affect UK banks, but also domestic bank and other foreign financial institutions with operations in the U.S. This is my first point. Not only do banks and other financial companies have to deal with the Dodd Frank legislation, they also have to deal with a whole new regulator based in New York, the beating heart of the U.S.’s financial sector.
Whether or not you agree that a bank should be able to do business with whoever they like (and not be dictated to by the U.S.), more regulation tends to mean higher costs, and in the current environment when it is hard enough to make money some banks may choose not to relocate from London or elsewhere and move to New York if they think the regulatory burden there is growing or going to cost them money in the future.
-Jeremy Edwards is Head of Banking & Financial Services at Firstsource Solutions. The opinions expressed are his own.-
The recent publication of Sir John Vickers’ International Commission on Banking (ICB) finally gave the banking industry a glimpse of the long-promised change in regulatory regimes following the global financial crisis. The report comes at the same time as a torrent of new regulations and legal changes: the recent High Court ruling on the misselling of payment protection insurance (which is estimated to cost the banks £8 billion), the Treasury report on financial regulation, and the Basel III regulations that will force banks to hold greater liquidity. If adopted, many of these recommendations will create unprecedented change for the banking industry.
Bob Diamond's promotion to chief executive of Barclays is no surprise. The driving force behind the UK bank's investment banking arm was a candidate for the top job back in 2004, and Barclays Capital's rise since then -- it contributed over 80 percent of the group's pre-tax profit in the first half of 2010 -- made him a shoo-in.
The question is what the decision means for Barclays' future structure. The UK banking commission, which reports next year, is examining whether to demand that lenders separate their retail and wholesale arms. Barclays' leaders have to consider every possible scenario.
Regulators and bankers rarely see eye to eye. But at the World Economic Forum in Davos, the two sides were in surprising agreement about creating a global fund, financed by a tax on banks, to deal with future bailouts.
Mario Draghi, head of the Financial Stability Board, which is spearheading a new global financial regulatory regime under the auspices of the G20, floated the idea of a cross-border body to manage this fund. Surprisingly, several big European banks -- including Barclays and Deutsche Bank -- support it.
Mixed reaction from major European banks to appointment of Naoto Kan as new Japanese finance minister. ING is pretty scathing, saying the appointment sidesteps a process of change Japan must undertake to avoid further stagnation or a fate far worse.
"PM Hatoyama has appointed someone with no experience in economic management... Mr. Kan takes on the finance minister role without a well documented, deeply considered policy agenda. Here we rely on reports of positions he has taken in the Cabinet, and from public statements on economic management. These suggest his instincts are to pursue a stimulus strategy involving higher government spending; a weaker yen and ultra-loose monetary policy. Mr. Kan appears tone deaf to microeconomic reform or to the threats to financial stability posed by high public debt."
So much for Barclays' ambitions to be a magnet for banking talent. When the British bank hired Frits Seegers, the Dutchman arrived with a big reputation and an even larger price tag -- the cost of buying him out of his previous job at Citigroup. Three years on, he's on his way, the main casualty of a management shake-up that leaves his main rival, Barclays president Bob Diamond, looking stronger than ever.
As ever, the reorganisation is not entirely without strategic merit. Barclays is shifting responsibility for the corporate bank from the retail side of the business to its Barclays Capital investment banking arm. The logic is that even small companies want to hedge foreign exchange and commodity risks -- products they are more likely to find in Barclays Capital. Besides, most rival banks have combined corporate and investment banking. There is something in this. Though it is hard to see Barclays' investment bankers wasting much time on small British businesses with a few million pounds in turnover.
Barclays has come up with an interesting way to solve an optical problem. Concerned that the bank's shareholders are nervous about possible future writedowns of wobbly assets with a value of $12.3 billion, it has sold them to its own employees.
This isn't necessarily a bad idea. But there are two things to dislike about this deal. First, it looks pretty cozy to sell to your own workers. And second, the deal looks potentially very favourable for the purchasers.
– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –
Barclays’ and HSBC’s interim results are a study in contrasts. Barclays has used the credit crunch to make a bet-the-farm move into the investment banking big-league, a bet that has so far paid off. HSBC, in comparison, chastened by its flawed move into the U.S. subprime market, has returned to its conservative roots.
John Varley, Barclays’ chief executive, gives the usual guff about “staying close to our customers and clients”. In truth, Barclays’ 3 billion pounds of profit in the first half owes much more to its investment banking division, enlarged by its opportunistic acquisition of Lehman Brothers’ North American unit last autumn, than to its traditional banking businesses.
Barclays Capital (BarCap) more than doubled revenues to 10.5 billion pounds, and doubled pre-tax profits to 1 billion pounds. As with rivals, the star performer was fixed income, currencies and commodities where banks are profiting thanks to their access to very cheap central bank funding.
This is just as well, because Barcap is still carrying plenty of toxic assets left over from the credit boom. These cost it 4.7 billion pounds in gross writedowns and impairments in the first half. Given that it still has other dodgy exposures, including assets worth more than 7 billion pounds guaranteed by ailing monoline insurers, further losses seem likely. Barclays cannot rely on other parts of the bank to come to its rescue: profits in traditional retail and commercial banking businesses all collapsed as impairments soared.
HSBC’s global banking and markets (GBM) division also delivered a record performance, more than doubling its first-half profits, to $6.3 billion. However, HSBC has long resisted the charms of investment banking, and runs GBM as a complement to its existing global commercial banking franchise. Despite the juicy returns currently on offer, this is unlikely to change.
HSBC has its own sizeable bit of historical baggage in the form of Household, the U.S. consumer lender that is now being expunged from the record, though not without considerable additional losses.
Many suspected that HSBC would use its bumper $17.8 billion rights issue this spring to acquire divisions of ailing rival banks at bargain basement prices. So far, it has resisted, instead bolstering its tier 1 capital ratio to 10.1 percent.
Rather, it is building on its position as the world’s leading international bank (especially now with Citi holed under the waterline) organically. While cash-strapped rivals retreat from China, HSBC is investing in its Chinese operations. It has been the first international bank to settle cross-border trade in renminbi (yuan). It is on track to have 100 outlets, including many in rural China, by year end, more than any other international bank. Such loyalty will not go unnoticed in Beijing.
Which bank is better positioned for the new environment? That depends partly on the speed of the recovery. Barclays has so far performed a dazzling high-wire act, avoiding state capital by spreading its losses over a number of years and by selling its Barclays Global Investors arm. But this is hard to sustain if the downturn turns out to be prolonged. Meanwhile, once banking conditions return to normal, central banks will cease to flush investment banks with cheap cash and investment banking profits are bound to tumble. The HSBC tortoise looks set to leave the Barclays hare far behind.
It looks like it will end up with around $8 billion in cash and a fifth of the enlarged asset manager.
The gain on the sale would lift its equity tier 1 ratio to 6.8 percent from just over 6 percent, according to Nomura.
The legendary financier, JP Morgan, was said to have made his money by “selling too soon”. Some say that is exactly what Sheikh Mansour Bin Zayed Al Nahyan of Abu Dhabi has done by selling a chunk of his stake in Barclays. Other sovereign wealth funds must wish they had the same dilemma.
The Sheikh’s sale of the convertible notes that he bought as recently as November as part of a “strategic” partnership — for a 1.5 billion pound profit — has taken Barclays by surprise.
However, this sort of thing is not uncommon right now. Just look at the way Western banks are selling their stakes in Chinese financial institutions.
The Sheikh has endured a roller-coaster ride. Barclays shares plunged by almost 80 percent in the three months after he, and neighbouring Qatar, agreed to invest.
That made them look as foolish as other sovereign wealth funds that had rescued western banks and lost their shirts in the process. Given the sharp bounce in the shares since then, it is no wonder that the Sheikh has taken his profit with a sigh of relief.
The Sheikh also plans to sell down bonds with a coupon of 14 percent, but to hold on to warrants (exercisable at 198 pence versus today’s 275 pence) over around 6 percent of Barclays fully-diluted share capital.
The Qataris, who invested 2.3 billion pounds alongside the Sheikh, Singapore’s state investor Temasek, which bought in at much higher levels, and other foreign investors must be considering whether to take profits (or cut their losses) too.
Temasek is heavily skewed to banks, something that Chip Goodyear, the new chief executive, may want to address. Barclays is in a stronger position than RBS and Lloyds, which both survive thanks to extensive state support: it is still profitable, it will pay a dividend this year and its capital markets arm is doing brisk business in volatile markets.
Moreover, there is some technical support for the bank’s share price because the conversion from notes to shares at month-end will increase the bank’s weighting in the FTSE 100 index from 2.0 percent to 2.6 percent.
However, the capital markets boom is unlikely to last. Much of Barclays’ strength is already priced in to the shares, which are trading above book value. Moreover, the revelation of the details of Britain’s stress tests last week showed that the assumptions used were not that pessimistic.
The true cost of the recession has not yet hit the bank. Even if the shares rise further, there are less stressful ways for the Sheikh to make money — especially if he wants to sleep at night.