The Great Debate UK

It’s time to call the bankers’ bluff



-Laurence Copeland is professor of finance at Cardiff University Business School. The opinions expressed are his own and do not constitute investment advice. -

I have just reread the blog I wrote for this column last September. A year has gone by, and neither the title – “It’s All Over: the Banks Have Won” – nor the rest of it seem out of date. In fact, last weekend’s Basel III deal looks very much like the final surrender by the authorities.

It is not simply a matter of the feebleness of the reserve requirements and the ease with which they will be emasculated by arbitrage, nor the fact that the regulators have given the banks a few years to satisfy them – “Please Lord, make us prudent…..but not yet”.

Rather, it is the way the banks have so easily fought off any attempt at more radical reform, and in particular their success in silencing the calls to enforce a separation of retail from investment banking and to break up the biggest groups into units which are no longer Too Big To Fail.

Shareholder confidence vs. value investing


Brendan Woods- Brendan Wood is Chairman of Brendan Wood International, a global intelligence advisory firm. Recently, BWI published the World’s TopGun CEOs as ranked by 2500 institutional investors, which provides insight into the executives in whom shareholders feel the greatest confidence. The opinions expressed are his own. -

The Brendan Wood International’s panel of 2500 institutional investors suffered through last year’s markets believing value would somehow prevail. Those value investing “diehards” indeed died hard.

Diamond hangs on to Barclays crown jewel


REUTERSYou have to hand it to Barclays. The reported sale of BGI, its fund management arm, to BlackRock for $13 billion is probably the best way that the bank could bolster its capital ratio.

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.

Barclays shouldn’t vendor-finance iShares


REUTERS– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –

Barclays’ hasty deal to sell iShares in April served its purpose. The $4.4 billion price-tag boosted the bank’s capital, thereby allowing it to dodge the government’s insurance scheme. Barclays should now seek better terms on the deal.

RBS and Barclays: not monolithic on monolines


REUTERS– 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.