The Great Debate UK
Banks and insurers are looking for ways to bolster their capital, while having the flexibility to strike if there are acquisitions to be had on the cheap. To achieve these twin goals, Spain's Santander and now British insurer Aviva intend to float minority stakes in subsidiaries.
Aviva's chief executive Andrew Moss, who cut the insurer's dividend with its first-half result on Thursday, argued that it must be ready to take advantage of acquisition opportunities. Moss plans to float 25-30 percent of Delta Lloyd so that Aviva's 92 percent owned Dutch insurance unit can take part in the restructuring of the Benelux insurance market.
This has echoes of Santander's plan to float around 15 percent of Banco Santander Brasil. That move will not only allow the parent to bank as much as $4.5 billion from the sale, but will give the subsidiary an acquisition currency, allowing it to go out and buy more assets.
The logic of a minority IPO is fairly clear. It allows parent banks to raise capital by selling shares in more highly rated subsidiary companies, and also gives those subsidiaries a more highly rated acquisition currency. It sidesteps any objections parent company shareholders might have to capital raisings. And it is a way -- at least in theory -- to reveal the value of a "hidden gem".
– 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.
Revolting shareholders were reduced to throwing shoes and coins at the chairman at Tuesday’s meeting to approve the carve-up of the failed Benelux bancassurer, but to no avail.