The Great Debate UK
from Breakingviews:
RBS shows watchdogs need power to stop M&A
By Peter Thal Larsen
The author is a Retuers Breakingviews columnist. The opinions expressed are his own.
The failure of Royal Bank of Scotland shows bank reform still has some way to go.
The report should dispel any doubts that new Basel III rules make banks safer. Using this measurement of capital, RBS's equity Tier 1 capital ratio at the end of 2007 was around 2 percent -- well below the 7 percent now considered to be an acceptable minimum. Under the new regime, RBS would have been prevented from paying a dividend at any time from 2005 onwards. Its heavy dependence on short-term funding would also now be deemed unacceptable.
However, RBS's collapse was also a failure of supervision. The FSA describes in painful detail how its team of supervisors -- which comprised just six people, compared to 23 today -- did little to challenge the bank's assessment of the risks it faced. That approach reflected the reigning theory of efficient markets and political pressure to maintain a "light-touch" regulatory regime. Both those factors no longer apply. Moreover, UK bank supervision is being transferred to the Bank of England.
Why we have to support Ireland
– Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own. –
Supporting Ireland to the tune of a few billion quid must look like a no-brainer to the British Government. We should not make the same mistake as the Germans, who managed to get the worst of both worlds over Greece – forced by the scale of their bank exposure to support Greece, but providing the money with ill will, causing bitterness rather than gratitude – and now repeating the error in the Irish case.
from Breakingviews:
Banks bully, brokers bleat
It's just not fair. Those beastly banks are snatching the bread from our mouths, chorus three of London's mid-cap broking houses. "Taxpayer supported banks" (do they by any chance mean Lloyds and Royal Bank of Scotland?) are strong-arming the clients of Panmure Gordon, Numis and Evolution into steering lucrative rights issue underwriting their way.
The trio are so upset at the sight of this lovely business disappearing that they have written to Paul Myners, the government's Minister for the City, to complain about "anti-competitive behaviour." It's "stifling competition in the capital markets." Anecdotal evidence from twitchy businesses in thrall to their banks suggest they are right.
from Commentaries:
Are Lloyds shares cheap? Not as cheap as this funny money
Shares in Lloyds Banking Group are worth 150 pence apiece, according to the analysts from Royal Bank of Scotland, who think the shares offer "a compelling restructuring opportunity" around today's 95 pence.
Lloyds, say the brokers, is going to recover sufficiently to pay a nominal dividend next year, and something quite substantial in 2011, thanks to margin expansion, cost control and normalising bad debts.
from Commentaries:
Why is RBS’s boss selling its shares?
Controversy and running RBS go hand in hand. Stephen Hester replaced Fred Goodwin as chief executive of RBS and is now in hot water himself over his incentive pay deal. The chief executive of the state-controlled bank could be paid 9.6 million pounds over three years if the share price (currently 44p) reaches 70p. However, he seems to have so little faith in the shares reaching that level that he has offloaded 1,264,565 shares since last November at prices between 28.5p and 48p, yielding just over 464,000 pounds.
When unveiling first half results last week Hester asserted that "We have a strong plan in place that I believe can get us to where we need to be by 2013," which presumably includes recovery in a share price still languishing more than 90 percent off its peak.
Reining in Lloyds
– Peter Thal Larsen and Paul Taylor are Reuters columnists. The views expressed are their own –
Sir Win Bischoff appears to relish a challenge. His brief spell as chairman of Citigroup was spent resisting regulators who wanted to break up the bank. If the veteran banker takes over as chairman of Lloyds Banking Group, his first fight will be with competition authorities in Brussels. This is one battle where it would be better if Sir Win did not live up to his name.
The EU and Hedge Funds: silencing the dog that didn’t bark
- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -
We could see it coming, couldn’t we? Those gigantic over-leveraged hedge funds were bound to come crashing down, as their massive bets turned sour, forcing them to default on their bank loans and bringing the banking system to its knees.
Fears for bank rally overdone
— Margaret Doyle is a Reuters columnist. The opinions expressed are her own –
Three months is a long time in the markets, and particularly for banks. Alongside the rally in bank shares, investors have also bid up bank bonds, especially so-called tier 1 bonds which rank just above the equity in the list of creditors.
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.
Look to deal numbers for M&A green shoots
LONDON, April 23 (Reuters) – Volumes may be down, but there are green shoots appearing in the M&A market after the frozen winter of financial distress.
This doesn’t mean a return to the boom years of a few years ago. It could take years for deal values to reach the dizzy heights of the second quarter of 2007, given falls in asset prices. But the number of deals is recovering fast. This fell off a cliff in Q1 of 2009 and at just over 8,000 deals was the lowest global tally since Q3 2004.
The week starting March 29 was the busiest of the year in terms of deals announced, with 821 transactions, and the 5th busiest since Sept. 2008, according to Thomson Reuters data.
There are still some complications (the disappearance of loan-funding, equity market volatility to name just two), but investors seem to be back on the hunt for bargains.
M&A deals may tend to be pretty hit and miss (indeed the failure rate is high) but historically the best returns from deals have been achieved on those struck during economic downturns, when activity is low.
True, M&A has been fuelled so far this year by a spate of large deals in the pharmaceuticals sector, an area that has been least affected by the crunch, with healthcare accounting for 27 percent of the total of $472 billion of announced deals during Q1. Pfizer’s <PFE.N> $68 billion acquisition of Wyeth <WYE.N> and Merck’s <MRK.N> $41 billion takeover of Schering-Plough <SGP.N> were the blockbusters.
But this was only just ahead of the distressed financials sector at 25 percent. And it is this area of activity which will grab a significant share of deals (by volume if not by value) as banks, insurers and fund management companies rejig their portfolios and vulture investors pick off the walking wounded.
The restructurings resulting from the meltdown in financial services are just getting underway. Look at the businesses UBS <UBSN.VX> is selling, Barclays’ <BARC.L> disposal of iShares, or indeed the auctions of Citigroup <C.N> and Royal Bank of Scotland <RBS.L> units in Asia.
Banking groups are under pressure to offload non-core businesses to strengthen weakened balance sheets and therefore are less sensitive to value. Add the assets which governments will have to repackage or offload once they have feel confident they have stabilised the sector and the deal pipeline starts to look positively healthy.
No wonder some investment bankers — especially those in boutiques and which thus have no conflicts with mainstream financial businesses — are rubbing their hands.
The main constraint on buyers (other than those lucky or sensible enough to still be sitting on cash) is obtaining financing. It is possible for companies to raise money for deals that seem to investors to make strategic sense. Roche <ROG.VX> of Switzerland, for instance, tapped the bond markets for a whopping $39 billion to fund its Genentech buy-out.
But stock market investors aren’t flush with cash and are wary of giving companies a free hand. UK’s Pearson <PSON.L> recently had to pull a small share issue that was designed to give it a cash pile from which to make opportunistic acquisitions. Meanwhile, it is still difficult to obtain loan finance from banks, and the bond markets are only really available to larger companies.
Even so, with debt-strapped companies being forced to sell off assets to meet covenants and prices relatively low, there should be plenty of action this year.
– At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.
(Edited by David Evans)
