It is always about the banks or in central banker speak “The Precious”

If we look back over the credit crunch era we were told that bailing out the banks would lead us into a better future. The truth nearly a decade later in some cases ( Northern Rock in the UK) is that we see a situation where central banks have enormous balance sheets and low interest-rates dominate with the Euro area and Japan in particular having negative interest-rates. That is most odd in the Euro area as of course we have been told only this morning by the Purchasing Managers indices that growth in France and Germany is strong. So something has changed and is not quite right and if we look we see signs of trouble in the banking industry even after all the bailouts and accommodative monetary policy.

Royal Bank of Scotland

This has turned out to be the doppelgänger of the concept of the gift which keeps on giving. Each year we have had promises of recovery at RBS from whoever is in charge and each year that fades to then be replaced by the same in a so far endless cycle.  Rather like Greece actually. Also the original promise of the UK taxpayer getting their money back seems further away than ever as the price of £2.40 is less than half of what was paid back then. Quite an achievement when we see so many stock markets close to all time highs.

As to the economic effect well claims of benefits have had to face a stream of bad news of which there was more yesterday. From the BBC.

Hundreds of jobs will be lost following a decision to close almost 160 RBS and NatWest branches.

RBS blamed a “dramatic shift” in banking, with branch transactions falling 43% since 2010.

In the same period, online and mobile transactions have increased by more than 400%.

Whilst online and mobile transactions have plainly surged it is also true that all bad news is claimed as somebody else’s fault. If you have a zombie bank wallowing on then you will of course be affected by change especially in this sort of timeframe.

RBS remains still majority-owned by taxpayers following its multi-billion government bailout almost a decade ago.

If we look back to the UK motor industry bailouts were stopped because the business model no longer applied yet that critique seems to have been forgotten. I note that after of course a fair bit of economic pain the motor industry is producing record figures.

Co-op Bank

I wrote about the latest problems of this bank on the 13th of February and this morning I note we have a sort of official denial of trouble in the Financial Times.

Co-Operative Bank says “a number” of suitors have come forward since it announced plans to fin a buyer in February.

This gives rather a different picture to this from Sky News on Tuesday.

Co-op Bank bonds have been trading at little more than 80p in the pound this week, underlining investors’ pessimism that a £400m repayment due in September will be made.

Talk is cheap but apparently those bonds are not cheap enough?! Easy money if you believe the hype especially at a time of low interest-rates and yields.

But you see I warned about this back in February.

The problem in my opinion is that when a bank has trouble the record is simply that so far we have never been told the full truth at the beginning.

And note this from Sky News.

One insider said the Bank of England had hosted a meeting last week at which the Co-op Bank’s problematic pension schemes had been discussed.

The losses of £477 million last year and the announced need for £750 million should there not be a sale are hardly good portents. Back in February I feared the Bank of England might find itself stepping in and that danger has increased in the meantime.

Portugal

My eyes were drawn to this yesterday from Patricia Kowsman of the Wall Street Journal.

Portugal state-owned bank raises EUR500M carrying hefty 10.75% interest. Says 49% of buyers asset managers, 41% hedge funds. Majority in UK.

In these times an interest-rate of 10.75% is extraordinary for a state-owned bank and compares to a ten-year bond yield for Portugal that has been around 4% for a while. Why might this be so?

Also on Wednesday, a group of major international investors that suffered losses on Novo Banco’s senior bonds issued a warning to the Portuguese authorities and indicated that an agreement to minimize those losses would be beneficial to the country. The group, led by BlackRock and PIMCO, said Portugal and Portuguese banks continue to pay the Bank of Portugal’s decision to transfer obligations from the New Bank to BES ‘bad’ at the end of 2015.( Economia)

So a past bailout has caused what Taylor Swift would call “trouble,trouble, trouble” and if we return to Patricia the record of Caixa Geral de Depósitos has been very poor.

Well, it’s a state-owned bank that had a EUR1.86B loss last year, big NPLs, in a country with a v weak banking system ( NPLs are Non Performing Loans)

We find ourselves in a situation where a past bailout ( BES) have made life more difficult for a current one and the Portuguese taxpayer ends up being held over a barrel especially after the European Commission declared this.

CGD will also take actions to further strengthen its capital position from private sources

This bit raised a wry smile.

the Commission analysed the injection of €2.5 billion of new equity into CGD by Portugal and found that it generates a sufficient return that a private investor would have accepted as well.

Can they see the future now? Shall we call it forward guidance…..

Italy

Speaking of forward guidance around this time last year Finance Minister Padoan was telling us that bailouts were not going to be required for Italy’s banks and Prime Minister Renzi was telling us what a good investment the shares of Monte Paschi were. Anyway if we move to this Wednesday Reuters were reporting this.

Italy’s plans to bail out two regional banks pose a tough dilemma to European regulators, who are still considering whether Monte dei Paschi qualifies for state aid, three months after giving a preliminary green light.

Banca Popolare di Vicenza and Veneto Banca said

If they hang on long enough with Monte dei Paschi maybe something will turn up. Oh and there is Unicredit the largest bank which I called a zombie on Sky News about five years ago. It is issuing another 13 billion Euros of shares which further dilutes shareholders who of course have had to dig deep into their pockets before. Also there were plenty of rumours that it was a big recipient from the ECB TLTRO ( cheap money for banks) this week. Looking more generally Frederik Ducrozet of  Bank Pictet thought this.

Extrapolating from the share of each country in previous operations, Italy and Spain would account for at least 60% of total TLTROs holdings.

Greece

The official mantra has been along the lines of D-Ream’s “Things can only get better” and yet this happened this week. From the Bank of Greece.

On 22 March 2017 the Governing Council of the ECB did not object to an ELA-ceiling for Greek banks of €46.6 billion, up to and including Wednesday, 5 April 2017, following a request by the Bank of Greece.

The increase of €0.4 billion in the ceiling reflects developments in the liquidity situation of Greek banks, taking into account private sector deposits flows.

In a situation where we keep being told the Greek economy is improving?

Comment

This is like an economic version of the never-ending story. Proclamations of success and triumph are followed by “move along please, nothing to see here” and then well you know! In addition to the bailouts there are other schemes to help the banks. For example the cheap loans offered by the Bank of England under its Term Funding Scheme have now reached some £47.25 billion. If we move to Europe I note that Bank Pictet think this.

In aggregate, the maximum subsidy from those long-term loans at a negative rate is EUR3bn on an annual basis, compared with a total cost of the ECB’s negative deposit rate of around EUR5.5bn (a number that will grow to over EUR8bn as QE continues).

As you can see some of it is hidden or to be more precise not generally known. The biggest critique is simply the “lost decade” for the banking sector we seem trapped in and we learnt explicitly from the chief economist of the Bank of England earlier this week that different rules apply to his “Precious”. From Chris Giles of the Financial Times.

why does the chief econ of BoE think banks accounting for a third of the productivity puzzle is peanuts?

When people look away though banks seem to return to type.

Credit Suisse Group AG increased its bonus pool 6 percent…….The bank is increasing its bonus pool for the first time since 2013 in spite of a second consecutive annual loss.

 

Reuters

After posting this I note that a long post from Reuters has a different perspective to mine.

Banks used to have a cosy relationship with Britain’s government. Now they say they are struggling to be heard as the country prepares to leave the EU…….

 

Or perhaps not albeit from a different corner.

Senior bankers expected special treatment from the government after Britain voted to leave the EU. They expected ministers to champion their cause, above other industries,

 

 

The Portuguese banking crisis of 2016 is ongoing

It was only on Friday that I found myself analysing again the problems and travails of the Italian banking system and this morning we find that its Euro area twin the Portuguese banking system is in further trouble as well. Mind you according to Italy’s Finance Minister Padoan there is no problem at all.

Italian finance minister rejects need for banks bail-in……Pier Carlo Padoan, the Italian finance minister, has denied that Italy’s banks are suffering from systemic problems and rejected a “bail-in” of private investors.

Apparently though there are “a few “contained” critical cases.” As we mull the record of official denials of banking problems we can only wonder how large a number “few”can be and does he mean contained like at Fukushima?

In a familiar tale share trading in Monte Paschi was stopped this morning in Milan as it fell another 5%.

The Portuguese Banks

Let me repeat a summary I used on June 7th and July 6th.

A concentrated banking sector with strong links to the Portuguese establishment and many links to Angola has failed to provide investment for the economy in the good times and led to contraction in the bad times. Whenever the light of media attention is shown on the sector we see cockroaches scuttling for cover. Putting it another way this is the reality of the theory of money velocity falling.

The Portuguese statistics office in its review of 30 years of European Union membership puts it like this.

The second subperiod, from 2001 to date (2014), was marked, by contrast, by an almost stagnant Portuguese economy, while the EU15 and the EU28 on average experienced economic growth (average annual growth rates slightly above 1.0%)……….. In other words, the conditions for this small open economy trying to find its place in the new international environment became much more unfavourable, with the additional aggravating circumstance of having to meet the fiscal targets set out within a financial rescue programme.

Not much of a recommendation of the decision to join the Euro is it? The previous period has been more successful. But the “almost stagnant Portuguese economy” of this century has meant that the banks have got weaker and in fact the economy and the banks have dragged each other lower.

For those unfamiliar with Portugal there has been the issue also of unfavourable demographics which have been made worse by this.

However, the crude rate of net migration has been following a negative trend since 2011, as was already the case with the crude rate of natural increase.

Novo Banco

Let us remind ourselves that this was supposed to be as it name implies as good bank or literally new bank. Back on August 3rd 2014 the Bank of Portugal told us this.

Under Article 153-B of the RGICSF, the Resolution Fund will solely own the equity of the new bank, and will later allow new capital to enter, reestablishing a shareholder base for this bank with the inherent reimbursement of the capital now provided by the fund.

Ah “allow new capital to enter!” Well nearly two years and several abortive attempts later there has been not a penny or cent of new capital but there was this last New Year.

The nominal amount of the bonds retransferred to Banco Espírito Santo, S.A. totals 1,941 million euros and corresponds to a balance-sheet amount of 1,985 million euros.

So the new clean bank turned out to be not so clean which I would imagine explains the shortage of buyers for the equity. This rather leaves the Resolution Fund holding a very expensive baby.

The equity capital of Novo Banco, to the amount of €4.9 billion, is fully underwritten by the Resolution Fund.

What is the make-up of the fund?

The Resolution Fund’s sources of funding are the contributions paid by its member institutions and the proceeds from the levy over the banking sector, which, according to applicable regulations, are collected without jeopardising the solvency ratios.

Why is this a good idea?

The State will bear no costs related to this operation.

Oh really?

Given that the Resolution Fund started its operation only in 2012 and has not available sufficient financial resources to finance the resolution measure applied to Banco Espírito Santo, S.A., the Fund took out a loan from the Portuguese State. The loan granted by the State to the Resolution Fund will be temporary

Eurostat took a somewhat different view.

“other adjustments” that in 2014 includes € 6 186 million (3.6% of GDP) related to the recording of the financing operations of the State to the public enterprises “Carris” and “STCP”, to the write-off of nonperforming loans by BPN Crédito, held by Parvalorem, S.A. and to the capitalization of Novo Banco.

The other banks

In theory they now hold Novo Banco via the Resolution Fund albeit that it had nowhere near the money to pay for it. According to the Financial Times this morning that is not going so well.

Estimates of the potential bill facing banks, which finance the resolution fund that bailed out Novo Banco in 2014, range from €2.9bn to €3.9bn. Some bankers are even doubtful that the rescued lender will attract any acceptable offers, leading to its possible break-up or liquidation.

Has a “good bank” ever destroyed money and capital so quickly? This is a flaw of collective banking insurance which I have pointed out many, many times and here is the present consequence.

Portuguese banks, already undercapitalised and loaded with bad debt, are bracing for heavy losses from Lisbon’s so far unsuccessful attempts to sell Novo Banco, the lender salvaged from the collapse of Banco Espírito Santo.

Caixa Geral de Depósitos

Back on the 6th of July I pointed out that there seemed to be a flurry of departures from the board and that trouble was building. Today the FT puts it like this.

Lisbon and EU authorities are locked in tough negotiations over plans to recapitalise state-owned Caixa Geral de Depósitos, Portugal’s largest bank, with conflicting estimates of its capital needs ranging from about €2bn to €5bn.

If we wished to copy the Beatles and set about “fixing a hole” what might it cost?

In a recent report, Barclays estimated that Portuguese lenders could need up to €7.5bn to resolve a “systemic banking crisis” that was bringing the country under “close market scrutiny”.

Comment

Portugal is far from alone in seeing the share prices and values of its banks fall in 2016. However there are specific problems here based on the Portuguese system and the way that it has tried to play the parlour game “pass the parcel” without the music ever stopping. If we look back a corrupt banking system with links to Angola has lived through 15 years of  overall economic stagnation which of course it has contributed to. There is a growing list of problems which the Portguese state has looked away from.

However as time has progressed it has successively been forced to face up to them one by one. Usually not by itself as it has invariably used accountancy chicanery to avoid that but after a period Eurostat catches up with it. This means that its deficit problems ( 12.4 billion Euros in 2014 , 7.9 billion in 2015) have continued which have meant that the national debt (129% of GDP) has grown too. The can has been kicked not into a future full of sunshine but one with more clouds and rain. More Euro area punishment for breaking the fiscal rules is of course part of that.

In current conditions a rising national debt means much less than it did simply because Mario Draghi and the ECB are hoovering up so much of it  So far the purchase of 19.1 billion Euros of Portuguese government debt has meant that it can continue to borrow relatively cheaply ( ten-year yield 3.06%). But as to repaying any of it well that looks ever further away and without ECB support then Portugal looks on its way to insolvency unless it can finally find some sustained economic growth. A great shame for what is a lovely country.

What Portugal did not need is a worsening of its banking crisis

Tonight Portugal plays Wales in the semi final of the European Championships and this will occupy much of the news. I have to confess I cannot wait! But for Portugal there is another story going on and it brings together two themes of my work. Firstly there is the underlying problem that it has struggled to achieve any real rate of economic growth for years and in fact for decades. Even in the relatively good times it has struggled to grow at more than 1% per annum and that effect has been exacerbated by the problems of the Euro area crisis which put it into a depression. The combination of a shrinking economy and the Euro area crisis has left it with a national debt of 129% of GDP (Gross Domestic Product).

Whilst Portugal has begun to climb out of the original Euro area crisis problem we see something familiar in its recent economic performance. Here is the trend for annual economic GDP growth from the first quarter of 2015. 1.7%, 1.5%, 1.4%, 1.3%, and then 0.9%. This is in a period of negative interest-rates, ever more QE and a lower Euro. If we throw in the beneficial effect of a lower oil price then such numbers are both disappointing and sadly consistent with past performance. Here is the view of the Bank of Portugal on this.

Nevertheless, low productivity growth reflects persisting structural weaknesses, as well as some negative consequences of the past few years’ adjustment process. The Portuguese economy continues to record a long-term trend of low potential growth, associated with the vulnerabilities in labour and product markets and in the quantity and quality of productive inputs.

It tries to be upbeat about Euro area membership and it is true there are “particularly favourable monetary conditions” right now but for a central bank to use the word “challenges” you know there are problems. That in their language is what Taylor Swift calls ” I knew you were trouble”. It too is worried about the apparent slow down.

However, economic activity showed signs of weakness in the second half of the year, as a result of a deceleration in business gross fixed capital formation (GFCF) and exports.

Portugal has managed a better export performance in recent times. On the other side are the ongong problems in the former colony Angola where there are still close links. It has just raised interest-rates to 16% and turned away an IMF bailout. There are also potential problems from the Brexit referendum should the lower value of the UK Pound £ mean fewer visitors and tourists from the UK. According to Dow Jones the Finance Minister thinks it cause problems.

“[Brexit] is a structural change that will have an impact in our economy,” Mr. Centeno told lawmakers in parliament. ” Let’s have no doubts about that.”

Portugal’s banks

These have been in the news in recent times as they have been struggling in spite of the fact that for the past couple of years or so Portugal has managed some economic growth. They are suffering because little was done about the problems in the weaker phase with a strategy looking similar to that applied by Italy which mostly involved hoping the issue would somehow disappear.

As to the state of play we get a signal from this which if you recall was introduced by the UK as an emergency measure only yesterday. From the Bank of Portugal.

decided that the countercyclical buffer rate to be in force in the 3rd quarter of 2016 will remain unchanged at 0 per cent of the total risk exposure amount.

The Bank of Portugal also tells us that the banks have continued to deleverage.

Banking system total assets maintained a gradual downward trend in the first quarter of 2016.

This means that total assets have dropped from 513 billion Euros in 2011 to 409 billion in the first quarter of 2016. Some of this has been caused by the bank resolution deals at BES and Banif for example but there have been genuine falls. Also credit quality has declined.

The credit-at-risk ratio increased slightly to 12.2% in 2016 Q1, explained equally by an increase in credit at risk and a decline in gross credit.

The speed at which credit impairments are being seen has slowed but the total has continued to rise. The overall position is shown below.

Banking system solvency ratios declined slightly in the first quarter of 2016 due to a decrease in own funds

Also whilst the banks have received a lot of help it is also true that they are being hurt by the -0.4% deposit rate imposed by the European Central Bank.

Although positive, the profitability of the banking system decreased in the first quarter of 2016 on a year-on-year basis, due mainly to a reduction in income from financial operations.

Novo Banco

If ever a bank has not lived up to its name then this one has to be high on the list. The new bank or Novo Banco turned out to be a case of misrepresentation. It was supposed to be clean fresh and new and a good bank constructed from the wreckage of Banco Espirito Santo. On this basis it was supposed to be sold but the sale was suspended last September and this emerged at the end of the year.

The nominal amount of the bonds retransferred to Banco Espírito Santo, S.A. totals 1,941 million euros and corresponds to a balance-sheet amount of 1,985 million euros.

Now if you were an owner of a bond in a clean bank you might well be troubled by it going to one which pretty much defines a bad bank. Even worse this happened just in time for the bail in procedure that was part of the changes involving the European banking system . So your bonds went from rather valuable to pretty much worthless. No wonder this went to the courts!

In spite of this being a shambles it is still something of a surprise that another effort was made to sell off Novo Banco just after the Brexit referendum. Just before that it tried to buy back some of its own bonds which posed the question as to why it had not done that back last December? Four bidders emerged although at what price? Anyway I think we can discount the alternative which would be to make a public offering of the shares! Although officially that is still on the table.

Caixa Geral de Depósitos

There has been trouble at this state owned bank with the European Commission so far undecided whether to approve the recapitalisation required by it. Portugal’s Politico pointed out that there has been a series of resignations driven by this. Apologies for the clunkiness of the translation.

And in a harsh language, refer to the Government the responsibility for response to uncertainty hovering for months over the largest bank in the system.

The newspaper also looked at the consequences of this.

The letter was sent in the morning, by e-mail, and is the culmination of a more than six months path marked by the deadlock over the future of the largest Portuguese bank, which since January is rudderless and without strategy. A situation that has undermined the image of CGD and generated an arm-rail deaf among current managers and the Government. The lack of clarity in governance is leading to the suspension of many decisions, especially in the area of credit.

As you can imagine the last sentence caught my eye. It no doubts contributes to this.

In May 2016, the annual rate of change (a.r.) of loans granted to non-financial corporations (NFC) was -2.5%, that compares with -2.7% from the previous month

Hardly supporting the wider economy is it? Also this is at a time when ECB policy is extremely expansionary. Perhaps the Portuguese banks are increasingly worried by this.

The overdue loans ratio for NFC increased 0.3 p.p., standing at 16.7%. The percentage of NFC with overdue loans increased 0.1 p.p., standing at 29.6%

Comment

Back on the 7th of June I put it like this.

A concentrated banking sector with strong links to the Portuguese establishment and many links to Angola has failed to provide investment for the economy in the good times and led to contraction in the bad times. Whenever the light of media attention is shown on the sector we see cockroaches scuttling for cover. Putting it another way this is the reality of the theory of money velocity falling.

As we bring things up to date we see that in the meantime more problems have arisen. The general environment is that the Eurostoxx bank index has fallen from 125 to 78 in Europe so far which gives us a clue as the the likelihood of a public offer for Novo Banco and the likely price offers.

Meanwhile Portugal is in trouble with the European Commission over its fiscal deficit and whilst no sanctions have been declared there have been some consequences. From Publico.

It’s the first casualty of the railway investment plan that the Government presented in February. The Aveiro-Mangualde line, amounting to 675.3 million euros and it would have a share of 404.8 million of EU funds, was sunk by Brussels because the cost-benefit analysis was negative.

Remember the Roads To Nowhere in Portugal?