It is all about the banks yet again

If there is a prime feature of the credit crunch in the financial world it is the woes and travails of the banks. That is quite an anti-achievement when you consider that if you count from the first signs of trouble at the mortgage book of Bear Stearns we are now in out second decade of this period having lost one already. Before we come to today’s main course delightfully prepared first by chefs in Italy and then finished off in Brussels I have a starter for you from the UK.

The Co-op Bank

Back on the 13th of February I gave my views on this institution being put up for sale.

So the bank is up for sale and my immediate thought is who would buy it and frankly would they pay anything? Only last week Bloomberg put out some concerning analysis……..Co-Operative Bank Plc, the British lender that ceded control to its creditors three years ago, has plunged in value to as little as 45 million pounds ($56 million), according to people familiar with the matter.

Since then we have had regular reports in places like the Financial Times that a deal was just around the corner whereas I feared it might end up in the hands of the Bank of England. This morning has come news that the ill-fated sale plans have been abandoned and replaced by a doubling-down by the existing investors. From Sky News.

The beleaguered Co-operative Bank is closing in on a £700m rescue deal with US hedge funds amid ongoing talks about the separation of the vast pension scheme it shares with the Co-op Group.

Much of the issue revolves around funding the pension scheme and if I was worker at the Co-op I would be watching that like a hawk. Also the name may need some review as the shareholding of the Co-operative group falls below 5%.

We have also seen in the UK how a bailed out bank boosts the economy in return for taxpayers largesse. From Reuters.

British lender Royal Bank of Scotland (RBS.L) is planning to cut 443 jobs dealing with business loans and many of them will move to India, the bank said

The Veneto Banks

As we move from our starter to the main course we find ourselves facing a menu which has taken nearly a decade to be drawn up. The Italian response to the banking crisis was to adopt the ostrich position and ignore it for as long as possible. Indeed for a while the Italian establishment boasted that only 0.2% of GDP ( Gross Domestic Product) had been spent on bank bailouts compared to much higher numbers elsewhere. Such Schadenfreude came back to haunt them driven by one main factor which was the rise and rise of non-performing loans in the Italian banking sector which ended up with more zombies than you might expect to see in a Hammer House of Horror production. Even worse this was a drag on the already anaemic Italian rate of economic growth meaning that its economy is now pretty much the same size as when it joined the Euro.

There has been a long program of disinformation on this subject and I am sure that regular readers will recall the claims that Monte Paschi was a good investment made by then Prime Minister Matteo Renzi. There have also been the regular statements by Finance Minister Padoan along the lines of this from Politico EU in January.

Italian Finance Minister Pier Carlo Padoan has defended the way his country dealt with its banking crisis, saying the government had “only spent €3 billion” on bailouts, in an interview with Die Welt published today.

If we are being ultra polite that was especially “odd” as Monte Paschi was in state hands but of course over this weekend came more woe for Padoan. From the European Commission.

On 24 June 2017, Italy notified to the Commission its plans to grant State aid to wind-down BPVI and Veneto Banca. The measures will enable the sale of parts of the two banks’ activities to Intesa, including the transfer of employees. Italy selected Intesa Sanpaolo (Intesa) as the buyer in an open, fair and transparent sales procedure:

I will come to the issue of Intesa in a moment but let us first look at the cost to Italy from this.

In particular, the Italian State will grant the following measures:

  • Cash injections of about €4.785 billion; and
  • State guarantees of a maximum of about €12 billion, notably on Intesa’s financing of the liquidation mass. The State guarantees would be called upon notably, if the liquidation mass is insufficient to pay back Intesa for its financing of the liquidation mass.

This has opened up a rather large can of worms and as Bloomberg points out we can start with this.

Rome will effectively by-pass the EU’s “single resolution board” which is supposed to handle bank failures in an orderly way and the “Banking Recovery and Resolution Directive,” which should act as the euro zone’s single rulebook.

Why? Well as we have looked at before there was the misselling of bonds to retail investors.

The government could have taken a less expensive route, involving the “bail in” of senior bondholders. It chose not to: Many of these instruments are in the hands of retail investors, who bought them without being fully aware of the risks involved. The government wants to avoid a political backlash and the risk of contagion spreading across the system.

Privatisation of profits and socialisation of losses yet again. Also only on the June 8th we were told this.

Italian banks are considering assisting in a rescue of troubled lenders Popolare di Vicenza and Veneto Banca by pumping 1.2 billion euros (1.1 billion pounds) of private capital into the two regional banks

Good job they said no as they would have been over 3 billion short! Oh and Padoan described the problems as “exaggerated” whereas if we return to reality this was always the real problem.

A bail in has the problem of the retail depositors who were persuaded to invest in bank bonds.

Intesa

This seems to have got something of a free lunch here provided courtesy of the Italian taxpayer. From Reuters.

The government will pay 5.2 billion euros ($5.82 billion) to Intesa, and give it guarantees of up 12 billion euros, so that it will take over the remains of the banks.

So it can clear up the mess? Er not quite.

will leave the lenders’ good assets in the hands of Intesa,

So it is being paid to take the good bits. Heads it wins if things turns out okay and tails the Italian taxpayer loses if they do not as it will use the guarantees. Also as you can see it seems to have thought of everything.

You think Santander made a killing with Pop until you realise will even make the state pay for the redundancy package of V&V staff ( @jeuasommenulle )

It may even be able to gain from some Deferred Tax Assets but chasing down that thread is only in very technical Italian.

Comment

There is much to consider here so let me open with the two main issues. The European Banking Union has just been torpedoed by the Italian financial navy. The promised bail in has become a bailout. Next comes the issue of how much all the dilatory dithering has cost the Italian taxpayer? As in the end the cost is way above the sums that Financial Minister Padoan was calling “exaggerated”. I note that BBC Breakfast called the cost 5 billion Euros this morning ignoring the 12 billion Euros of guarantees which no doubt Italy in a by now familiar attempted swerve will try to keep it out of the national debt numbers. Although to be fair Eurostat has mostly shot down such efforts.

Over the next few days we will no doubt be assailed with promises that the money will come back. For some it already has. From the FT.

Intesa Sanpaolo, the country’s strongest lender that will take over the failed banks’ good assets, was the second biggest riser on the eurozone-wide Stoxx 600 index. Shares in the bank were up 3.6 per cent at publication time, to €2.71.

 

 

 

 

 

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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,

 

 

Could the Bank of England end up taking over the Co-op Bank?

One of the consequences of the credit crunch and the consequent banking bailouts is the way that the banks dominate financial life. We can in fact take that further because in the same way that British Airways was described as a pension fund with an airline subsidiary can we now be described as a financial sector with a real economy subsidiary? It so often feels like that.

Actually there is some fascinating number-crunching we can do as banks interact with central banks and as so often ECB (European Central Bank) gives us food for thought. Earlier @insidegame pointed out this.

ECB deposit facility usage €495.763 billion.

Interesting that banks are so willing to deposit at an interest-rate of -0.4% is it not? That hardly suggests confidence in the system. Well there is another 955.27 billion Euros held by them in the ECB current account at the same -0.4% interest-rate. Indeed at a time of apparent economic success someone is also borrowing some 590 million from the Marginal Lending Facility.

Marginal lending facility in order to obtain overnight liquidity from the central bank, against the presentation of sufficient eligible assets;

There is more to consider as we note that what is supposed to be a penal interest-rate is a mere 0.25%.

Co-op Bank

This is an institution about which Taylor Swift might well have written “trouble,trouble,trouble” for. This morning the Co-op group has announced this.

As a minority investor in The Co-operative Bank, the Co-op Group is supportive of the plan to find the Bank a new home. We will continue to work with the Bank and other investors through the process. We are focused on finding the best outcome for our members, two million of whom are Bank customers, as well as the members of our shared pension scheme which is well funded and supported by the Group. Our goal is to ensure the continued provision of the type of co-operative banking products our members want.

So the bank is up for sale and my immediate thought is who would buy it and frankly would they pay anything? Only last week Bloomberg put out some concerning analysis.

Co-Operative Bank Plc, the British lender that ceded control to its creditors three years ago, has plunged in value to as little as 45 million pounds ($56 million), according to people familiar with the matter.

The shares are privately owned so prices are not published but we are told this about trading and prices.

Shares in the Manchester, England-based lender, which don’t trade publicly, are quoted between 10 pence and 30 pence by investment banks offering private trading among institutional investors, said the people who asked not to be identified because they weren’t authorized to speak publicly. The shares were worth about 3 pounds after the bank was rescued by bondholders in 2013, falling to about 50 pence in September before plummeting in recent weeks amid questions over its financial strength, the people added.

There are two initial issues raised by this. The first is that “worth” is not the same as price and related to that I would say that the £3 price after the 2013 rescue was a combination of a false market and wishful thinking. In a closed private market, how can I put this? You can pretty much price it as you like and wait and see if anyone is silly enough to buy at that price? I think we are clear now that the answer was no! So the fall in the price has in my opinion been more an acquaintance with reality than any real change.

The institution would already have been on the radar of the Bank of England.

Co-Op Bank will probably operate below regulatory capital guidance until at least 2020, the bank said Jan. 26, as it replaces crumbling IT systems and separates its pension fund from its former parent.

One thing that raises a wry smile is that the banks are always described as having “crumbling IT systems”. How can this be when pre credit crunch we were told that they were run by people of such talent that they deserved vast salaries and remuneration packages? Someone should try a case for miss selling there. I believe the Co-op Bank has now outsourced such matters to IBM.

The Prudential Regulation Authority or PRA has been looking into this although its moves are awkward in the sense that they give the Co-op bank another downwards push.

The PRA increased its so-called Pillar 2A capital requirements, financial buffers linked to a lender’s idiosyncratic risks, to 14.1 percent of risk-weighted assets in November. By contrast, the level set for Lloyds Banking Group Plc, Britain’s largest mortgage lender, is 4.5 percent.

Bonds,Bonds Bonds

There is no bull market here indeed we see the reverse as the Co-op Bank’s bonds have seen quite a bear market.

The bank’s 206 million pounds of junior bonds due December 2023 dropped 4 pence to 45 pence on the pound on Wednesday, according to data compiled by Bloomberg, while 400 million pounds of senior bonds maturing in September this year were little changed at 85 pence, with a yield of 34.5 percent.

In these times of zero and indeed negative interest-rates which we reminded ourselves about at the opening of this article an interest-rate of 34.5% can be described thus.

Danger, Will Robinson! Danger!

The official view is quite different as the BBC explains.

The bank has four million customers and is well known for its ethical standpoint, which it says makes it “a strong franchise with significant potential” when it comes to a sale.

This seems like a reality was a friend of mine moment, or of course perhaps viewed through the prism of its previous drug-taking chairman Paul Flowers, who pursued the new methods of counting GDP with quite an enthusiasm. Meanwhile the last Fitch Report told a different tale.

Co-op Bank’s relaunch is crucial for it to become a viable business, but losses and capital erosion continue to hamper its progress. We expect Co-op Bank to report losses until at least 2017, and significant investment in new systems could extend losses into the medium term. Profitability should begin to benefit in 2018 when fair value adjustments related to the 2009 acquisition of Britannia Building Society are fully unwound.

Comment

This is a sad, sad story as there is much to recommend mutual organisations although of course much of that disappeared in the 2013 rescue. When the credit crunch hit there were hopes ( including mine) that the mutual system might help but sadly it has done little if any better than the share owned banks. The same greed culture ravaged it and may yet ravage us as taxpayers. This is particularly disappointing from an organisation which has promoted itself ad being based on ethical foundations.

Right now the Bank of England will be trying to encourage and goad someone into buying this. The problem is that the shortlist at the moment has one maybe which is the TSB. 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. A bit like the rule that you never buy a share until the third profit warning. After all if the outlook was good the hedge funds would keep it wouldn’t they? So there remains a genuine danger that the Bank of England will end up stepping up and apply its new bank resolution procedure. At such a time it would be on my timeline for such events.

5. The relevant government(s) tell us that they are stepping in to help the bank but the problems are both minor and short-term and are of no public concern.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

7.Part-nationalisation of the bank is announced and taxpayers are told that a profit will result from this sound and wise investment.

8. Full nationalisation is announced to the sound of teeth being pulled without any anaesthetic.

As to the individuals concerned there is this.

It is also announced that nobody could possibly have forseen this and that nobody is to blame apart from some irresponsible rumour mongers who are the equivalent of terrorists. A new law is mooted to help stop such financial terrorism from ever happening again.

12. Some members of the press inform us that bank directors were both “able and skilled” and that none of the blame can possibly be put down to them as they get a new highly paid job elsewhere.

13. Former bank directors often leave the new job due to “unforeseen difficulties”.