It is always the banks isn’t it?

Perhaps the most regular theme of the credit crunch era is the problems of the banks and the finance sector. This is quite an (anti ) achievement as we note that if we count from problems at Bear Sterns the credit crunch is now into its second decade. In only a couple of months or so it will be ten years since Northern Rock began its collapse. We are regularly told by our establishment that there has been reform and repair along the lines of this from Alex Brazier of the Bank of England that I analysed only on Tuesday,

The financial system has been made safer, simpler and fairer.

Banks, in particular, are much stronger. British banks have a capital base – their own shareholders’ money – that is more than 3 times stronger than it was ten years ago.

They can absorb losses now that would have completely wiped them out ten years ago.

Lloyds Banking Group

I pointed out on Tuesday that it was hard to know whether to laugh or cry at the “simpler and fairer” claim and this morning there is this announcement to consider.

This was after taking additional provisions for PPI and other conduct related issues which was disappointing. The Group is also currently undertaking a review of the HBOS Reading fraud and is in the process of paying compensation to the victims of the fraud for economic losses, ex-gratia payments and awards for distress and inconvenience.

Later we got some details on the monetary amounts involved.

The £1,050 million charge for PPI includes an additional £700 million provision taken in the second quarter reflecting current claim levels, which remain above the Group’s previous provision assumption. The additional provision will now cover reactive claims of around 9,000 per week through to the end of August 2019,

The good news from this is that the UK economy will get another £700 million of PPI style Quantitative Easing which seems to be much more effective than the Bank of England version.  The bad news is that the saga goes on and on and on in spite of us being told so many times that it is now over. Indeed the rate of provision has doubled from last time around. This means that in total Lloyds either has or is about to provide this in terms of PPI style QE. From Stephen Morris of Bloomberg News.

Lloyds Bank takes ANOTHER £700m in charges today, taking their total since 2011 to 18.1 BILLION POUNDS………This is the 17th time the bank has increased its provisions for the scandal.

This is a feature of the ongoing banking scandal where we are drip fed the news as a type of expectations management as another bit is announced and we are told it is the last time again and again. The issues are legacy ones from the past but the management and response cycle has not changed. Actually if we look at the total numbers for misconduct New City Agenda has some chilling ones.

has now set aside £22.5 bn for misconduct since 2010

If we go wider to the whole industry it calculates this.

Total amounts set aside for PPI redress now stand at £42.1 billion – around 4.5 times the cost of the London 2012 Olympics. Banks have proved hopeless at estimating the total cost of their misconduct – with some increasing their PPI redress provisions 10 times over the past 3 years. Legitimate complaints have been rejected and banks have delayed writing to customers, meaning that the scandal has taken years to be resolved and cost billions in administrative costs.

If we return to the QE style impact it does make me wonder how much of the UK economic recovery has been due to this as we note for example its possible contribution to car sales. If we throw in every type of miss selling the total comes to £58.1 billion.

Before we move on there was also this. From the Financial Times.

The bank has also set up a £300m compensation scheme to repay 600,000 mortgage customers as a result of failings in its arrears policies between 2009 and 2016,

How can there be recent failings when everything is supposed to have been reformed?

Lending

On Tuesday Alex Brazier warned about looser lending standards. But according to Lloyds Bank in the Financial Times it is everybody else.

 

Mr Horta-Osório said the bank has been increasing its consumer lending — comprising credit cards, personal loans and car finance — at less than 4 per cent a year over the past six years, and remains under-represented in the sector versus its size.

I am very cautious about anyone who uses this sort of swerve “over the past 6 years” as no doubt 2011 and 12 are included ( remember the triple dip fears?) to get the number down. Still the Alex Brazier should be alert to that as it is exactly the sort of swerve the Bank of England uses itself.

Royal Bank of Scotland

We cannot look at UK banks and miss out RBS can we?! It did make BBC News earlier this month.

Royal Bank of Scotland has agreed a £3.65bn ($4.75bn) settlement for its role in the sale of risky mortgage products in the US before the financial crisis.

Also there is the on-going saga about the on and now off sale of Williams and Glyns. If I recall correctly around £1.8 billion was spent on this and the bill is rising yet again.From the BBC.

The European Commission has accepted a UK government plan to free Royal Bank of Scotland from an obligation to sell its Williams & Glyn division……..Under the new deal, which the EU has accepted “in principle”, RBS would spend £835m to help boost competition.

Deutsche Bank

My old employer has seen plenty of scares in the credit crunch era. For the moment it seems to mostly be in the news via its likes to both the Donald and his circle. From the New York Times.

During the presidential campaign, Donald J. Trump pointed to his relationship with Deutsche Bank to counter reports that big banks were skeptical of doing business with him.

After a string of bankruptcies in his casino and hotel businesses in the 1990s, Mr. Trump became somewhat of an outsider on Wall Street, leaving the giant German bank among the few major financial institutions willing to lend him money.

Well as this from the Wall Street Journal points out today’s results have brought both good and bad news.

The German lender said Thursday net income was €466 million ($548 million), compared with €20 million for the same period a year earlier. Deutsche Bank’s companywide revenues declined 10% from the year-ago period, to €6.6 billion.

Comment

There is much here that seems familiar as the claimed new dawn looks yet again rather like the old one. There has been a reminder of this from another route today as the establishment reform agenda has led to this.

FCA say Li(e)bor is to end in 2021 citing that the bank benchmark is untenable  ( @Ransquawk)

Good job there is no rush to do this like a big scandal destroying any credibility it had or something like that.  We need a modern benchmark for new trades starting now whilst a sort of legacy Libor is kept for the existing contracts that cannot be changed.

Still there is always an alternative perspective on it all as this headline from Reuters indicates.

Lloyds bank posts biggest half-year profit since 2009

 

 

 

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The problems of the banks have not gone away

As we progress through 2017 we will reach the decade point for the credit crunch era especially in UK terms if we count from the collapse of the Northern Rock building society in October 2007 when it required liquidity support from the Bank of England. We are also left mulling establishment promises like this as quoted by the BBC.

Northern Rock is to be nationalised as a temporary measure, Chancellor Alistair Darling has said.

Now whilst some of it was taken over by Virgin Money giving the UK taxpayer a loss. some of it remains with UK Asset Resolution Limited.

Today, UKAR comprises of approximately 200 colleagues and is responsible for around 215,000 customers holding £33.1 billion of mortgages and loans.

Around £9 billion of that is from Northern Rock and the rest is from the failure of Bradford & Bingley which also failed. So we are left mulling the meaning of the word temporary one more time.

The next theme we kept being promised was that this time would be different and that there would be fundamental reform of the banking system. Actually that reform got kicked into the very long grass in the main and has yet to fully arrive. Back in 2011 the BBC reported it like this.

The ICB called for the changes to be implemented by the start of 2019…….The BBC’s business editor, Robert Peston, called it the most radical reform of British banks in a generation, and possibly ever.

Of course since then we have seen various delays and “improvements” to the plan as we wonder if it will ever be implemented or whether banks will collapse again first. So the reform so lauded by Robert Peston became this in February last year.

Sir John Vickers, who headed up the Independent Commission on Banking (ICB), said: “The Bank of England proposal is less strong than what the ICB recommended.”

In a BBC interview, he added: “I don’t think the ICB overdid it.”

The Bank of England rebuffed the criticism.

As ever the Bank of England moved to protect the banks rather than the wider economy.

Deutsche Bank

Today has seen yet more woe and bad news reported by Deutsche Bank which has never really shaken off the impact of the credit crunch. From Bloomberg.

The bank’s net loss narrowed to 1.89 billion euros in the three months through December, from a loss of 2.12 billion euros a year earlier. Analysts had expected a shortfall of 1.32 billion euros.

As I look at this there is the simple issue of yet another loss. After all the German economy is doing rather well with economic growth of 1.9% in 2016 and the unemployment rate falling to 5.9% with employment rising. So why can’t Deutsche Bank make any money?

Deutsche Bank took 1.59 billion euros of litigation charges in the fourth quarter, more than the 1.28 billion euros analysts surveyed by Bloomberg News had expected on average. While 2015 and 2016 were “peak years for litigation,” this year will continue to be “burdened by resolving legacy matters,” Deutsche Bank said in slides on its website.

Ah “legacy issues” which is the new version of Shaggy’s “It wasn’t me!”. Here is a breakdown of where they stand.

Last month, Deutsche Bank finalized a settlement with the Justice Department over its handling of mortgage-backed securities before 2008. The bank agreed to pay a $3.1 billion civil penalty and provide $4.1 billion in relief to homeowners. This week, it was fined $629 million by U.K. and U.S. authorities for compliance failures that resulted in the bank helping wealthy Russians move about $10 billion out of the country.

Also we have some signals as to what may be coming over the horizon.

A criminal investigation of the trades by the Justice Department is ongoing. The bank also hasn’t resolved investigations into whether it manipulated foreign-currency rates and precious metals prices.

Apart from that everything is hunky dory. If we look at this overall there is a very odd relationship between countries and banks these days. Banks get “too big to fail” support both explicitly and implicitly but they are also fined fairly regularly and hand over cash to taxpayers. Mind you some care is need here because Deutsche Bank is backed by the German taxpayer but the fines above have gone to the US and UK treasuries.

The one case where banks have some argument for saying official policy hurts them is in the case of negative interest-rates and of course the ECB has a deposit and current account rate of -0.4%. But whilst there is an element of truth in this there are also issues. The most obvious is that the banks wanted many of the interest-rate cuts that have been made and have also benefited from the orgy like amount of QE (Quantitative Easing) bond buying. The second is that the ECB has allowed them to borrow at down to -0.4% as well in an attempt to shield them.

These are bad results from my old employer and perhaps the most troubling of all is the impression created that clients are moving business elsewhere. For a bank that is invariably the worst situation. This is how it is officially put by the chairman.

Deutsche Bank has experienced a “promising start to this year,”

The share price had been on a strong run but has dropped 5% today so far.

Unicredit

Ah the banks of Italy! They seldom get far away from the news. It has seen its rights issue plan approved today as we mull why it need so much extra capital if things are going as well as we are told? From Bloomberg.

Unicredit Spa will sell new shares for more than a third less than their current price in a 13 billion-euro ($14 billion) rights offer aimed at strengthening its capital position.

The bank will sell stock at 8.09 euros a share and offer 13 new shares for every five held….. The offer price is 38 percent less than the theoretical value of the shares excluding the rights, known as TERP.

So more woe for shareholder as we note that the recent rally from around 19 Euros to just below 27 requires the perspective that the price was 423 Euros at the pre credit crunch peak. Also this is not the only rights issue that has been required.

In 2012, amid the global financial crisis, UniCredit sold shares at a 43 percent discount to raise 7.5 billion euros.

Also the mood music became a combination of grim and bullying.The offer document suggested that even with the extra capital there was no guarantee that things would be okay and hinted that if the bank did not get its money then shareholders would be even worse off if the bank failed.

It’s Chief Economist Erik Neilson (ex Goldman Sachs) is very opinionated for someone who works for an organisation that has performed so badly.

Comment

We are continually told that this time is different and that the banks have been reformed and then yet more signs of “trouble,trouble,trouble” as Taylor Swift would put it emerge. In the UK we have seen signs of yet another cover up at HBOS this week as Thames Valley Police reports.

Following a six year Thames Valley Police investigation into a complex multi-million pound fraud involving bank employees and private business advisors, six people have been convicted at Southwark Crown Court of fraud and money-laundering offences…….The fraud resulted in these offenders profiting from hundreds of millions of pounds at the expense of businesses, a high street bank and its customers.

When the Clash wrote these lines they were not thinking of the robbers working for the banks.

my daddy was a bankrobber
but he never hurt nobody
he just loved to live that way
and he loved to steal your money

These matters provide plenty of food for though as today 2 European banks take centre stage but it is like a carousel. Monte dei Paschi is now in state ownership and no doubt there will be more bad news from RBS. On and on and on it goes.

Me on TipTV Finance

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It is always the banks isn’t it?

Firstly as we arrive at what is now called  Christmas Eve Eve let me wish all of you a very Merry Christmas. As I will be on the lunchtime show on Share Radio next Thursday I will  post at the end of next week but will take a short break before then. Meanwhile financial markets have raised themselves from annual end of year torpor to review quite a bit of activity in the banking sector. You see governments and regulators invariably wait until this time of year to hand out presents to the banking sector although many of them are not the sort of present we dreamed of as children. In past years we have seen both bailouts and bail ins in Portugal and Italy for example and this year I have been expecting the final chapter of the Monte Paschi story to arrive about now for some time.

The collapse of Monte Paschi

This sad sorry saga is now coming to some sort of climax. Yesterday evening as City-AM reports the board of directors met and decided it was over.

The country’s third-largest bank said it failed to secure investors and sell new shares, so it scrapped a debt-to-equity conversion offer that had raised €2bn. It is returning bonds tendered under the swap.

Monte dei Paschi said it would not pay fees to investment banks that had worked to place its shares or on its planned bad loan sale, including its advisers JPMorgan and Mediobanca.

Investment bankers not be paid is that allowed these days? Anyway that moved us to a situation this morning as described below.

Trading in Monte dei Paschi shares, derivatives and bonds has been suspended today after confirming it has requested state aid from the Italian government.

Paolo Gentiloni, the new Italian prime minister, announced in the early hours of this morning that the country will dip into a €20bn (£16bn) fund to help the world’s oldest bank

The timescale being provided is a little bizarre however as the Bank of Italy should now move in and complete this over the holidays so that people know where they stand.

Local press has said the bailout plan could take two to three months, starting with a government guarantee of Monte dei Paschi’s own borrowings to ensure it doesn’t run out of cash.

The problem of course is balancing Euro area bail in rules with the fact that ordinary Italians bought and in some cases were miss sold the bonds of Monte dei Paschi which will be bailed in and the fact that the Italian taxpayer has to take on yet more debt. So whilst we can say “It’s Gone” we do not know exactly where. However we may find out later as Livesquawk points out.

Italian Government To Meet At 12:00 CET To Discuss Economy & Finance Decree.

Fines Fines Fines

The next section is brought to you with the question what did the US taxpayer do for revenue before they discovered fining foreign banks?

Barclays

There was a little more surprise when this appeared on the news wires yesterday evening. From the BBC.

The US Department of Justice said: “From 2005 to 2007, Barclays personnel repeatedly misrepresented the characteristics of the loans backing securities they sold to investors throughout the world, who incurred billions of dollars in losses as a result of the fraudulent scheme.”……

Federal prosecutors said that as part of the alleged scheme Barclays sold $31bn in securities.

More than half of the mortgages backing the securities defaulted, the suit alleged.

According to Barclays this is all “disconnected with the facts” which looks like an official denial to me and we know what to do with them.  This is a by now familiar tale where denial turns into how much? As I describe below.

Deutsche Bank and Credit Suisse

My old employer regularly features in the news and here it is as the US regulators hand it a grinch style Christmas present. From Sky News.

Deutsche Bank and Credit Suisse have agreed to pay $7.2bn (£5.9bn) and $5.3bn (£4.3bn) respectively in penalties relating to the collapse of the US housing market before the financial crisis.

The Swiss lender announced it had reached a deal with the US Department of Justice hours after a similar move by Deutsche.

So happy days for the US taxpayer and unhappy days for the shareholders of the two companies? Actually the share price of Deutsche Bank is up around 3% this morning at 18.27 Euros meaning this from Sky News must have been a miss read of expectations.

While the German bank’s sum is half the $14bn originally sought by investigators, it is more than $2bn above the amount analysts expected Europe’s third-largest bank to shell out.

It seems that it is Credit Suisse where expectations may not have been met as after an early rally the share price has drifted lower today. For a deeper perspective a pre credit crunch share price just under 90 has been replaced by one of 15.2. As for my old employer a sort of Christmas ghost puts a chill in the air as we note just under 99 Euros being replaced by 18.27.

How many extra nukes for the United States will these fines pay for?

Of Number Crunching and GDP

Let me open with some seasonal cheer for the UK providing by the Office for National Statistics this morning.

UK GDP in volume terms was estimated to have increased by 0.6% in Quarter 3 2016, revised up 0.1 percentage points from the second estimate of GDP published on 26 November 2016, due to upward revisions from the output of the business services and finance industries.

We cannot keep the banks out of the news but at least this time it is for something positive! However annual growth fell to 2.2% due to downwards revisions earlier in the year meaning that the post EU vote number was better than the average of the pre EU vote number leaving ever more egg on ever more establishment faces. I did ask about this on Twitter.

Is Professor Sir Charles Bean available to explain how his -0.1% to -1% GDP forecast turned out to be +0.6% please?

It would seem that our professorial knight is ideally equipped to continue the first rule of OBR ( Office of Budget Responsibility) club. Also the more wrong he is will he collect even more impressive sounding titles?

But there is something to provide humility to those who analyse the detail of economic numbers. From Howard Archer.

Welcome news as balance of payments deficit in 2015 revised down markedly to £80.2bn from £100.2bn;

Even in banking terms £20 billion is a tidy sum and a revision from back then gives us some perspective on this.

The trade balance deficit widened from £11.0 billion in Quarter 2 2016 to £16.7 billion in Quarter 3 2016 (Figure 9). The trade position reflects exports minus imports. Following a 1.4% increase in Quarter 2 2016, exports decreased by 2.6% in the latest quarter, while imports increased by 1.4% in Quarter 3 2016 following a 0.4% increase in Quarter 2 2016.

It would be more accurate to say we think we did worse in the quarter in question rather than being absolutely sure of it.

Comment

As I look back over not only this year but the preceding years of the credit crunch era I note how much of this is really a story about the banks and the banking industry. As we compare it to the real economy I feel that our establishment have misunderstood which is the tail and which is the dog. Even when we move to other stories such as UK GDP we see the banks at play again although in a rare occurence the mention is favourable.

The saddest part is that all of this was supposed to have been reformed well before now. I guess it is reflected by this from bitcoin price.

The average price of Bitcoin across all exchanges is 910.16 USD

 

 

 

 

How are our banks still in so much trouble?

A major theme of the credit crunch era has been the banking crisis in so many places followed by the many bailouts under the Too Big To Fail or TBTF strategy. The catch is that this week has seen more signs of distress for various banks more than 8 years after the collapse of Lehman Bros which by definition shows that the strategy such as it was is continues to fail. What is supposed to happen is that the can is kicked into the future via the bailouts and then we pick the can up later in better times. Indeed in the past central bankers have been able to bask in the reflected glamour of a successful intervention.

Economic policy has been warped to suit the banks

It bears repeating that the economic response has been more for the banking sector than the real economy. The initial slashing of interest-rates benefited them and the proliferation of QE improved the value of their bond holdings. Also in a rather transparent move countries cut interest-rates to a lower bound for their banks. What I mean by this is that the Bank of England stopped originally at 0.5% because it was afraid that the creaking IT systems of the UK banks could not cope with any negative numbers.

More recently we have seen blatant subsidies to the banking sector. The UK started one this week which is the Term Funding Scheme where UK banks will be able to borrow up to £100 billion at an interest-rate of 0.25%. This of course follows on from the Funding for (Mortgage) Lending Scheme which not only gave then cheap finance but boosted one of the main assets house prices. Only yesterday the Bank of Japan warped its buying of equities towards an index in which banks are more strongly represented. The TOPIX bank index rose by 7% on the day.

Also banks are often excepted from negative interest-rates either by also being given money at the negative interest-rate ( i.e even better than free money) like the TLTROs of the European Central Bank or simply being excluded from them like in Japan. Actually the -0.1% interest-rate there is more honoured in the breach than the observance.

House prices

A big gain for banks is rising house prices a subject I have covered extensively in the UK. This week has given us some news on this front from the Euro area as some countries respond to all the monetary easing. From Netherlands Statistics.

Prices of owner-occupied houses (excluding new constructions) were on average 6.0 percent higher in August 2016 than in August 2015. This is the most substantial price increase in 14 years.

And on Tuesday Portugal Statistics joined the party.

In the second quarter of 2016, the House Price Index (HPI) registered an increase of 6.3% when compared to the same period of the previous year….When compared to the first quarter of the year, the HPI increased by 3.1%

Now these are only 2 of the Euro area countries but we do get a clue that the picture has changed for this major part of banks asset books.

UK Banks

The Bank of England has summed up the situation only this morning.

Market valuations of major UK banks remain, in aggregate, well below their book value.

This poses a direct problem for the TBTF strategy as the investments of the UK taxpayer are currently well underwater especially in the perpetually crisis ridden Royal Bank of Scotland. It symbolically has fallen another 2 pence today to £1.81 which compares to a peak over the past year of £3.34. With the travails of the world shipping industry it was sadly typical to find the accident prone RBS affected. Lloyds Banking Group at 56 pence is also well below the price at which the UK taxpayer invested although some of the shares were sold in better times. Whilst HSBC for example has done much better in share price terms the two main bailed out banks have hit more trouble after all these years. Also there is an implicit admittal from the Bank of England that it is still providing a subsidy.

bank funding costs remain significantly lower than during previous episodes in which market valuations have been well below book value.

Deutsche Bank

The topic du jour in banking and semaine and mois. For all the official proclamations that everything is fine we see rumours continue to circle particularly about the derivatives book. Yesterday its share price fell back close to its lows again and whilst it has rallied today the current price of 11.44 compares to a high of 27.98 Euros over the past 12 months. It faces a conundrum where it would like more share capital but that is increasingly difficult due to the low share price. A vicious rather than a virtuous circle is in play as represented by this from Bloomberg.

Leverage ratio — a lender’s capital measured against its assets — at Deutsche Bank lags behind the rest of the world’s major banks, according to data released Tuesday by Federal Deposit Insurance Corp……While it’s not an official scoring by the FDIC, Hoenig’s calculations put more emphasis on derivatives exposure,

There are obvious issue such as the upcoming fine over mortgage miss selling in the US. It is likely to be a fair bit below the US $ 14 billion mooted but none the less Deutsche could do without it right now. Of course it has not actually been bailed out except implicitly but we have to ask how it has such problems 8 years down the road.

Monte dei Paschi

The world’s oldest bank seems like an old friend on here now. It was only a few short weeks ago when we were told that everything was on its way to being fixed and yet yesterday Reuters reported this.

Monte dei Paschi shares fell for eight sessions in a row, shedding 26 percent of their value, after the unexpected resignation of CEO Fabrizio Viola on Sept. 8 added to uncertainty over the lender’s future.

This particularly matters right now because it does this.

a string of losses that have shrunk the bank’s market capitalisation to one ninth of the size of a planned 5 billion euro (4.31 billion pounds) share issue.

You get an idea of the scale of the change as I remember making a mental note that it was one fifth back then as opposed to the one ninth now. Ouch!

If we move to the wider issue of the Italian banking sector it is true that the Non Performing Loans look like they are topping up. The problem is that share prices and hence bank capital have fallen much more quickly.

Comment

As time passes it becomes ever more glaring that many of the banks were not fixed but simply patched-up and told to carry on. It is not just a European issue but that area is making the news right now with Fitch pointing out problems for Portugal earlier today a subject I covered on the 25th of July.

But asset quality is still a major weakness for the banking sector and, in our opinion, makes banks vulnerable to downside risks from the highly indebted Portuguese economy. The unreserved portion of problem assets exceeds 100% of capital at CGD, BCP and Montepio.

Indeed there was not much sign of European solidarity in this reported by Reuters about Italian Prime Minister Renzi on Monday.

Italian Prime Minister Matteo Renzi said on Monday that Germany’s central bank chief Jens Weidmann should concentrate on fixing the problems of his own country’s banks, after Weidmann had urged Italy to cut its huge public debt.

Renzi told reporters in New York that Weidmann needed to solve the problem of German banks which had “hundreds and hundreds and hundreds of billions of euros of derivatives” on their books.

So after all these years the words from Alice In Wonderland sum it up well.

In another moment down went Alice after it, never once considering how in the world she was to get out again.

Me on Tip TV Finance

 

 

 

 

 

 

 

The European banking system is creaking in response to Brexit

These days so much of economic life revolves around the banking and finance sector. The political class tied the knot even more closely with the bailouts and supportive monetary policies that began in the UK with Northern Rock in 2007. That of course is quite a few years ago now even though it feels like yesterday. Internationally there are plenty of issues especially in places like Italy where there has been very little attempt to address the problems created by 360 billion Euros of bad loans leading to a drip drip drip of bad news. A sign of the ongoing problem was provided by the US Federal Reserve last night.

The Federal Reserve objected to the capital plans of Deutsche Bank Trust Corporation and Santander Holdings USA, Inc. because of broad and substantial weaknesses across their capital planning processes, and insufficient progress these firms have made toward correcting those weaknesses and meeting supervisory expectations.

So the United States has provided a shot across the bows for two major European banks and perhaps this is partly why Mario Draghi has started talking about “vulnerabilities” rather than “resilience”. UK readers will note that Santander has a large operation in the UK and wonder about that. I was critical of the takeover of Abbey National and other building societies back at the time. Please do not misunderstand me this is not anti-Spanish in any way and I had no issue with Santander buying assets here it was the amount of them that posed potential problems.

Deutsche Bank

My old employer is something of a goliath in the German financial system but the goliath has increasingly become a problem child. A factor here is the large derivatives book which has seen all sorts of large estimates for its size. I think the largest I have seen is US $64 trillion but care is needed here as these are a past speciality of mine and valuations depend on circumstances. If a bank writes derivatives what it does not need is extraordinary events, have we seen any of them in recent times? You get the idea….

The International Monetary Fund weighed in yesterday on the German banks in general.

However, German banks’ business models are vulnerable to low interest rates. This is because most German banks have businesses based on maturity transformation with a large number of branches and high overhead costs. Net interest income is the most important component of their profits.

Not so easy when they have so far been unwilling/unable to pass on the -0.4% deposit rate of the European Central Bank (ECB).

So far banks have proven unwilling, or even legally unable, to pass on the negative interest rates to depositors, while their assets have recently started to reprice to lower interest rates.

Then it lands its punch on Deutsche Bank.

Among the G-SIBs, Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse……..The relative importance of Deutsche Bank underscores the importance of risk management, intense supervision of G-SIBs and the close monitoring of their cross-border exposures, as well as rapidly completing capacity to implement the new resolution regime.

The share price has responded by falling another 3% this morning and of course this comes in addition to a stream of falls. A price of 12.32 Euros gives a year to date return of -45.7% according to Bloomberg and its market capitalisation is now a mere 16.8 billion Euros. That of course means that any share issue to strengthen capital would be expensive.

Allianz

This is the other German institution that was identified as globally significant by the IMF. As it is an insurer it is subject to the critique of negative interest-rates which I express regularly on here. How do long-term business models for insurance products, pensions and annuities work with an official interest-rates of -0.4% and a 10 year German bond yield of -0.11%?

For the German insurance sector as a whole how is this one going?

guaranteed return life products playing a dominant role

Also what could go wrong here?

Some evidence of search for yield has
been emerging.

European banks

If we step back we see this from Morgan Stanley with thanks to @Fmirw

The Eurostoxx banks index still trades 20% below pre-Brexit levels. This index has halved since the start of the year.

Leverage within EU banks is high and with domestic returns on assets falling (lower growth potential), balance sheet consolidation is warranted.

The implication here is that there will be even more deleveraging. It was only a few days ago I pointed out that Oliver Blanchard who used to be chief economist at the IMF was wrong to say that phase was over.

The Italian Job

I am grateful to @lemasabachthani for pointing this out yesterday.

RENZI SAYS HE HAS MADE ITALY BANKS `SECURE’

That is clearly a hostage to fortune as the word secure goes into my financial lexicon for these times. Meanwhile the rumours about another bailout continue except of course they are prohibited by the new bail in rules in the Euro area.  Oh and the bad bank Atlante which only a few short weeks ago had saved the Italian banks according to finance minister Padoan seems to be on the list for ch-ch-changes.

ITALY GOVT WORKING ON PLAN TO RECAPITALISE ATLANTE FUND TO HELP BANKS FOR 3-5 BLN EUROS BEFORE SUMMER BREAK – GOVT SOURCE

Just as a reminder this uses private money.

TALY GOVT IN CONTACT WITH PRIVATE PENSION FUNDS TO SEEK CONTRIBUTIONS TO ATLANTE; MAY ALSO USE TREASURY’S SGA COMPANY AND STATE LENDER CDP –

If you look back to my updates over the past few days you will see the considerable problems with such a plan. One of Baldricks from Blackadder I think.

The US Cavalry

There was a sub-plot to the US Federal Reserve stress test results last night as there was then a barrage of responses. If I show some you will get the idea.

JP Morgan announce share buyback of up to $10.6bln up to 2017……..Bank of America announce share buyback programme of $5bln, plans to increase quarterly dividend to $0.075………Citi announce buyback programme of up to $8.6bln, quarterly dividend of $0.16/share

I think in total it came to around US $45 billion in buybacks plus some dividend increases. A type of mini QE4 for the United States and an effort to pull away from banking troubles elsewhere.

Comment

The official view was put by Gillian Tett of the Financial Times on Newsnight on Tuesday night. The view was that the bank reforms and changes had in fact meant that the banks have survived Brexit. I was left with the thought “so far” as of course this is a situation where things are always okay until in a “surprise” they are not. Whilst UK banks are stronger in capital terms we invariably find in a real crisis that they still have too little of it. Here is the view of Bank of England Governor Mark Carney.

UK banks have raised over £130bn of capital, and now have more than £600bn of high quality liquid assets.

One other thing that Gillian pointed out what that the US banks feel they have won the war. Such proclamations are dangerous as we know the whole system is so interconnected but we do know as I have described today that there are plenty of problems in the European banking system.

Meanwhile there was this announced today. From the Guardian.

United Overseas Bank said it would “temporarily stop” issuing the loans because of heightened uncertainty following the Brexit decision.

They mean mortgages in the UK. This made me think of the Nine Elms and Battersea Power Station developments near to me which had been advertising in that geographical area. It also made me think that in Singaporean Dollars UK assets are now around 10% cheaper than they were. Good for new buyers but it may be that the fall in value for existing owners in Singaporean Dollars has worried the banks risk mangers.

As to lyrics well I guess many of you are singing along to ABBA right now.

What’s the name of the game?
Does it mean anything to you?
What’s the name of the game?
Can you feel it the way I do?

 

Me on TipTV Finance

 

 

Brexit poses yet more questions about the banks

There is much to consider in the changes and fallout after the UK voted to leave the European Union on Thursday. However there are international perspectives and one of the themes of this blog has been singing along to ABC this morning already.

Shoot that poison arrow though to my heart
Shoot that poison arrow

Yes the Italian banking sector which I warned about again only on Friday posting a chart from Sober Look showing the share price declines seen recently including 22% that day. So far this morning there has been a small rally so panic over? Well when you see why they have stabilised there is a clear issue. From Bloomberg.

The government is weighing measures that may add as much as 40 billion euros ($44 billion), said one person, asking not to be identified because the talks are private. Italy may support lenders by providing capital or pledging guarantees, said the person.

Well not that private! We are reminded one more time that official vessels are leaky ones. I also note the “pledging guarantees” which is usually a scheme to try to keep the money off-balance sheet and therefore out of the national finances. An obvious issue if you are a country with slow economic growth and a national debt of 132.7% of GDP (Gross Domestic Product) at the end of last year. Another issue here is the way that private losses ( the Italian banks have around 360 billion Euros of bad debts) look like they might be socialised and handed over to the Italian taxpayer. We have seen before that the estimates of such a move rise ever higher in what is presented as a “surprise”.

Regular readers will recall that I have long argued that Mario Draghi will use some of the ECB monetary easing to help the banks he used to supervise. Friday brought some news about this as Reuters reports.

Italy’s top thirteen banks took up over a quarter of the 399 billion euros ($442 billion) in super-cheap loans allotted by the European Central Bank in the initial round of Targeted Long-Term Financing Operations……….Net additional liquidity injected by the TLTRO on Friday was equal to 32 billion euros and Italian banks took up over half of it, or 16.25 billion euros.

As we look at such numbers we can look for comparison at the still relatively new bad bank called Atlante. It raised some 4.25 billion Euros of capital which looks rather thin compared to the challenges ahead to say the least. Also before all of this it was being asked for help again. From Bloomberg last week.

Veneto Banca SpA’s shareholders spurned its initial public offering, signaling that Italy’s new rescue fund will probably be called upon to assume control of a second lender.

Retail investors bought just 2.2 percent of 1 billion euros ($1.1 billion) in stock, the Montebelluna, Treviso-based lender said in a statement Thursday.

There was a chance that institutional investors would buy on Friday but of course in that days melee they would have regretted it if they had. I will move on but just point out that the situation is frenetic as share prices which were up are now down which frankly just like the rumour mill is a sign of what a mess this is.

Japan

The UK day opened with various statements from Japan. There were of course plenty of issues pre-existing there including the new stronger phase for the Yen with the Brexit result gave a push to. So far it has mostly been open mouth operations but one bit seems to be building in volume.

Japan Govt Mulls Boosting Stimulus Package To Over JPY 10 Tln — RTRS ( @livesquawk )

Oh and some are pressing for more monetary easing which of course has a credibility problem with the implication that the enormous amount provided so far was and is not enough. What we are seeing is how tightly strung the supposedly recovered world economy is.

Something extraordinary

This is something that like the 0% yield for the benchmark German 10 year bond yield has felt like it has been coming for a while.

UK 10-year yield drops below 1% for the first time ever ( @FerroTV )

If we move to longer dated yields we see that the 30 year yield is now 1.82%. Both of these are SIMPLY EXTRAORDINARY and the use of capitals is deliberate.  I can recall the benchmark UK Gilt yield which back then was between the two (15/20 years) being 15%. It reminds me of the discussion on the 10 th of June. I was writing about negative yielding bonds then but much of this applies to the very low yields the UK now has.

Negative yielding bonds provide quite a windfall for fiscal policy. There is a flow one which the media mostly ignores but there is the opportunity for a capital one should the 3 main beneficiaries use it. It is not quite a “free lunch” although it would be for a while a lunch that you were paid to eat. What I mean by that is that the national debts would rise and also the bonds would as a minimum have to be refinanced in the future and maybe in some sort of alternative universe – the sort of place where Spock in Star Trek has emotions – be actually repaid.

So thoughts?

Such yields will also spiral through the economic system so let us remind ourselves of two of the main consequences. Firstly there is the problem for the business model of pensions and longer-term contracts which has been oiled for years by positive interest-rates which have shrunk dramatically. On the other side there are mortgage-rates which have been falling and if this position is sustained look set to fall again.

Whilst Brexit has been the trigger here in the short-term it is also true that yields have been falling across much of the world for some time now. Indeed if you look at really long-term trends for around 30 years or so.

The banks

So often we find ourselves returning to the banks which we keep being told have recapitalised and are in central banker speech resilient. From Bank of England Governor Mark Carney on Friday.

These adjustments will be supported by a resilient UK financial system – one that the Bank of England has consistently strengthened over the last seven years.
The capital requirements of our largest banks are now ten times higher than before the crisis.
As a result of these actions, UK banks have raised over £130bn of capital, and now have more than £600bn of high quality liquid assets.
Yet we find that each time there is financial market trouble they are at the forefront of it.

Overall I think that he did the right thing on Friday morning as a central banker should in response to a clear change in so many areas. However there is a sub-plot which is like with the Forward Guidance debacle where reality undermines bluster. From the Financial Times.

Shares in RBS and Barclays were briefly suspended this morning after falling more than 8%.

Ah yes the RBS which needs fixing every year and has been about to turn a corner for at least 6 years now. But as we look around the financial world we see so many names familiar to my analysis on here. Let us pick one which is down 7% today.

Deutsche Bank shares are down 57% over 12 months. ( h/t Patrick McGee )

This reinforces this from Friday.

Charlie Bilello, CMT ‏@MktOutperform Jun 25
Deutsche Bank ADR, Friday
1) All-Time Low
2) 88% below ’07 peak
3) 2nd highest volume
4) Worst decline since Jan ’09

As Taylor Swift would put it.

I knew you were trouble when you walked in

But here is another factor which is that Deutsche Bank expects that it will always be bailed out by Germany. So there is a sort of stop-loss for it but of course there are all sort of problems as I was reminded earlier.

EU’s Bank Recovery & Resolution Directive – outlaws further state-funded bailouts of failing banks Ref p514 ( h/t Mervyn Randall )

Rock meet hard place.

Comment

There is so much at play and as ever let me avoid any specific politics. However the UK political establishment has managed to under-perform even my very low expectations. Of course they are intertwined these days with the banks and the bailouts and I would point out again how fragile the confidence is in the banking system that we keep being told is fixed or rather “resilient”. But take care as the central bankers have backed the banks at every turn so far and I cannot help thinking of the “no limits” phrase of Mario Draghi.

Also I have seen market panics before like for example as a young man when the UK left the ERM and one thing I do know is that proclamations of certainty about the future are often out of date that week if not day.  I also know that it will not stop people from making them. Just like markets so often re-test their lows.