Will the UK taxpayer ever get back the money invested in Royal Bank of Scotland?

Today we find ourselves arriving at what has become an annual event although sadly there is never any money for a party although we are invariably promised that there will be plenty of cash next year. This is of course the announcement of more bad figures from Royal Bank of Scotland as we look back over all the promises made on its behalf which stretch back now to the beginning of the credit crunch. Let us step back in time to the 13th of October 2008.and see what the then Chancellor Alistair Darling told us  in the Guardian.

There is every reason to be confident that, as we go through this, the British taxpayer will get his money back.

The UK taxpayer invested at around £5 per share and this morning’s price is £2.44 so it looks as though Alistair will have to remain confident for quite some time and maybe forever. Also we learn that so-called alternative facts come from official sources as well as unofficial. But as time has passed others have proclaimed triumph only to see disaster.

Here is The International Financing Review from 2012.

In some ways, however, RBS is well ahead of the pack…….RBS was forced to concentrate on what it was good at and should come out of its current (second) restructuring as one of the more efficient banks in the industry.

I am not sure how much more they could have been wrong! But they were not alone as this from a former employer of mine Union Bank of Switzerland proves.

However, with 2013 expected to be the last year of significant restructuring for RBS, it is likely to be one of the first European banks to have dealt with legacy issues.

We can put that as a clear fail as the 2017 figures will show us later as we mull whether RBS will ever be able to sing along with Taylor Swift regarding legacy issues.

Baby, I’m just gonna shake, shake, shake, shake, shake
I shake it off, I shake it off

Along the way we have at least managed a little humour as this from Bluebullet on Twitter from 3 years ago shows.

Dear Dragons Den, I have 80% share. Losses this year are £8 billion. I am paying out £0.5 billion in bonuses. Would you like to invest? #RBS

Today’s data

Chief Executive Ross McEwan told us this only last year.

“I am determined to put the issues of the past behind us and make sure RBS is a stronger, safer bank,” chief executive Ross McEwan said.

 

“We will now continue to move further and faster in 2016 to clean up the bank and improve our core businesses.”

Does he think so? Well according to this in the Guardian he does although you may spot the bit that makes him think so.

“The bottom line loss we have reported today is, of course, disappointing but given the scale of the legacy issues we worked through in 2016, it should not come as a surprise,” said the RBS chief executive, Ross McEwan, who was paid £3.5m for 2016.

Okay so what was the loss declared?

Royal Bank of Scotland has reported losses of £7bn for 2016, taking its losses since its 2008 government bailout to more than £58bn.

 

The taxpayer-backed bank has also admitted that it will not return to profit until 2018, indicating that it will report 10 years of losses before it returns to the black.

There are a litany of issues here as we note yet another large loss. For Mr McEwan there is an awkward trend to explain as losses have gone £1.5 billion then £2 billion and now £7 billion as he has promised improvements. For the UK taxpayer there is the issue that the losses since the bailout are now larger than the funds invested. Next there is the fact that things are apparently so bad even these serial fakers cannot claim a profit is just around the corner!

If we switch to the Financial Times we see two of my themes being deployed as a defensive mechanism. Firstly losses are always described as a one-off which are nine years and rising of them is risible and secondly the way a bit like inflation measure we keep getting them until the “correct answer” is given.

In total, these one-off conduct and restructuring costs amount to £10bn. This pushed down the bank’s capital reserves, with the common equity tier one ratio dropping to 13.4 per cent, from 15.5 per cent a year ago. On a pre-tax basis, RBS reported an operating loss of £4.1bn, compared to a £2.7bn loss a year earlier. Its core business, comprising commercial and retail banking, delivered its eighth successive quarter of £1bn operating profit, stripping out one-off items.

So it made a profit right?

Reform

I have been critical of other countries on such matters so it is now time to apply similar methodology to the UK and the botched efforts with Williams & Glyns should lead to sackings of those involved. From the Financial Times.

This includes the £750m cost for the new Williams & Glyn plan unveiled last week. RBS has spent some £1.8bn over a number of years on attempting to divest Williams & Glyn.

They have splashed the cash and then given up after buying time with our money in a saga rather like Novo Banco in Portugal.

There are also more problems on the horizon as of course RBS was involved in so much miss selling and the issues with small businesses seem to just grow and grow. As to optimism well there does not seem to be much on display here in this from the Financial Times.

Mr McEwan is targeting £750m of cost savings this year, as part of a total £2bn of planned cuts over the four-year period, which is expected to involve hundreds of job losses and branch closures.

Comment

Actually the banking environment is really rather favourable. For example the UK economy returned to solid economic growth nearly four years ago and the Bank of England regularly rustles up a new bank subsidy plan. The latest one called the Term Funding Scheme  has now grown with little public attention to just under £42 billion. On that theme there was this from City AM yesterday.

Mortgage lending hit £18.9bn in January, new figures have shown – two per cent up on the same month last year, and the best January since 2008.

Enough to cheer both a banker’s and a central banker’s heart. Indeed the theme has been reinforced this morning by mortgage approvals rising to above 44,000 in January according to the British Bankers Association. The most similar bank to RBS is Lloyds Banking Group so how did it do this year?

Pre-tax profits increased by 158% to £4.24bn, a level last seen in 2006 before the financial crisis. ( BBC )

Next nearest is Barclays so what about it?

The bank reported a profit before tax of £3.2bn for 2016, up from £1.1bn the year before. ( BBC )

As you can see if they are from Venus RBS looks like it is from Mars. It needs a change and needs to go one way or another. What I mean by that is the taxpayer should fully own it and raise the current stake of around 72% to 100% or it should be sold-off and left to stand on its own. The current half-way house is doing no good at all. The fact that Lloyds is now nearly fully in the private sector ( ~96% of shares) is a guide but maybe not as much as we think as of course the shares were more easily sold off because it was already doing better than RBS.

 

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

http://tiptv.co.uk/inflation-quagmire-not-yes-man-economics/

How many promises about Royal Bank of Scotland have been broken today?

One of the main features of the credit crunch in the UK were the collapse of Royal Bank of Scotland and the UK taxpayer bailout of it. Since then we have been regularly informed that it has recovered and that the sunlit uplands are not only in sight but have arrived. The 27th of January this year was an example of this.

“I am determined to put the issues of the past behind us and make sure RBS is a stronger, safer bank,” chief executive Ross McEwan said.

“We will now continue to move further and faster in 2016 to clean up the bank and improve our core businesses.”

I am not sure how you can move “further and faster” on something you have supposedly fixed several times before! If we look back to September 2014 we were told something which is likely to echo later in this article.

we expect to spend much of the next 18 months simply marvelling at the sheet size of the RBS’ capital surplus and wondering why it is just sitting there gathering dust,’ he said.

Back in 2012 my old employer Union Bank of Scotland was on the case sort of.

However, with 2013 expected to be the last year of significant restructuring for RBS, it is likely to be one of the first European banks to have dealt with legacy issues

The International Financing Review put its oar in as well.

In some ways, however, RBS is well ahead of the pack…….RBS was forced to concentrate on what it was good at and should come out of its current (second) restructuring as one of the more efficient banks in the industry.

Mind you at least someone had a sense of humour on the way.

If we advance to the figures released in January of 2014 we see that BlueBullet on Twitter had a wry take on events.

Dear Dragons Den, I have 80% share. Losses this year are £8 billion. I am paying out £0.5 billion in bonuses. Would you like to invest? #RBS

Royal Bank of Scotland Today

Which pack was RBS “well ahead of” here?

The Royal Bank of Scotland Group (RBS) did not meet its common equity Tier 1 (CET1) capital or Tier 1 leverage hurdle rates before additional Tier 1 (AT1) conversion in this scenario. After AT1 conversion, it did not meet its CET1 systemic reference point or Tier 1 leverage ratio hurdle rate.

The rhetoric carries on as Mark Carney is telling us “they (RBS) have made progress” in this morning’s press conference. Although there is a clear warning signal as he deflects a question about it to a colleague. This happens on difficult questions and means that the Governor cannot be quoted in future on the details for RBS.

Reuters sums up the tale of woe for RBS here.

The unexpected result underlines the litany of problems RBS is grappling with, which include a mounting legal bill for misconduct ahead of the 2008 financial crisis and difficulties selling off assets such as its Williams & Glyn banking business.

So “litany of problems” is the new “stronger,safer bank”? So what will it do about this?

The state-backed lender rushed out a statement following the announcement to say it would take a range of actions, including selling off bad loans and cutting costs to make up the capital shortfall identified by the tests of around 2 billion pounds ($2.49 billion).

“Rushed out a statement” is really rather poor when it will have been given advance notice about this but this does echo its response to the 2008 crisis. Meanwhile I guess it cannot go back to the UK taxpayer for more cash as of course it did this only in March.

Royal Bank of Scotland is paying £1.2bn to the Treasury to buy out a crucial part of its £45bn bailout in a step towards returning the bank to the private sector.

This was a way that Chancellor George Osborne massaged and manipulated the UK public finances back then. Was this from Earth Wind & Fire the backing track?

Every man has a place
In his heart there’s a space
And the world can’t erase his fantasies
Take a ride in the sky
On our ship, fantasize
All your dreams will come true right away

I do hope that he will be called in front of the Treasury Select Committee to explain this and that his diary is not too full as he collects new titles. As I suspect we can file this in the bin.

George Osborne has already said he is hoping to generate £25bn from the sale of three-quarters of its RBS shares in this parliament,

The share price is down nearly 3% at 191.5 pence as I type this and perhaps it should be another 3%. The breakeven for the UK taxpayer is just over £5.

Other UK banks

There were more technical and minor failures to be seen.

Barclays did not meet its CET1 systemic reference point before AT1 conversion in this scenario. In light of the steps that Barclays had already announced to strengthen its capital position, the PRA Board did not require Barclays to submit a revised capital plan…..Standard Chartered…. did not meet its Tier 1 minimum capital requirement (including Pillar 2A). In light of the steps that Standard Chartered is already taking to strengthen its capital position, including the AT1 it has issued during 2016, the PRA Board did not require Standard Chartered to submit a revised capital plan.

A confession from Mark Carney

We got yet another U-Turn as we were told that household debt is now an issue which I summarised on Twitter like this.

Mark Carney says “thanks” to a question about household debt which means of course the opposite!

The fact that the subject got a mention is extremely revealing. As nobody at the press conference had either the gumption or the courage to ask Governor Carney how his Bank Rate cut and extra QE would improve household debt we were left with a sinking feeling. Which of course is what Governor Carney had been telling us was happening to house hold debt. Also he has a pretty odd view about lending for cars and automobiles.

Does Mark Carney really think “auto lending” is secured debt as he just claimed? What about depreciation?

There used to be quite a few adverts on the radio for Buy To Let lending for cars which I always thought was bizarre. Either Governor Carney wants to boost this or he used his £250,000 a year rent allowance to have a punt. Oh excuse me, long-term investment.

We were also told that he has plenty of “tools” although when I enquired about a definition of them some were ones he may or may not agree with.

A bunch of them, they sit on the committee with me.

I have been warning about the rise of unsecured lending in the UK and my latest piece on the issue was only yesterday. Perhaps the Governor read it.

Comment

There are several issues to consider here. I think that the way Governor Carney has used it to highlight claimed concerns about the rise of household lending is revealing. It enabled him to get this on record with little chance of being challenged as the media rushes to print about RBS. I also note that he shuffled the question about Buy To Let lending to someone else.

Meanwhile RBS continues on its own private ( albeit publicly owned) Road To Nowhere. We have almost infinite inflation in false dawns but a reality of disappointment and failure. After 8 years of this is it time to file the claims of reform in the “Liars Lexicon” mentioned in the comments section yesterday.

Meanwhile we have an example of another of my themes in play. Actual helicopter money from the Indian Air Force.

 

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.

 

Shouldn’t our banks be helping the economic recovery and not hindering it?

The last 8 years or so have seen the development of the symbiotic nature of the relationship between governments and banks. Much of this has come about by the way that central banks have set monetary policy to help banks more than the real economy. We may have seen an example of that this week from the Bank of Japan which is worried about the impact of a -0.1% interest-rate on the Japanese banks and so decided to not ease again. There we have a problem as of course they have never really recovered in the lost decade period. Another version of the symbiotic relationship is the amount of sovereign or national debt banks hold especially in the Euro area. What could go wrong with giving sovereign bonds a zero risk rating? You will not be surprised to see who is leading this particular pack. From Bloomberg.

In Europe, the issue is particularly important in Italy, where domestic state debt accounts for 10.5 percent of banks’ total assets, well above the euro-area average of 4.2 percent.

Royal Bank of Scotland

Another example of the symbiotic relationship between governments and banks has been demonstrated this morning in the interim statement by Royal Bank of Scotland or RBS.

An attributable loss of £968 million included payment of the final Dividend Access Share (DAS) dividend of £1,193 million to the UK Government.

So we see that RBS has done its best to help bail out the UK Public Finances as Chancellor Osborne finds himself able to trouser nearly £1.2 billion of extra revenue. he is probably singing Dionne Warwick.

That’s what friends are for
For good times and bad times
I’ll be on your side forever more
That’s what friends are for

Of course the UK taxpayer bailed out RBS in 2008 and ended up owning 78.3% of RBS. They were let down then because for that money they could have insisted on 100% ownership but the establishment preferred to be able to claim that the bank had not been nationalised. More recently some of the shareholding has been sold but for a loss. Currently the share price is at 243 pence compared to the 407 pence that the government claims is a break-even level. So RBS got a bailout and this year the figures of Chancellor Osborne have got one. But the taxpayer seems to be staring at losses which of course are the opposite of the profit promised back in the day. From the then Chancellor Alistair Darling.

The taxpayer, therefore, will be fully rewarded for that investment………ensuring that the taxpayer is appropriately rewarded…….

In the same statement “fully” had morphed into “appropriately” and it has been on that declining journey ever since.

The Outlook

The official view on RBS ever since this has been on the lines of the outlook is bright. If anyone has actually believe that then they must by now have been very disappointed as bad news has followed bad news! These days banks produce a litany of different profit figures an issue I raised earlier on Morning Money on Share Radio but the sentence below sums the state of play up best I think.

Adjusted operating profit(4) of £440 million in Q1 2016 was down from £1,355 million in Q1 2015 primarily due to Capital Resolution and the IFRS volatility charge.

You might reasonably think that as we are three years into a boom that banks would be doing well especially as that boom has centred on boosting mortgage lending and house prices. Indeed one might reasonably expect the numbers below to be up rather than down.

UK Personal & Business Banking (UK PBB) adjusted operating profit of £531 million was £54 million, or 9%, lower than in Q1 2015.

Still one area is booming.

Buy-to-let new mortgage lending was £1.5 billion compared with £0.8 billion in Q1 2015

If we look at the impact of RBS on the UK economy we open in troubled fashion as we note the growth of buy-to-let. But surely after all the help its has received and the UK economic recovery RBS is fit to help us back? Well not by boosting employment.

RBS remains on track to achieve an £800 million cost reduction in 2016 after achieving a £189 million reduction in the first quarter.

And this.

Capital Resolution remains on track to reduce RWAs to around £30 billion by the end of 2016 following a £1.4 billion reduction in Q1 2016.

All these years later we have job losses and deleveraging as opposed to the brave new world promised. Oh and there continues to be something of a sword of damocles hanging over it as this tweet sent to me earlier indicates.

I’m optimistic about Today we launch our action against them 4 funding/counsel in place ( @efgbricklayer )

RBS has remained what we might call accident prone as it was caught up in the Panama Papers problem and this morning this emerged as well. From the Guardian.

RBS said the Swiss regulator, the Swiss Financial Market Supervisory Authority, had “opened enforcement proceedings against Coutts & Co Ltd (Coutts), a member of the RBS Group incorporated in Switzerland, with regard to certain client accounts held with Coutts”.

It feels like a bottomless pit does it not?

Monetary data should be good for banks

Our Martian economist might reasonably expect it to be boom time as he/she peruses this morning’s data release from the Bank of England. Let us start with mortgage lending.

Lending secured on dwellings increased by £7.4 billion in March, compared to the average of £3.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 4.7% and 3.4% respectively.

Quite a surge as we presumably see the impact of the higher Stamp Duty charge on Buy To Let purchases which is now in place but was not then. But if you really want to see numbers which are motoring take a look at this.

Consumer credit increased by £1.9 billion in March, compared to the average of £1.4 billion over the previous six months. The three-month annualised and twelve-month growth rates were 11.6% and 9.7% respectively.

If our banks cannot make money out of this when can they? That is a little ominous as we note lower mortgage approvals on the month as the Buy To Let surge fades away.

Barclays

It too seems to be failing to do its bit for the UK economy. From Bloomberg.

Following these disposals, which include the sell-down of its 62 percent stake in Barclays Africa Group, McFarlane said the bank expected group full-time employees to reduce by around 50,000 people, resulting in a total headcount of 80,000 – almost half the staff employed at its peak.

Oh and this bit could have come straight out of an episode of Yes Prime Minister.

McFarlane said he had “a lot of sympathy” with the issue of high levels of banker compensation but that Barclays was not among the highest payers in the industry and the payouts were necessary to retain top staff.

Comment

Back in 2009 the then Chancellor Alistair Darling was reported in Hansard as saying this.

They will mean strong and safer banks that are better able to support the recovery,

Actually the story of the credit crunch was that we continued to support the banks via less explicit moves that were still bailouts. For example Quantitative Easing offered them profits on government bonds and similar assets. Then the summer of 2012 saw the Funding for Lending Scheme which gave quite a subsidy to both their mortgage books and mortgage lending. So the theme of us helping them continued rather than us getting much back.

Also I note that back in 2008/09 many of the moves were badged as being to help UK businesses via bank lending. So if we add in the FLS above it should be booming right? I will let readers make up their own minds after perusing this morning’s numbers.

Net lending – defined as gross lending less repayments – to large businesses was -£1.9 billion in March. Net lending to SMEs was £0.1 billion.

We appear to have copied Japan and our version of kicking the can has left us with a banking sector which the Cranberries provide a theme song to.

Zombie, zombie, zombie
Hey, hey
What’s in your head, in your head
Zombie, zombie, zombie

Some of course seem to be even worse off. From the Financial Times

Contributions to Italy’s bank rescue fund undershoot

On The Radio

 

How many more promises about Royal Bank of Scotland will be broken?

This morning has seen an event that has become a regular event in the credit crunch era. In fact it has become so regular that I note analysts are calling it a “surprise”! That is the annual event where the figures of Royal Bank of Scotland are produced and they are again bad. We are seven years or so into the credit crunch but the promised recovery here appears to be like the “train in the distance” sung about by Paul Simon. Let us take a look at today’s problems for it. From Reuters.

Royal Bank of Scotland (RBS.L) said it would take a surprise 2.5 billion pound ($3.58 billion) hit to its fourth-quarter profits after setting aside more cash to cover litigation costs, compensation for mis-selling loan insurance and an impairment charge at its private bank.

You might reasonably think that this is bad enough and I did warn about the surprise bit. But wait like the doppelgänger of the gift which keeps on giving there is sadly more to come.

RBS said in a statement that it would also make a 4.2 billion pound payment into its pension scheme due to changes in its accounting policy, while it will set aside an extra 2.2 billion dollars for mortgage-related litigation in the United States.

So the clear winners here appear to be the lawyers who lose about as often as top bankers. I am reminded of my article on pensions on Monday as we see “accounting policy” lead to a substantial change in another situation which is a shambles. Also if we look at the BBC we see that there is more.

In addition, it will write down £498m from its private bank Coutts.

We also got a statement that could have been produced in any of the years since the UK taxpayer bailed the bank out.

“I am determined to put the issues of the past behind us and make sure RBS is a stronger, safer bank,” chief executive Ross McEwan said.

“We will now continue to move further and faster in 2016 to clean up the bank and improve our core businesses.”

It is rather like the time in each ECB meeting when President Draghi talks about the need for structural reforms because if you turn up next time and there it is again. The 2016 in the statement could be replaced with 2015,14,13,12, and so on. Or to put it another way in the words of Talking Heads.

Same as it ever was

Same as it ever was

Surprise!Surprise!

If we consider this in terms of that ITV television program let us consider this from Mindful Money on September 11th last year.

we expect to spend much of the next 18 months simply marvelling at the sheet size of the RBS’ capital surplus and wondering why it is just sitting there gathering dust,’ he said.

They must be greater value now at 254 pence than the 330 pence of back then so you can buy and marvel at the capital surplus or perhaps not. The poor UK taxpayer is in at around £5 so they are far away from the profits which were originally promised.

A journey back in time

If we jump into the TARDIS of Dr.Who then we see this from Chancellor Alistair Darling in the Guardian on the 13th of October 2008.

There is every reason to be confident that, as we go through this, the British taxpayer will get his money back.

If we look at the review of 2012 by The International Financing Review then things were apparently on track.

In some ways, however, RBS is well ahead of the pack…….RBS was forced to concentrate on what it was good at and should come out of its current (second) restructuring as one of the more efficient banks in the industry.

My old employer Union Bank of Switzerland had a go too back then.

However, with 2013 expected to be the last year of significant restructuring for RBS, it is likely to be one of the first European banks to have dealt with legacy issues

If we advance to the figures released in January of 2014 we see that BlueBullet on Twitter had a wry take on events.

Dear Dragons Den, I have 80% share. Losses this year are £8 billion. I am paying out £0.5 billion in bonuses. Would you like to invest? #RBS

Andrew Bailey

Whilst you may not have heard the name you are virtually certain to have seen it as Andrew was Chief Cashier of the Bank of England and so his signature was on banknotes issued then. He is and will soon be was a 30 year insider at the Bank of England and is currently performing the roles shown below.

Deputy Governor, Prudential Regulation at the Bank of England and Chief Executive of the Prudential Regulation Authority (PRA),

He is now about to be head of the Financial Conduct Authority or FCA although the date on which he will assume the role is unspecified. This role has in football terms had an “interim manager” who unlike Rafa Benitez did not want a permanent role. Actually since the sacking of Martin Wheatley there was a shortage of people willing to take on the role. Presumably they were concerned about the contradiction between the fact that Mr.Wheatley got the order of the boot and how the Chancellor described him.

Britain needs a tough, strong financial conduct regulator. Martin Wheatley has done a brilliant job of launching the FCA in tough circumstances.

So brilliant he got removed! Now we have got ourselves an insider and I have to confess I am troubled by this development. The Bank of England has had a troubled record itself with the Li(e)bor and foreign exchange scandals where it seems to have done much more covering up than exposing. Also Andrew Bailey put senior bankers above the law of the land back in 2012. Here is a letter from a Mrs. N. Turner quoted on the blog of the journalist Ian Fraser on the subject of prosecuting banks and their directors.

would be a very destabilising issue. It’s another version of too important to fail. Because of the confidence issue with banks, a major criminal indictment, which we haven’t seen and I’m not saying we are going to see… this is not an ordinary criminal indictment.

Her concern was that banks and bankers were being put above the law. I expressed my concerns on this issue on the Investment Perspectives show on Share Radio yesterday.

https://audioboom.com/boos/4106053-is-andrew-bailey-the-right-man-for-the-fca-shaun-richards-gives-his-thoughts

Also there has been another development at the FCA as the Financial Times informs us.

Today (26 January), the FCA separately announced the appointments of Baroness Sally Hogg, chairman of the audit committee at John Lewis Partnership, and Ruth Kelly, former global head of client strategy at HSBC Global Asset Management, as non-executive board members from 1 April.

Why is this an issue well even cuddly old John Lewis has a dark side from its sale of its store card business in 2003 and yes it was sold to HSBC and Ian Fraser has summed it up on Twitter thus.

well the £1bn of allegedly illegal store-card charges were gouged from, inter alia, customers of JLP store cards.

If you have seen the name Hogg before well her husband claimed moat cleaning in his parliamentary expenses and her daughter is now Chief Operating Officer of the Bank of England as well as of course the many roles the Baroness has. That family is pretty much what some would call “the great and the good” for which you can find many definitions in my financial lexicon for these times.

Lets us move on with the thought that if you were allegedly picking people to cover something up then those with a past history which involves themselves would be at the top of your list…

Comment

If you would like to take The Matrix style red pill then the Financial Times offers to help you.

Andrew Bailey’s appointment as head of the FCA given the thumbs up by the City:

For those who took the blue pill that is a potential sign of what Taylor Swift called “trouble,trouble,trouble”. We find that RBS is singing along with Talking Heads and should be filed along with the other basket cases such as Deutsche Bank and Italy’s Monte Paschi.

We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride

Policy could not be more bank friendly and yet they are still in quicksand. A sign of this is that if today’s title seems familiar then you are right as I have plagiarised myself and used one from the 2014 results of RBS.

Mark Carney

He came under fire at the Treasury select Committee for being an “unreliable boyfriend” if I may put it like that on the subject of what term he will serve. Graeme Wearden of the Guardian regularly quotes my research and output and I guess I have been something of an influence. I am glad to see that the message is spreading!

If Mark Carney does 8 years at the he’d finish in summer 2021, when the top job at the IMF becomes free…

 

 

 

 

What is wrong with our banks? After all the bailouts started seven years ago…

The story of the credit crunch has been one of our banking industry. Who would have thought that more the seven years after the collapse of Northern Rock and nearly seven years after the collapse of Lehman Brothers that there would be so much doubt about the state of our banking industry? If we look back to before then we saw a UK banking sector which bestrode the world stage like a colossus with Royal Bank of Scotland (RBS) in particular making ever grander deals and becoming the largest bank in the world by assets and the fifth largest by market capitalisation. Sadly for RBS it bought a share of the ill-fated ABN Amro  just in time for the crash to happen in a disastrous move and many of the spinning plates crashed to the ground. Were we fully aware then that banking life would not be the same again?

Economic life was also affected back then because in my opinion profits and economic growth were recorded which were in fact more accurately described by the band Imagination.

It’s just an illusion, illusion, illusion

Could it be that it’s just an illusion
Putting me back in all this confusion?

There were all sorts of economic impacts from this. In the banking sector there was over-recording of profits which of course subsequently turned to dust and in some cases stone but there was also over-recording of economic output. This poses a problem for knowing where we stand as the conventional analysis released on Tuesday is therefore wrong.

In Quarter 1 (Jan to Mar) 2015, GDP was estimated to have been 4.0% higher than the pre-economic downturn peak of Quarter 1 (Jan to Mar) 2008.

That peak was, in my opinion, not as high as officially recorded back then and this has other consequences. If we return to the Financial Times research on productivity that I discussed on Tuesday we see that pre credit crunch growth cam from five main areas.

professional services, manufacturing, banking, retail, and information and communication.

My contention is that much of the recorded growth in banking was based on asset inflation based on debt rather than actual growth. This no doubt would have knock-on effects for professional services and communication. Thus the present “productivity gap” can be partly explained by fact that the previous peak relied  on conjuring tricks and of course the magic show then ended. As our establishment of all political hues sucked up to our banking establishment then -you can invariably find politicians bathing near the money flow- there is no appetite for proper reform and what we have in the form of the Vickers Report was like a can kicked to 2019.

Together with other reforms in train, it would put the UK banking system of 2019 on an altogether different basis from that of 2007.

Too little too late?

Economic policy

To cover up the lack of reform our establishment has twisted economic policy so that it favours the banking sector. We still have an emergency Base Rate of 0.5% and we still have some £375 billion of QE (Quantitative Easing) which the Bank of England added to try to reduce longer-term interest-rates. Ironically the latter would have fallen anyway in the dash for yield and indeed almost any yield we have seen in the last couple of years.

However even such moves were apparently not enough so we got the Funding for (Mortgage) Lending Scheme or FLS introduced by the Bank of England in July 2012. This provided a multitude of subsidies for the banking-sector.

The FLS incentivises banks to boost their lending by reducing bank funding costs

Well it did the latter bit anyway! You see in its original form they got some £41.9 billion of cheap funding in return for increasing lending by £10.3 billion. As the economy was expanding they may well have done that in the normal course of events. But by allowing them to lower mortgage-rates a boost was given to mortgage business. Also the overall effect was to drive up house prices which improved the position of the banks loan books. What was not to like if you were a bank?

Today

So after all this help our banks should be bursting with vim and vigour. After all we have had two years of pretty solid economic growth to back up all the aid and subsidies they have been receiving.

RBS

This morning however the promised nirvana of a future of profits and gains saw yet another setback.

An attributable loss of £446 million for the first quarter of 2015

When you factor in the positive economic situation and the subsidies both explicit and implicit which have been poured into the banking arena we should not still be having disappointments. So what was the cause?

restructuring costs of £453 million and £856 million of litigation and conduct charges.

As ever our banks are pouring out money in fines for past bad behaviour. A bit much 7 years after the “reform” was supposed to have happened! An odd situation as we as taxpayers bail them out and then fine them and take money back. Would it not be better if the individuals responsible were punished for their actions? Sometimes it gets even stranger as international fines mean that in effect the United States for example is fining the UK taxpayer who owns the bank. And the responsibility of the average UK taxpayer for all of this is? The word responsibility only applies these days to individuals who are not members of the establishment.

We might think from the report that today’s numbers are a freak but if we look back we see this.

RBS reports an attributable loss of £3,470 million in 2014, compared with a loss of £8,995 million in 2013…….2012 pre-tax loss of £5,165 million, after £4,649 million

Most of these came with promises that a corner -presumably into profit – was about to be turned whereas the road has proved to be ramrod and indeed Roman straight. Back in 2013 we were told this.

Since 2009 RBS has cleaned up the world’s largest bank balance sheet by removing more than £1 trillion in assets. This was a remarkable achievement, born of absolute necessity, but delivered with exceptional skill.

You may note that bankers always refer to themselves as delivering “exceptional skill” even when they are making or correcting a mistake. The customers do not seem to agree at least in Scotland as the satisfaction ratio in today’s results is a measly 10% there and there is a lack of ambition as the target is a mere 11%. Still target achieved bonuses all round?!

If seven years of losses which total in the mid-forties an oddly similar number to the original taxpayer bailout are getting you down why not try the red pill?

Finance director Ewen Stevenson said: “Overall, we’re very pleased with progress.” (The Guardian)

Adjusted operating profit(2) was £1,634 million, up 16% from Q1 2014.

Adjusted presumably means if we do not count any losses….

Comment

If we look at the overall situation we can see that for RBS the beat goes on where promised profits turn to stone and become yet more losses. In the current favourable economic climate that is quite an anti-effort! Also there are mines in the water awaiting our banks. From Reuters.

Britain’s biggest banks face another 19 billion pounds ($29 billion) of charges relating to past misconduct over the next two years, ratings agency Standard & Poor’s (S&P) said in a report on Monday.

S&P said Britain’s banks and customer-owned lenders had incurred 48 billion pounds in misconduct and litigation charges over the past five years.

Those are extraordinary sums when you note the shortage of bankers in jail for all of this. That is a rather round number especially when we consider that vastly smaller amounts of fraud in the benefits arena do lead to prison terms. Also there was a discussion earlier this week in the comments about an economic depression, well UK banking is stuck in an economic depression and shows little or no signs of escaping.

So we plough on but with a feeling that nothing has been resolved and that Johnny Mathis was right to sing that Too Much (help) has been given to banks in return for Too Little Too Late. Or as South Park gloriously put it about money put into the banks “It’s gone”

Bank Clerk: Hello Mrs. Farnickel. How are you, today? Making a deposit, are we? Greeeat. We can just put that into your retirement account and make it go to work for you aaaaand it’s gone.

Mrs. Farnickel: Whaaat?

Bank Clerk: Sorry, yeah, it’s gone. Please step aside for people who actually have money with the bank. Next please!

Later

Newsreader: Just how far will the economy fail? We asked economic reporter, Dan Banks, for his assessment.

[Dan pulls out a gun and shoots himself, followed by a loud thump as he falls]

Newsreader: [pause] We’ll have the rest of Dan’s interview tonight at ten.