Deutsche Bank and RBS continue to headline the zombie bank era

A feature of the credit crunch era has been like an episode of Hammer House of Horror. This has been the march of the Zombie banks where a burst into normal life is always promised but never seems to actually arrive. More than a decade later in some cases we find ourselves observing them still being on the march. Apart from problems which this raises for shareholders there are three big issues from this. The first is economies which are tilted towards the preservation of what in Lord of The Rings style we have named “The Precious” which we can see in two ways. One is economic policy which the European Central Bank is demonstrating by responding to the Euro area economic slow down with yet another banking subsidy called the TLTRO. The other is the way that bank profits are privatised and losses socialised by the way that the UK still has some £555 billion of gross debt and £305 billion of net debt on its books from the bank bailouts. Third is the effect of Zombification itself as described by the Bank for International Settlements last September.

Using firm-level data on listed firms in 14 advanced economies, we document a ratcheting-up in the prevalence of zombies since the late 1980s. Our analysis suggests that this increase is linked to reduced financial pressure, which in turn seems to reflect in part the effects of lower interest rates. We further find that zombies weigh on economic performance because they are less productive and because their presence lowers investment in and employment at more productive firms.

It is of note they think this has been going on for over 30 years although as the central bankers bank they may well be trying to deflect us from the growth of banking zombies over the past decade.

Two clear cases of zombiefication have been Royal Bank of Scotland and Deutsche Bank and the last 24 hours has brought a flurry of news on both. So let us start with my old employer which is the main bank in Germany.

Deutsche Bank

Here is the BBC from yesterday explaining things which we knew all along.

Deutsche Bank and Commerzbank have abandoned merger talks, saying the deal would have been too risky.

Both banks said the deal would not have generated “sufficient benefits” to offset the costs of the deal.

The German banks only entered formal merger talks last month.

The German government had been supporting the tie-up, with reports saying Finance Minister Olaf Sholz wanted a national champion in the banking industry.

It is interesting how Too Big To Fail or TBTF is now apparently being a “national champion” isn’t it?

Combined, the banks would have controlled one fifth of Germany’s High Street banking business with €1.8 trillion ($2tn; £1.6tn) of assets, such as loans and investments.

The real issue all along was not the assets but the liabilities especially at Deutsche Bank! Anyway perhaps someone at the BBC has a sense of humour.

The deal was seen as a way of reviving the fortunes of both banks.

If we bring ourselves forward in time to this morning then the story has moved on.

Net revenue at its sprawling global investment bank, which accounts for more than half the German bank’s overall revenue and which relies heavily on its bond trading earnings, fell 13 percent to 3.3 billion euros (£2.8 billion).

The German flagship lender posted a net profit of 201 million euros, up 68 percent from a year ago but hardly making up for a net loss of 409 million euros in the fourth quarter as the bank battles stiff competition from U.S. powerhouses. (Reuters).

The share price has responded with a nearly 3% fall to 7.27 Euros. This continues the trend of the last year where it has lost 38% and beyond that because if my chart is any guide the pre credit crunch peak was over 94 Euros. The response on social media to me pointing out these matters has varied from that is 7.27 Euros too high to this from Nicholas Dubois.

Because in my eyes, the market is emotionally driven at the moment in DB, not seeing through the fundamentals – why was the stock up more than 5% yesterday and 10% higher from here ? Noise. CET1@13.7%, VaR only 27m (!) – chance of a lifetime.

How many chances of a lifetime have we had now to invest in banks? As a punt at a low price this can work as for example the Greek banks have shown recently but as a long-term investment you only get poorer.

RBS

Again the news started yesterday. From Sky News.

Royal Bank of Scotland (RBS) boss Ross McEwan has quit, saying the time is right to leave as it is in a “much stronger financial position”.

The news was announced ahead of the bank’s annual general meeting in Edinburgh – five-and-a half years after he took over the reins of the part-nationalised lender. ( Sky News)

Somewhat irreverently I suggested that he was clearing the decks so he could apply to be Governor of the Bank of England. Although this from Simon Jack highlights that the reality is of a rather odd sort of resignation.

He is staying till 2020. 12 month notice period

That is rather different to my days in the City of London where if they could not persuade you to change your mind you got sent home with your belongings in a black bin liner.

As to his tenure there are clear issues because RBS is still mostly owned by the taxpayer and whilst it does now have profits here is its own statement from earlier.

RBS reported an operating profit before tax of £1,013 million, compared with £1,213 million in Q1 2018 primarily reflecting £265 million lower income, partially offset by £73 million lower operating expenses.  Q1 2019 attributable profit of £707 million compared with £808 million in Q1 2018.

Up is the new down again, or something like that. We get a deeper perspective from the share price which has fallen 11 pence today as I type this to 239 pence. UK taxpayers of a nervous disposition might like to sit down before reading the next bit.

 still way below the 502p the Labour government paid for them at the height of the crisis. ( Sky News)

Here is the Daily Telegraph from those days back in 2008 and the Chancellor was Alistair Darling.

The Chancellor said the taxpayer would not lose out.

“The taxpayers’ interest is being protected,” he said.

“I’m very clear that in return for all this, the taxpayer has got to see some upside. In relation to lending to small businesses, in relation to mortgages… that’s important too.”

 

Comment

The official story about the banks has sung along with Carly Simon.

I know nothing stays the same
But if you’re willing to play the game
It’s coming around again

They are always about to turn the corner on what turns out to be a Roman road. Also I note the mention of small business lending from a decade ago which has also been a grim theme. Those who have followed my updates on that issue will now that the promises here have required this to believe them.

Are you drunk enough?
Not to judge what I’m doin’ ( Calvin Harris and Sam Smith)

The subject reconvened in the summer of 2012 when the Bank of England claimed it was supporting the area but in fact reverted to type and pumped up mortgage lending by giving the banks yet another subsidy. Meanwhile lending to small and medium-sized businesses has required the use of the establishment’s ultimate admission of failure the use of the word “counterfactual”

I fear that Deutsche Bank is even worse because it has pretty much carried on regardless with the stories about past losses on derivatives never going away. Or to put it another way if big investors really believed they are just an illusion or imagination the share price would be nowhere near here. Now we face another slow down with the banks still singing along with Lyndsey Buckingham.

I should run on the double
I think I’m in trouble,
I think I’m in trouble.

It all comes down to the fact that the socialisation of losses helped to stop a change in behaviour as for so many the party mostly just carried on. The scandals of what it did to smaller businesses and the 2008 rights issue show that the law of the land often turns its blind eye to the banks as well.

 

 

 

 

Deutsche Bank and Royal Bank of Scotland continue their zombie bank march

We find ourselves in yet another version of banking Monday and let me immediately note an issue highlighted by moves at the UK’s main zombie bank which is Royal Bank of Scotland or RBS. From the BBC.

A UK payment processing firm that used to be owned by Royal Bank of Scotland has been sold in a deal worth $43bn (£32bn).
WorldPay has been bought by Florida-based Fidelity National Information Services (FIS) for $35bn in cash and shares, plus WorldPay’s debt.

FIS chief executive Gary Norcross said “scale matters in our rapidly changing industry”.

WorldPay was sold by RBS as a condition of the bank’s financial crisis bailout.

The value of the FIS purchase means Worldpay is worth about £8bn more than RBS.

Some perspective is provided by the way WorldPay is worth much more than RBS. It also means that if it has kept it UK taxpayers would have done a lot better as we see yet another shambles delivered by our political establishment.

This is from Finextra in August 2010.

RBS was told to sell off WorldPay – or Global Merchant Services – by the European competition authorities last year as a condition for joining the UK government’s asset protection scheme.

Meaning RBS got this.

Royal Bank of Scotland has inked a deal to sell just over 80% of its WorldPay payments processing unit to private equity firms Bain Capital and Advent International.

The agreement is for an enterprise value of up to £2.025 billion including a £200 million contingent consideration, with RBS keeping a 19.99% stake in the business.

As you can see whilst money was earnt at the time it was much, much less than would have been received today. Oh and the remaining part was sold in 2013. Seems inevitable really doesn’t it? We will never fully know whether the private equity owners of WorldPay drove it forwards or just surfed the wave nor whether RBS ownership would have held it back or worse. But we can see that as the UK and European establishment’s mixed the one part of the RBS business that has charged ahead and would have made a return for taxpayers was flogged off and the loss making dregs were kept. Also we know from experience that it will be nobody’s fault and could not possibly have been foreseen ( makes you wonder why anyone bought it…).

Deutsche Bank and Commerzbank

Reuters was on the case yesterday and they opening with something breathtaking.

Deutsche, the largest bank in Germany, Europe’s biggest economy, emerged unscathed from the financial crash but later lost its footing.

Really? So the share price fall from 94 Euros to 24 Euros in eighteen months was a sort of unfortunate piece of timing! Or maybe not.

Deutsche and other European banks have taken longer to recover from the financial crisis, losing ground to stronger rivals from the United States.

Anyway as we expected last week the story continues to gain momentum.

Berlin wants a reliable national banking champion to support its export-led economy, known for cars and machine tools.

Deutsche Bank is hardly a champion and has been the opposite of reliable unless you are counting unexpected losses. But here is the Sunday news.

Deutsche Bank and Commerzbank confirmed on Sunday they were in talks about a merger, prompting labour union concerns about possible job losses and questions from analysts about the merits of a combination.

Germany’s two largest banks issued short statements after separate meetings of their management boards, a person with knowledge of the matter said, indicating a quickening of pace in the merger process, although both also warned that a deal was far from certain.

The choice of Commerzbank reminds me of the bit in the film Zulu when the Colour Sargeant Bourne answers the question why?

Because we are here lad. There’s nobody else, just us

Or as Reuters put it.

Other than Deutsche, Commerzbank is Germany’s only remaining big bank, after a series of mergers.

You would have thought that a series of mergers would have created other big banks as we already see signs of past trouble. Still why stop a plan which is performing badly? Also Commerzbank has its own issues.

Commerzbank, like Deutsche, has struggled to rebound, and German officials say it is vulnerable to a foreign takeover. If an international rival snapped it up, that would increase competition for Deutsche on its home turf.

Berlin also wants to keep Commerzbank’s speciality – the funding of medium-sized companies, the backbone of the economy – in German hands.

Problems

On the 11th I pointed out I was dubious about large losses in bond markets. But it would appear that the people we are regularly told are highly talented and worth large bonuses continue to do things like this.

Commerzbank, for example, has about 30.8 billion euros of debt securities such as Italian bonds that now have a value of 27.7 billion euros – a drop of 3.1 billion euros. A tie-up could crystallise this loss. Deutsche has such securities at market value in its accounts.

To make a loss in bond markets when they in general have seen surges and what the Black Eyed Peas would call “Boom!Boom! Boom!” is something else to look into. Also the government is caught in something of a spider’s web from it past actions concerning Commerzbank.

The government holds a 15 percent stake after bailing it out during the crisis, giving it an important voice.

If we move to the statement from Christian Sewing the CEO of Deutsche Bank we are left wondering “economic sense” for who?

What is also important to me is that we will only pursue options that make economic sense, building on the progress we made in 2018.

Comment

We are seeing ever more consequences of the zombie bank culture. In the UK the RBS saga has reminded us today that the rhetoric of the bailout which claimed that taxpayers would get their money back put a smokescreen over the reality that it involved selling what has turned out to be the most profitable part of it. That echoes as we note a bank worth less than half of what was poured into it. The “privatistaion of profits and socilaisation of losses” them gets turned up to 11 one more time.

Moving to the Deutsche Bank merger with Commerzbank let me open with the obvious issue that solving the Too Big To Fail or TBTF issue is not going to be done by making it even larger. They did manage a cosmetic name change to  G-Sifs or Globally Significant banks but that is it. Also arrows will be flying in the direction of Mario Draghi and the ECB about how its negative interest-rate policy has helped trap the banks in the zombie zone. They get help ( TLTRO is coming) in a liquidity sense but not in a solvency sense.

Also we are told the banks support the economy and yet this keeps turning up.

 A merger with Commerzbank would face opposition from unions, which expect as many as 30,000 jobs to be lost. And the combined bank would probably lose some business from German companies keen to diversify their sources of funding. ( Reuters)

For it to work we need plenty of smoke and mirrors as @jeuasommenulle points out.

Finally, an “amusing” one for the geeks: a very large part of the financials of the deal rely on the regulatory treatment of the negative goodwill the deal would generate (we’re possibly talking of 15-20bn€!)…….Positive goodwill is deducted from CET1, but negative isn’t – which does not make any sense if you ask me. Why is that ? Because when the CRR was drafted nobody thought of that so the wording is vague.

 

QE and its role in the Dollar shortage, zombie banks and productivity woes

Overnight there have been some intriguing releases from the BIS or Bank for International Settlements, which if you were not aware is the central bankers central bank. The BIS has, although it would not put it like that been reviewing some of the problems and indeed side-effects of the QE ( Quantitative Easing) era, So what does it tell us? Well one major point links to yesterday’s post on India and indeed to the travails of Argentina and Turkey.

The second defining feature is the rise of foreign currency US dollar credit . US dollar-denominated debt securities issued by non-US residents have been the key driver of this trend, surpassing bank loans for the first time in the second half of 2017 . The overall amount of dollar credit to the non-bank sector outside the United States has climbed from 9.5% of global GDP at end-2007 to 14% in the first quarter of 2018. Since end-2016, however, the growth in dollar credit has been flat.

So the US Dollar has been used as a new form of carry trade as people and businesses choose to borrow in it on a grand scale. Also as global GDP has been growing the 14% is of a larger amount. But to me the big connection here is the way that this pretty much coincides with plenty of US Dollars being available because the US Federal Reserve was busy supplying them in return for its QE bond purchases. Correlation does not prove causation but the surge fits pretty well and then it ends not long after QE did. Or more precisely seems to have faded after the first interest-rate increase from the Fed.

The question to my mind going forwards is will we see a reversal in the QT or Quantitative Tightening era? The supply of US Dollars is now being reduced by it and we wait to see what the consequences are. But it is hard to avoid noting the places that seem to be as David Bowie and Queen would put it.

It’s the terror of knowing what this world is about
Watching some good friends screaming, ‘Let me out’
Pray tomorrow gets me higher
Pressure on people, people on streets

Things seem set to tighten a little further tomorrow should the Fed tighten again as looks likely.

Zombie Companies and Banks

This development has been brought to you be the financial world equivalent of Hammer House of Horror. All the monetary easing has allowed companies to survive that would otherwise have folded, or to put it another way the road to what is called “creative destruction” or one of the benefits of capitalism was blocked. A major form of this was the way that banks were bailed out and some of them continue to struggle a decade later but also took us down other roads. For example the debt model of the Glazers at Manchester United looked set to collapse but was then able to refinance more cheaply in the new upside down world. Ironically it was then able to thrive at least financially as in football terms things are not what they were.

The BIS has its worries in this area too.

In this special feature, we explore the rise of zombie companies and its causes and consequences. We take an international perspective that covers 14 countries and a much longer period than previous studies.

It is willing to consider that the era of lower interest-rates and bond yields which covers my whole career and some has had consequences.

A related but less explored factor is the drop in interest rates since the 1980s. The ratcheting-down in the level of interest rates after each cycle has potentially reduced the financial pressure on zombies to restructure or exit. Our results indeed suggest that lower rates tend to push up zombie shares, even after accounting for the impact of other factors.

So cutting interest-rates for an economic gain looks to have negative consequences as time passes. How might that work in practice? The emphasis below is mine

Mechanically, lower rates should reduce our measure of zombie firms as they improve ICRs by reducing interest expenses, all else equal. However, low rates can also reduce the pressure on creditors to clean up their balance sheets and encourage them to “evergreen” loans to zombies . They do so by reducing the opportunity cost of cleaning up (the return on alternative assets), cutting the funding cost of bad loans, and increasing the expected recovery rate on those loans. More generally, lower rates may create incentives for risk-taking through the risk- taking channel of monetary policy. Since zombie companies are risky debtors and investments, more risk appetite should reduce financial pressure on them.

The reason for the emphasis is that in essence that is the rationale for QE. That is something of a change on the past but as inflation as measured by consumer inflation mostly did not turn up the central banks got out their erasers and deleted that bit. It has been replaced by this sort of thing which links to the Zombie companies and banks theme.

In addition, QE can stimulate the economy by boosting a wide range of financial asset prices. ( Bank of England )

Note the use of the word can so that even the Take Two version can be erased! But the crucial point is that yet again the Zombies are on the march via central banking support. I guess most of you have already guessed the next bit.

Visual inspection suggests that the share of zombie firms is indeed negatively correlated with both bank health and interest rates.

Why are Zombies such a problem?

The have negative effects on economic life.

a higher share of zombie firms could depress productivity growth,

Could? Later we get more of a would as we see an old friend called “crowding out” return to the picture.

Zombies are less productive and may crowd out growth of more productive firms by locking resources (so-called “congestion effects”). Specifically, they depress the prices of those firms’ products, and raise their wages and their funding costs, by competing for resources.

But there is a deeper consequence.

We find that when the zombie share increases, productivity growth declines significantly, but only for the narrowly defined zombies………. The estimates indicate that when the zombie share in an economy increases by 1%, productivity growth declines by around 0.3 percentage points.

Comment

There is a fair bit to consider here. The first is the role of the BIS in this which in some ways is welcome but in others less so.  The former is an admittal of some of the side-effects of easy monetary policy but the latter is the way we are getting it a decade late. Or in the case of Japan a couple of decades or so late! To my mind intelligence also involves an element of timeliness. Although to be fair to do quantitative research you do need an evidence base. The catch as ever for the evidence in economics is the way that some many things are varying not only with each other but also with themselves over time. Or if you prefer heteroskedasticity and multicollinearity.

As to the issues they tend to be on the back burner because they are inconvenient for the establishment. The career path of economists at central banks is unlikely to be improved by research into the collateral damage of its policies especially ones which it may not be able to reverse. At the moment both ZIRP and QE are in that category even in the US. So should the period of QT lead to the issue below rising in volume get ready for the claims that it could not have been expected and is nobody’s fault.

I need a dollar dollar, a dollar is what I need
Hey hey
Well I need a dollar dollar, a dollar is what I need
Hey hey

On that subject I note that a bank borrowed 563 million Euros from the ECB overnight which is odd with so much Euro liquidity around. Next we come to the issue of the productivity puzzle which seems likely to have a few of its pieces with zombie companies on it. The same zombie companies and especially banks that have been so enthusiastically propped up. Time for some Cranberries.

Zombie, zombie, zombie, ei, ei
What’s in your head?
In your head
Zombie, zombie, zombie

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

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

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

ECB deposit facility usage €495.763 billion.

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

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

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

Co-op Bank

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

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

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

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

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

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

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

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

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

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

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

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

Bonds,Bonds Bonds

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

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

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

Danger, Will Robinson! Danger!

The official view is quite different as the BBC explains.

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

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

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

Comment

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

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

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

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

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

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

As to the individuals concerned there is this.

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

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

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

 

 

 

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/

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

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