September 22, 2008 | posted by Michael Baxter in Banking | comments (4) |

It’s funny, in a way, but the first bank to bring news of a potential crisis lurking with US subprime was HSBC. It even pipped Bear Stearns to the post in revealing subprime losses.

But then again, HSBC has retained a good capital base. Last month it was reported it boasted a capital tier 1 ratio of 8.8. To put that in context, the Basel Committee on Banking Supervision says banks should have a tier 1 capital ratio of at least 4 per cent. HSBC’s capital tier 1 ratio is easily the strongest of the main UK banks.

Perhaps the bank’s biggest assets are its links with China. Remember, the letters HSBC originally stood for Hongkong and Shanghai Banking Corporation.

And now the world’s local bank is the word’s biggest bank, at least by market capitalization.

Until a week ago, the word’s largest bank by market cap was the Industrial and Commercial Bank of China, but that took a nasty hit from the recent stock market panic seen in China.

And while HSBC is being proclaimed the world’s largest bank, it seems it is not letting that mantle get to its head.

HSBC has pulled out of talks to buy the Korea Exchange Bank.

It had originally agreed to fork out $6.3bn, but that was last year, before that thing called a finance crisis erupted.

The original plan was for HSBC to buy US private equity company New Star’s 51 per cent stake in the Korean bank. In view of recent events HSBC was gunning for a better deal; New Star said no.

Funnily enough, HSBC had just about cleared a minefield of regulatory hurdles, before it made the decision to pull out.

But, then again, you don’t get to be the word’s biggest bank if you are unwilling to spot the time when a good deal becomes a bad deal.

August 8, 2008 | posted by Michael Baxter in Banking | comments (0) |

And so RBS reveals its first ever half yearly loss in the forty years since it became a public listed company. It was also the second largest loss ever revealed by a British bank. Only Lloyds has ever managed to out do it, but that was back in 1989, and over Latin American debt.

Of the big five, RBS is the first bank to reveal a credit crunch related loss. But the key question is this: Is the worst now over, can we look forward to improved bank results, or is this just the thin end of the wedge?

RBS lost £691m in total – that is bad, but then again, consider this in the light of a £5bn profit in the same period last year, and while the decline in its fortunes is worrying, it is not as if the bank doesn’t have years of cumulative profit to fall back on.

Also, consider the losses in the light of the £12bn or so the bank has raised through selling shares lately.

These days, the strength of a bank’s balance sheet is measured by something called a Tier 1 Capital Ratio. This takes cumulative pre tax profit minus dividends, adds this to all investment the bank has received though the sale of shares, and then states this total value as a proportion of risk-weighted assets.

RBS now has a tier 1 capital ratio of 5.8 – that is after taking into account the sale of the bank’s stake in Tesco Personal Finance. To put that in context, the Basel Committee on Banking Supervision says banks should have a tier 1 capital ratio of at least 4 per cent. Barclays recently said it has a tier 1 capital ratio of 6,3; HSBC 8.8; Lloyds 7.4; and HSBC 6.5 per cent.

To put it another way, despite the massive fund-raising, the RBS has a lower tier 1 captial ratio than any of its four main UK rivals.

And the reason is easy to see. RBS, Santander of Spain and Fortis of Belgium forked out $110bn to purchase ABN Amro last year.

Although Santander seems to have absorbed its share of the takeover in its stride, both Fortis and RBS have had to get shareholders to stump up money, even though both the banks at first said this would not be necessary.

Mind you, there was some good news from RBS. The loss was much lower than expected.

In part this was because the bank has had some luck selling leveraged loans at a higher price than it had expected. The bank saw an £182m reduction in the value of its debt.

What about the future? Sir Fred Goodwin, chief executive at the bank said: “It doesn’t feel like we’re heading back to the good old days, but we are seeing some movement,” and he added: “Its a brave person that can try and predict this market through year-end, but we feel these are strong marks and we have a reasonable degree of confidence. We’re still reducing exposure. We feel more comfortable with these marks now than at the end of April.”

The big snag, though, with all the write-downs announced by the banks so far, is that it seems unlikely that, moving forward, they have taken sufficient account of the effect the credit crunch will have on indebted UK consumers.

It may be that we have seen the majority of US subprime write-downs taken into account now, but the US and UK property markets have an important difference.

As is explained in the article below – “House prices fall again, but at least they rise in the US,” in the US, the banks often have to pay the cost of the negative equity in a mortgage. In the UK, most of us with negative equity have to just struggle on. Meaning, the effect of negative equity could take longer to be felt in the UK.

The underlying forces that shape the economy can affect different sectors at different times. At the moment, it is the banks who are feeling the full force of the credit crunch. Over the next year or two, it will be business and consumers.

The economist Hyman Minsky once talked about three stages in the development of a credit bubble. Stage 1, borrowing is affordable. Stage 2, borrowers can’t afford to repay the loan, but they can afford to pay interest. Stage 3, they can’t even afford the interest, and may borrow from elsewhere to repay existing loans. Then, all of a sudden, credit dries up – backlash against the untenable borrowing occurs – this is called the Minsky moment.

For many consumers it seems as if they are close to reaching that Minsky moment. This will be the point of maximum danger for the economy. It seems that as consumers find they are no longer able to borrow to repay borrowing, defaults will rise.

Businesses could face a double blow. As the economy slows they may need to borrow more, but for many, the credit crunch will make this impossible.

As a result, British banks could face rising defaults from both consumers and business – and for those reasons, it is quite possible bank losses have further to rise.

August 5, 2008 | posted by Michael Baxter in Banking | comments (0) |

As you know HSBC, revealed its latest results – as was told here yesterday. Profits were down, at $10.2bn hardly disastrous. The total amount set aside to cover bad debt was increased by another $10.1bn; that’s a lot of money, but HSBC can afford it. There is no talk of a rights issue, instead the bank upped dividends.

The real significance of the HSBC results comes in other guises.

For one thing, don’t forget HSBC was the first bank to warn of subprime dangers. Maybe then HSBC can give us a hint as to what will happen next.

And that brings us to the really interesting information to emerge from HSBC yesterday. The musings of its chairman.

Stephen Green, the big boss at the bank says a US recession is still a “real risk.” He added: “… the length and depth of that is uncertain. I think if a recession occurred it could be shallow … but any meaningful recovery in the housing market is unlikely before next year. Employment is fragile. These are difficult conditions and they will remain difficult into next year too.”

As for Asia – and remember HSBC knows more about Asia than just about every other European or American bank – he said: “I don’t think emerging markets have completely decoupled from Europe, North America or Japan. There has been an element of decoupling. There is an increasing amount of exports to other destinations.” So what will the effect be of a US recession then? “There will be an impact,” he said, “there is no question.”

We are a tad cynical about this decoupling idea. The US is a massively important customer for China. It is also an important customer for China’s customers. If the US hits recession, China will feel it hard.

One other piece of interesting information from HSBC: The bank said there was an average 5 per cent drop in current account bank balances among UK customers during the latest period.

So, HSBC’s customers have had less money to spend. Well, we all knew that was true – but it’s nice to get conformation. But here is where we really are cynical. How can inflation take hold, in the longer-term, if the amount of money in the system is falling?

August 4, 2008 | posted by Michael Baxter in Banking | comments (0) |

If you wanted to try and encapsulate the two conflicting forces at work today in one company, then that company may well be HSBC.

Its strength is implied by its name: never forget HSBC stands for The Hong Kong and Shanghai Banking Corporation.

But the bank also has strong interests in the US.

And so it was that the bank posted a healthy profit of $10.2bn for the latest quarter, and while all around rivals are tapping shareholders and sovereign wealth funds for money, HSBC has actually upped its dividend payment for the first half of this year on the same period a year ago.

On the other hand, losses from the North American arm came in at $2.8bn and the total amount set aside to cover to bad debt was increased by another $10.1bn.

Profits for the same period last year were $3.9bn higher, so yes, HSBC has suffered a hit. Yes, profits are down. But, it really isn’t that bad,

Chairman Stephen Green said: “It is clear that growth models in our industry based on high and increasing leverage will no longer be sustainable.”

He added: “It is also clear that complexity in financial services and the recent consequences of failed risk management need to be addressed.

“Ultimately the real economy will recover from the crisis although it may get worse before it gets better. Financial markets will not, and should not, return to the status quo ante.”

April 9, 2008 | posted by Michael Baxter in Banking | comments (1) |

When the story of this period of economic turbulence is written, one assumes much will be written about the way certain banks, and building societies which talked the property market up,  insisted the underlying fundamentals were good, and in the process helped encourage a property bubble.

For trying to install confidence in the UK housing market, no one has done more than the Halifax.

Last summer it responded to the fears that had just started doing the rounds, that the property market would suffer as borrowers came off fixed rate mortgages, by suggesting that the additional costs involved would be relatively small.

“A borrower with a £114,000 mortgage, the average in 2005, taken out at the average two-year fixed rate in 2005 of 5.08 per cent,” said the Halifax last summer, “would be making monthly repayments of £669.02. When the deal expires this year, the new monthly repayments would be £733.72 - an increase of 10 per cent or £65 - assuming that the borrower moves onto the current average two-year fixed rate of 6.04 per cent.”

It suggested that such a hike would be eminently affordable – hence its bullish predictions on house prices.

But, nine months on, of course it is a different story – and at least some people on fixed rate mortgages which are about to expire, have got serious problems.

But a white knight may have come to the rescue.  The Halifax assertion of that period may prove valid – it’s just that while the white knight may yet save the Halifax predictions, the Halifax, along with most other mortgage lenders, could be the loser.

That is, all mortgage lenders apart from HSBC, for the UK’s biggest bank, not to mention one of the biggest banks in the world, is planning an audacious swoop on the British mortgage market that could leave it as the dominant player.

HSBC is set to match existing fixed rate mortgage offers which are due to end shortly with other lenders.

In other words, HSBC is planning to rescue holders of fixed rate mortgages from their forthcoming nightmare.

It goes to show that periods of down-turn are also periods of opportunity, and for HSBC, with its strong balance sheet, now is such a time.

It also goes to show how markets can self-correct.     When prices fall too low, some companies can exploit that, and as a result, prices eventually return to the norm.

The HSBC was one of the first banks to warn of subprime difficulties – first announcing write-downs over a year ago – yet losses have remained relatively modest at the bank.

It’s just possible that the bank has played the crisis like a supreme master.