News from Philip Bates & Company
Up-to-the-minute financial news from various sources
News and comment
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Citywire Investment News
- 'Keep calm and carry on' as FTSE tumbles 2%
Thu, 23 May 2013 17:19:00 +0100
Has the correction begun or is this a breather?†Experts say†today's slide in the FTSE 100†is†an over-reaction to†US and China news.†
- GLG's Edwards: three charts on why you shouldn't panic over Japan plunge
Thu, 23 May 2013 15:16:26 +0100
Japan veteran Neil Edwards says 'buy on the dips' as the trend is still generally upwards.
- Withers/Speechly Bircham merger talks collapse
Thu, 23 May 2013 14:41:47 +0100
The private client law firms have decided against a merger after nearly two months of negotiations.
- Arigatou Japan! Is Nikkei still world's top equity hotspot?
Thu, 23 May 2013 14:09:43 +0100
After partying hard for the last few weeks, investors woke up to a splitting Japanese hangover this morning, but asset allocators still see plenty of potential in the nation's stockmarket. †
BBC Business News
- German football model is a league apart
Thu, 23 May 2013 23:10:24 GMT
How German football clubs treat their fans differently
- Can watches show more than the time?
Thu, 23 May 2013 23:07:42 GMT
Why have we been waiting so long for watches to catch up with smart phones?
- The tech that's transforming gardening
Thu, 23 May 2013 23:03:43 GMT
The technology that's transforming gardening
- Poor countries take on tax avoiders
Thu, 23 May 2013 23:02:46 GMT
Developing countries are trying to stop mining companies shifting billions of dollars in profits out of their countries, depriving them of much-needed tax revenue.
- Cancer cell enzymes are 'good cops'
Thu, 23 May 2013 23:24:34 GMT
Enzymes released by cancerous cells have a protective function and are not one of the 'bad guys', say researchers from the University of East Anglia.
- WHO urges sharing over coronavirus
Thu, 23 May 2013 23:11:42 GMT
The WHO urges countries with possible cases of novel coronavirus to share information amid concern over patent rights held by commercial labs.
- US Boy Scouts to allow gay members
Thu, 23 May 2013 23:09:22 GMT
The Boy Scouts of America organisation votes to accept openly gay scouts, after a divisive campaign pitting liberals against some religious groups.
- Latam "gang of four" scrap tariffs
Thu, 23 May 2013 23:00:37 GMT
Four countries in Latin America - Chile, Colombia, Mexico and Peru - have agreed to scrap most of the tariffs on trade between their four countries.
FT.com - Financial Markets News
- Wall Street shrugs off Nikkei slide
Thu, 23 May 2013 20:16:59 GMT
Bullish US equity investors brush aside steep losses for Japanese shares and concerns about the outlook for the Chinese economy
- UK?s FTSE suffers biggest fall in a year
Thu, 23 May 2013 17:14:51 GMT
Miners led the wider market lower on weak Chinese manufacturing data. The FTSE 100 dropped from a 13-year high, losing 2.1 per cent or 143.48 points at 6,696.79
- Spain mulls inflation-linked debt sale
Thu, 23 May 2013 17:01:57 GMT
Spanish bond yields have fallen sharply since the height of the eurozone debt crisis, driven by promise of intervention from the European Central Bank
- Yen and franc gain as risk appetite hit
Thu, 23 May 2013 16:46:13 GMT
Haven currencies strengthen amid concerns the US Federal Reserve could taper its bond-buying programme as China data weigh on sentiment
BBC: Robert Peston
- Peston Picks is moving
Thu, 12 May 2011 12:20:59 +0000
My blog is dead. Long live the new blog. Or to put it another way, my page - and those of other BBC bloggers - is having a makeover. So if you don't want to read on, and you simply want to read my latest post, click here.
The reason for the change is to bring together more of my output in one place. So on the new page, you'll find many of my TV and radio pieces, and (soon) my tweets.
If I go mad and decide to do other social media, that'll be there too.
Fingers crossed that you like what you see. I can't hope that all of you will love all the changes. And in particular, I am sure some of you will be frustrated that (for cost reasons) there is now a 400 character limit on the comments you can leave.
Please don't let that put you off expressing yourselves. I can't tell you how much I value your opinions and the debate we have.
- HSBC banks on UK
Wed, 11 May 2011 09:43:37 +0000
For all HSBC's mutterings that it's fed up with having the UK as its home base - because of the incremental tax it pays here and what it perceives as an anti-bank climate - there is no evidence from today's strategy review that it is growing any cooler on having a big presence in the UK.
In fact, if anything, the opposite is implied by its assessment of where best to allocate its capital and expertise over the coming decade. The UK is categorised by HSBC as a "strategic market", which is HSBC's highest accolade, partly because it has a massive presence in retail banking here and partly because it wants to be "the UK's leading bank for international businesses".
Interestingly, and in spite of the superior growth rates of emerging economies, HSBC expects the UK to still be the sixth largest economy in the world in 2050, only a fraction smaller than Germany, but bigger than Brazil, Mexico and France.
The British economy is expected by HSBC to grow faster than the US, Japan, and France over the coming 40 years - and a bit slower than Germany (but, of course, massively slower than China, India, Brazil, Mexico and Turkey). Some of that British momentum, compared to the eurozone and Japan for example, is presumably due to an expected faster rate of population growth in the UK - which is not universally popular.
But even so, income per capita in the UK in 2050 is predicted to be $49,000, 6.5% below German income per head and almost 20% greater than French per capita income.
For HSBC, the important trends are expected annual growth of world trade of 8.9% in the coming 10 years and the persistence of huge financial imbalances between the saving and exporting nations (China, India, Germany, and so on) and the consuming and borrowing nations (the US and much of Europe).
Interestingly, HSBC expects the UK to be a rare example of a country moving from deficit into surplus, by 2020 (or rather it buys into the analysis of the consultants McKinsey and the World Economic Forum to that effect - although there is a bit of a mystery here, because HSBC attributes the forecast to McKinsey, but it's not in the relevant McKinsey document).
The point, for HSBC, of analysing the world in these terms is that it wants to be the leader in financing those swelling trade flows between emerging economies and developed ones, and also in the related businesses of shipping China's and India's and Taiwan's surplus capital to the US and Europe.
Which means that what it calls Global Banking and Markets (and others call investment banking) together with its Commercial Banking arm will be the focus of future expansion.
That looks rational for one of the world's genuinely global banks. But it is slightly disturbing for the rest of us, perhaps, because the bank is assuming that the leaders of the G20 most powerful economies will fail in their avowed aim of stabilising the global economy by reducing China's funding surplus and America's funding deficit, the imbalances that were a fundamental cause of the great crash of 2007-8.
HSBC's success in that sense seems in part to be predicated on the idea that the global financial economy won't become a much safer place.
Like all sensible businesses, HSBC say it will reallocate capital to where it sees superior growth or where it has substantial market shares. So it will only stay in retail banking in places, like the UK for example, where it is big enough to be a price leader, rather than a follower.
The new chief executive, Stuart Gulliver, recognises that current returns are too low, partly because the bank's running costs are too high. So it plans to reduce annual costs by between $2.5bn and $3.5bn over the next three years - though it hasn't said how.
There is one cost that particularly rankles with HSBC - the special banking levy imposed by the British government. What it finds particularly galling, I am told, is that it pays the levy on uninsured deposits outside the UK, which most would see as a stable form of funding that contributes to the perception of HSBC as being a relatively safe bank.
Given that Treasury said the levy was designed in part to encourage banks to finance themselves in a more prudent way, it is a bit odd that the levy is costing HSBC around £370m this year, almost exactly the same as Royal Bank of Scotland and Barclays, and £110m more than Lloyds, in spite of HSBC's funding arrangements being widely seen to be much more prudent and stable than those of the other UK banks.
It is perhaps understandable therefore that HSBC hopes the Treasury will look again at the structure of the levy. Although - as I've said and elucidated before - HSBC's not-very-veiled threat to leave the UK if the levy isn't reformed doesn't look credible.
- What price a Greek haircut?
Tue, 10 May 2011 09:41:04 +0000
One of Europe's most influential bankers said to me the other day that he thought it would be a disaster if any of the eurozone's debt-stretched nations imposed a reduction in the value of their respective sovereign borrowings, or - to use the jargon - took a haircut on their debts.
For him, the eurozone approach of muddling through - providing IMF and eurozone loans to those countries that cannot borrow on markets - is the right approach, even if it hasn't actually solved anything for the eurozone in a permanent sense.
It is curious he should take that view, given that the rescues of Greece and Ireland that took place last year are already having to be renegotiated. And the bailout of those countries didn't stop the rot: Portugal is well into the process of obtaining emergency finance from eurozone and IMF.
Wouldn't it be better to cut what Greece - or Portugal or Ireland - owes down to a manageable size, in tandem with the imposed shrinkage of its public sector, to put its public finances back on a basis that is sustainable for the long term?
The markets are saying that's the only way forward. Over the course of a year, the market price of Greek government debt has fallen by more than half, for example. The yield on 10-year Greek government bonds is well over 15%. Which is an unambiguous statement from investors that there is not the faintest chance that they will lend to Greece again, unless and until its debt burden is reduced to a manageable size.
Or to put it another way, markets are presenting a simple choice to eurozone government heads and the IMF: they can continue to lend to Greece for an indefinite period, in the hope that Greece's economic growth will eventually pick up and generate incremental tax revenues, which would allow the Greek government to perhaps start paying down its debts; or they can bite the bullet and put Greece into the equivalent of what the Americans call Chapter 11 bankruptcy protection, to restructure and reduce what Greece owes so that it is consistent with the market price of all that debt.
Now as of this instant, option one looks a bit naive, in that what's happened subsequent to the first bailout of Greece a year ago is that its ratio of debt to GDP has been growing in leaps and bounds to more than 150% of GDP (and for more on the heroic challenges faced by Greece, see reports in the next day or two from Stephanie Flanders, who is in Athens).
So you would have expected my influential banker - who knows a thing or two about the markets - to be in favour of what the markets are saying is inevitable. Surely he should be calling for that most humiliating event for any creditor, a formal admission by Greece that it can't pay what it owes, which goes by the moniker of a haircut, or restructuring, or default?
But Mr Big Banker doesn't think that's the right way forward. His reasoning is that he fears a debt restructuring would weaken many of Europe's banks, such that they would be forced to raise new capital - perhaps from their respective governments. And, for reasons that slightly elude me, he sees that as a worse outcome than leaving Greece trapped in an unbreakably vicious cycle of economic decline.
The odd thing, however, is that the official statistics really don't seem to indicate that a haircut on Greek debt would be Armageddon for Europe's banks.
It would be a disaster for Greece's banks, that's certainly true, given that (according to Bank of England figures) a 50% writedown of Greek sovereign debt would wipe out more than 70% of their equity capital. Or to put it another way, they would be bust and would have to be recapitalised.
But, sooner or later, Greece's banks are going to need strengthening in any case. Fixing Greece's public finances won't fix Greece unless its banks are mended too. So any estimate of the costs of rehabilitating that country will include the price of providing new capital to the banks.
The more relevant question, perhaps, is what a Greek haircut would mean for banks outside Greece.
The latest figures from the Bank for International Settlements, published a few days ago, show that at the end of last year banks outside Greece had lent $146bn to Greek banks, companies and the public sector - down from $171bn three months earlier. And, of this, loans to the public sector (largely holdings of Greek government bonds) were $54bn.
To be clear, this doesn't take account of exposure through derivatives, credit commitments or guarantees. So the world's banks probably have a further $100bn exposure to Greece.
The sums at risk therefore look serious though not - on their own - potentially disastrous for the health of the financial system.
Now as luck would have it, the banks most at risk happen to be those of the eurozone's two largest and strongest economies, Germany and France. The exposure of German banks to Greece is $34bn, including perhaps $20bn of loans to the Greek government, while the exposure of French banks is $57bn, of which again around $20bn is probably sovereign lending
Now because of what some would say is the madness of how the global Basel rules - that measure the strength of banks - are applied, there would be a double whammy for eurozone banks if there were a write-off of Greek sovereign debt.
The banks with Greek sovereign exposure would have to reduce their respective stocks of capital by the amount of the loan loss. And they would have to inflate the size of their balance sheets, because the residual exposure to the Greek government would lose its official (and some would say insane) zero risk weighting. So the fall in the capital ratios of banks with exposure to Greece would be magnified in a painful way.
Of the larger listed banks, only one, the Franco-Belgian group Dexia, looks as though it would be seriously hurt by a Greek debt writedown. According to Morgan Stanley, Dexia has 4.9bn euros of exposure to Greek sovereign debt, equivalent to more than half the value of its equity capital. Dexia would be significantly weakened by a 50% Greek haircut.
Next at risk, according to Morgan Stanley, would be Commerzbank of Germany, with €3bn of Greek sovereign debt, equivalent to 15% of its capital. Meanwhile BNP Paribas and Credit Agricole of France, Erste of Austria, KBC of Belgium and Deutsche Bank of Germany all have meaningful though not devastating exposures.
Less visible is the Greek exposure of Germany's state backed landesbanks - which regulators tell me is considerable. But if they were to incur large losses on it, Germany could afford to recapitalise them.
So what is going on? Why are eurozone governments so wary of a restructuring or haircut of Greek sovereign debt, given that banks in the round won't be killed by the consequential hit?
There seem to be three reasons.
First, in Germany, it is apparently politically more acceptable to provide rescue finance to Greece directly than to rescue German banks that foolishly and greedily bought Greek debt for its relatively high yield.
Second, a Greek debt restructuring would be a severe blow to eurozone pride in the strength of the currency union.
Third, a Greek haircut might be the thin end of a large wedge. If it created a precedent for haircuts in Portugal and Ireland, the losses for the eurozone's banks would begin to look serious. But again, if there were just a trio of national debt haircuts, if the rot were to stop with Ireland and Portugal, eurozone governments could afford to shore up and recapitalise their banks.
That said, what the eurozone could not afford - or so regulators fear - would be haircut contagion to the likes of Spain and Italy.
But Spain and Italy are looking in better shape. Spain, for example, is taking steps to strengthen its second tier banks and its banks in general have become less dependent on funding from the European central bank (which is a proxy for their perceived weakness).
So here, I think, will be what will determine whether Greece gets its haircut in the next two or three months: if eurozone governments come to believe that Spain is well past the moment of maximum risk of financial crisis, there will be a bold restructuring of Greek debt.
But, to use that awful footballing expression, if they do go for a Greek debt haircut or writedown, it will be squeaky bum time in government buildings all over Europe.
- The big PPI lesson for banks
Mon, 09 May 2011 10:02:36 +0000
The big lesson for the banks from today's decision by the British Bankers Association not to appeal against the high court ruling on Payment Protection Insurance is - funnily enough - very similar to the big lesson from the Great Crash of 2007-8.Which is that if a bank runs its business on the basis of what the regulators' detailed rules allow - rather than on the basis of what is commercially sustainable and sensible - public humiliation and enormous losses are likely to be the bitter harvest.
In the case of PPI, much of what the banks have now acknowledged to be mis-selling seemed consistent with rules laid down by the regulator, the Financial Services Authority, in its handbook and its source book on the selling of insurance.
But the FSA argued that following the letter of these rules was a necessary but not sufficient guarantee that the banks were behaving property. The FSA argued that the big banks should have been more mindful of its over-arching principles, notably the imperative of paying due regard to the interests of customers and treating them fairly.
The banks appear to have been so seduced by the apparently huge profits available from insuring personal loans, mortgages and credit card debt that they pushed the insurance to all manner of unsuitable customers (the self-employed who could never make a claim for being made redundant, or those with pre-existing health conditions, that would invalidate claims, to name just two common examples).
"It is very difficult to justify how we behaved" said one senior banker. "You can't imagine supermarkets treating their customers in the way we treated ours. I know my colleagues think that so long as we followed what was in the FSA's handbook, we shouldn't be blamed. But my view is that we forgot the cardinal rule, which is that we're there to serve customers, not to shove something down their throats which they don't need".
This departure from the very basics of retailing is costing the banks very dearly indeed. Last week Lloyds - the market leader in PPI and the first of the big banks to say it would provide comprehensive restitution - said that the settlement would lead to a £3.2bn expense.
Today, Barclays has quantified the compensation and related costs at £1bn. There will be a similar charge for Royal Bank of Scotland. And HSBC has just said it is setting aside £274m to meet these costs.
In total for all the big banks, the costs are heading towards £6bn or so - and that's to ignore the compensation bill for hundreds of smaller firms which joined in the PPI mis-selling frenzy.
Now what's striking is that the PPI debacle shares strong cultural characteristics with the behaviour that took many of the world's banks to the brink of bankruptcy less than three years ago. During the boom years before the crisis of 2007-8, you won't need telling that banks lent and invested recklessly - to subprime borrowers, to commercial property, to each other, through off-balance sheet vehicles, in the form of "structured" products which delivered the illusion of quality (inter alia).
And much of this reckless lending and investing took advantage of the global Basel rules that give the official regulators' view of how much risk the banks were taking - and, as we now know, were catastrophically wrong.
But - many bankers belatedly concede - banks should have known better than to make their judgments on how to lend on the basis of the regulators' rules. They should have done what other commercial businesses do, which was to lend and invest on the basis of what would be sustainable and prudent for the long term.
Gaming or playing the Basel rules, and forgetting commercial common sense, led to disaster. It meant that Royal Bank of Scotland, in the autumn of 2008, looked like a sound bank as measured by the Basel rules, when to all intents and purposes it was bust.
Of course it is reasonable to blame the regulators for framing the rules badly. But many would say that the banks were more at fault for mindlessly running their businesses on the basis of what the rules allowed.
So what's the big lesson of both PPI and the 2007-8 crash? Well, it is probably that banks need to base everything they do on what is good for customers, shareholders and creditors in a fundamental sense - and not on what the rules allow them to do.
PS Apart from the banks, another group of firms - the claims management firms - look set to be burned by the banks' decision to chuck in the towel and pay compensation to 2.75m or so individuals who were mis-sold PPI insurance.
The banks will now set up operations to speedily process claims for compensation. So they would argue that there is no point in their customers using the services of claims management firms, because in doing so those customers would not gain any additional compensation but would have to pay commission to the claims handler.