FIRST THE BIG PICTURECustomers' deposits are currently rising but this is not yet shown in year on year changes. What we can see roughly in LBG's accounts is £45bn fall (7%) in customer loans. Why? The main reason is that funding remained expensive through 2009 (causing income from savings and mortagges to fall by 27%) and banks are lending and depositing dramatically less with each other. Interbank lending margins ove LIBOR have since fallen sharply to less than 50bp, even to only 20bp, in part helped by £200bn of Bank of England QE (Quantitative Easing: buying gilts from non-banks which improves banks' liquidity in deposits compared to what it would have been, at first, and then causes a shift by investors to buying high-rated corporate bonds).
In 2009, banks either stopped competing for bank deposits or simply resigned themselves to the steep fall in bank deposits, much of which is cross-border retreat by banks into their domestic backyards. The banks don't want customer loans one third backed by bank deposits, but more closely aligned to only customer deposits, that or they have no choice?
LBG Loans to banks fell £30bn and its deposits at central bank/s increased by about the same. Deposits at LBG from banks fell by over £70bn (7% of total balance sheet). The question is 'could the bank have structured matters differently' to do more to maintain customer lending, that is the £11bn net increase in lending that the government requested (and about £15bn loans growth by RBS that also could not be fulfilled)? Total household net lending by all UK banks only grew £3bn in 2009 despite £143bn in gross (not net) mortgage lending. lending to business in 2009 has been negative through almost all of 2009.
In the chart it looks as if lending to other financial corporations has remained very positive in most of 2009, but this is domestic interbank data only and is overtaken by cross border retreat of foreign lenders to UK financial corporations.In LBG's case total liabilities (mainly deposits) fell by £108bn - so, perhaps LBG did do something to only let customer borrowing fall £50bn, and when customer deposits year on year failed to grow, and when customer loans exceed customer deposits by £220bn (nearly a quarter of total balance sheet), and when it is also said that ousehold customers are reducing their debt levels and businesses are investing less.
Total UK private savings rose £150bn in the year, which should have improved LBG's liabilities (deposits) by about £25-30bn. Instead, depositing customers have gone elsewhere! I hope we see a turnaround in customer lending in 2010 helped by £200bn QE plus £200bn rise in private saving? But, with banks facing higher reserve reuirements, needing to close the funding gap (high in LBG's case), and refinancing much of that funding soon, imposing tighter credit obstacles to new loans, possible continuing retreat by banks in lending and in depositing with each other, it looks as if recovery will have to proceed with negative help by banks as they buckle under pressure to pull in the opposite direction - what in recession is called pro-cyclical behaviour. Yet again, it is government that alone must pull the economy up by its bootstraps.
When our big banks such as LBG say recovery will be weak or slow they should know, because the speed of recovery is very much down to them, to how fast they continue to retreat their balance sheets in the opposite direction to economic recovery?
Note: LBG is the third big British bank to report its 2009 results, following RBS, which reported a smaller net loss on Thursday, and Barclays, which published strong profit figures on Feb.16. HSBC releases its results next Monday.
Comparative note on Barclays and RBS
Barclays shrank it balance sheet too, like RBS, by shrinking/netting its derivatives by £500bn. Barclays has a 130% assets/deposits ratio (RBS: 135%). It grew its lquidity reserve by over £80bn to £127bn. It made a profit of nearly £12bn (after selling BGI for over £6.4bn less £13.4bn impairments and writedowns) on £30bn of income plus £1bn gain from debt restructuring. Customer loans fell by £40bn (over 8%) when net deposits from banks fell by £46bn and customer deposits fell by £13bn. Like LBG, one defence may be that customer loans could have had to fall by another £20bn given the loss of deposits.
RBS also saw customer loans fall by £36bn or 6% (in UK 8% despite £60bn in new loans), when bank deposits fell £109bn and customer deposits by £36bn in 2009.
To those who argue, however sensibly from a liquidity aspect, for a swift return to traditional banking where loans are fully backed by deposits, and therefore outstanding loans rise and fall with deposits - it is a nice idea, but a painful one in a recession or recovery period, and not exactly what government had in mind when it puposefully asked the banks to maintain lending to small firms and customers generally! The 'trad bank' idea is based on 'you can't have loans without deposits', but the opposite is also true. But banks are not competing hard enough for customers deposits - but that's not the real issue!
If the big banks shrank customer loans to match customer deposits, that means by £220bn in LBG, £120bn in RBS, and £100bn in Barclays. If they and HSBC, Santander and other banks reduced UK domestic customer lending to customer deposits, the UK economy could not survive - more than £500bn retrenchment. Even if that is possible over the next 5 years, what would government have to do to ensure GDP recovery, probably double its borrow and spend, which is politically impossible! It must urgently look at what it can do to engage the banks in economic recovery - but how?
banks are anxious to raise their net interest margins to generate more internal capital even if it means shrinking their loan-books in the teeth of economic malaise. Government guarantees of deposits are one thing, the interest paid to term depositors is another. Regulators want banks to do more to make deposits stickier.but can't bring themselves to say how and why banks should shoulder more of the burden of economic recovery - that's a decision above the regulators' pay-grade.
LBG RESULTS DETAILS
Lloyds Banking Group TODAY reports £6.3bn (underlying) pre-tax loss for 2009 i.e. small change from £6.7bn deficit in 2008. But, of course, in getting there much has changed. With net income at £24bn, two thirds that of RBS, though risk weighted assets (total loans risk exposure) fell only 1% to £493.3bn, which is very similar in size to RBS after its gain from the APS. LBG decided it could do without APS by restructuring its own debt to gain £10.5bn, £4bn redemption of Gov. prefs. and a £13.5bn capital raising. It sees better economic conditions and has several assets it can and must sell following agreement with the European Commission to do so - even if the deal was struck based on mistaken market share statistics.
LBG significantly increased its liquid assets from £104.5bn to £150.8bn and quality by increasing cash at central banks and buying Government debt securities in place of short term interbank borrowings. Like RBS, there has been a roughly 10% rate of growth in customer deposits, which with flat lending, narrows the funding gap. Its own funding gap debt is now maturing at only about £200bn, less maybe £50bn annual balance sheet shrinking of own portfolio investments and non-core banking assets this year for 3 years, which evidences an improvement in its funding risk compared to what Lloyds TSB or HBOS were staring down the barrels of a gun at in Autumn 2008 before they merged. I have to say this liabilities restructuring is a sound achievement - quality dressage.
LBG's £24bn net income was roughly half from insurance and half from banking. It has a statutory profit before tax in 2009 of £1bn, compared to £0.8bn in 2008, from recognising a gain of £11.2bn in respect of goodwill because the purchase price of HBOS (at Jan.'09), was below fair value of HBOS net assets due to the stressed circumstances at the time i.e. HBOS's liquidity risk embarassments and short-sellers had cut the bank's value by over half - an important lesson! Heavy lifting (snatch and hold) of risk out of HBOS's corporate loan book, not efficiency gains from the merger, remains a set of tasks dominating balance sheet clean-up. The bank now has nearly £90bn in liquidity risk reserve. This is far in excess of expected new regulatory requirement that it must reflect the risk of not participating in APS and to give it negotiating power in the cost of funding and restructuring its funding gap - very prudent. It is shrinking its balance sheet more slowly than RBS, reflecting its lower credit and other derivatives exposure.
Asset impairments are 61% up at £24bn, but, like RBS, the bank says bad loan losses have passed their peak (in H1 2009). The impairments are mainly corporate property loans and wholesale (actually Wealth and International) generally, but this dates to the first half of 2009 when bank shares hit bottom and the HBOS book with £80bn sub-quality was roughly 20%written down based on a high-level estimates, and then wrestled through in detail - so that has it seems now allowed some improvement to emerge. 
The funding gap represented by loans/deposits ratio has a target of approx. 140% over the medium term. Nothing is said yet about treatment of its insurance reserves within bank group capital. This adjustment must be imminent. During 2009 the ratio, excl. repos, improved to 169%. Apart from unravelling or netting off derivatives, the gap is closing with flat household and small, SME and Corporate business lending, about which the banks only states supportive sentiments but provides no data to show it is putting money behind its fine words. New mortgage lending has been slightly below its mortgage book UK market share. This fits with subjective I hear that sound loan requests are being turned down and customers persuaded to go elsewhere! The bank has a very healthy 2% net interest margin.
I don't see why it cannot boost its small firm lending to at least improve its image at a difficult time for the economy. Small firm lending is trivial in the balance sheet. This would help government's recovery targets and be a positive response to what government has asked RBS and LBG especially to do more of; helping small firms. I suspect that the problems of unravelling and reconditioning HBOS's SME loans has blind-sided the bank to the virtues of helping small firms. This should be its number one social responsibility target.
It is quite obvious that the bank's story is far too much aimed at bank analysts and not at all at the general public. This is further evidence of an astonishing PR intertia that looks like indifference to political reality when customers so despise their banks and the mob is baying for blood over bonuses and small shareholders still extremely angry and not averse to continuing class actions about information not disclosed to shareholders at times of capital raisings in 2008 especially. The implied expected future impairments, in my view, reasonable to forecast for 2010 at about £15bn and £10bn in 2011, but substantial recoveries should be appearing by then. Not helping small firms and not being able to quantify what the bank is doing to help the economy pull out of recession is like not recognising that the paralympics are also important sport. banks have to learn how to rediscover how to talk to the public and customers and genuinely regain trust and belief. Helping small firms through to recovery and being able to say something about household and small business long loans and overdrafts are small things in the balance sheet but big in public and economic recovery perceptions.
LBG increased its forecast for the cost benefits expected from the acquisition of HBOS. The group said it now expected £2bn of annualised cost savings by the end of 2011, not £1.5bn i.e. an extra £3.5bn squeeze gain over 3 years. Lloyds’ underlying income net of insurance claims rose 12% to £24bn but this revenue performance was flattered by lower writedowns on fixed income and equity assets and gains from debt swaps and HBOS goodwill. Traditional banking's net interest income fell 15% to £12.7bn despite a healthy 2% margin, reflecting higher wholesale funding gap financing costs.
Lloyds has blamed rise in impairment charges on problematic commercial property loans extended by HBOS, but impairment charges fell 21% in H2 '09. I take this to mean that the bank could not yet feel confident about property values recovery sufficiently to make a bigger improvement to the HBOS impairments, which I think is due, and should therefore appear in 2010.
LBG's stress tests (economic forecasting) expects a “weak upturn” for the UK economy in 2010. This runs against historical precedent, especially if the USA is recovering fast - but of course with the long harsh winter and political anxieties, consumer spending and confidence cannot be relied upon yet. Lloyds suggests the risk of double-dip this year has decreased in recent months. That is true of 4Q '09, but Q1 '10 I expect to be a strong negative blip. LBG say company failures rise and fall during the year but would not peak as high as in '08-'09. This is duplicitous since company failures are small firms and some SMEs and avoiding or reducing their failure rates is eminently within the power of the banks, and relatively trivially so in balance sheet terms! Therefore, if LBG and other banks think small firms are in trouble it is up to them in the first instance to do something to ameliorate that!
The long run reported by Lloyds (necessary to its stress-testing) assumes for purposes of comparison that the bank owned HBOS through 2008 as well as 2009 (excl. the £11.2bn goodwill gain Lloyds made on HBOS and £2.5bn it was charged when choosing not to enter the Bank of England's APS).
What amazes me in LBG's reports today (RBS only slightly less so), given Daniels and Tookey are first class-brains, how totally inept it is of them not to address themselves to public policy issues, when the bank is over 40% government owned and has a huge social economic reponibility of owning a quarter of UK banking market. At this critical time, when reviewing what has been 1-2 crisis-ridden years, when it is not staff that needs cuddly assurances but customers, the general public, and indeed the bank's political masters without whom the takeover of HBOS would not have happened, why can these titans of finance not say something grander about their socially-useful relevance - the very question asked of them by The House of Commons Treasury select Committee? Announcing annual results is the best time of the whole year to grandstand and address customers and shareholders and LBG's 41% owning taxpayers - a slam-dunk moment to say some positive things about banks. But the supporting data for such positive self-promotion to the general public about the economy is not there. The banks remain focused on cleaning up their balance sheets to the extent of ignoring how best to help the wider economy - and thereby in my view also themselves - desperately - to restore public confidence in banks by showing how banks can and do help economic recovery!
LBG was asked today whether it had met lending growth targets agreed with the government. It had promised to lend an extra £14bn in 2009 – £11bn to businesses and £3bn to mortgage customers. Eric Daniels refused to give a net figure. “We didn’t publish net lending this time around,” he said. “What we are focused on is serving our customers through this troubled time” - but we want to know if that really means something - if so, what? The published statements do say LBG its share of gross (not net) UK mortgage lending was 24% (5% below its market share of outstanding mortgage loans),and "Unsecured lending balances were slightly lower, reflecting lower customer demand and tightened credit criteria." This does not square with the accompanying statement, "During the year, we have continued to build our current account and savings customer franchises in what remains a competitive market for customer deposits", which sounds like mere rhetoric on 'franchises' and otherise that deposits growth is more vital than loans i.e. the focus is on shrinking customer loans closer to customer deposits, which in LBG means narrowing a £170bn chasm. Asked whether net lending was positive, Mr Daniels said: “Absolutely, yes.” As the FT observed, "However, it later emerged that he was excluding from his numbers £170bn of “non-core” customer lending, which Lloyds does not want to renew (much of it probably in property development) - closing the customer loans/deposits gap dramatically, totally! LBG customer lending fell nearly £50bn to £660bn in 2009.
Tim Tookey, LBG finance director, talked down concern over the bank’s refinancing needs - the issues that in 2008 sank HBOS - when £157bn of government and central bank funding falls due over the next two years, of top of private sourced funding gap refinancing - maybe £400bn in total (my guess). "The bulk of the funding would not need to be refinanced", he said.
FT Lex offers the cryptic view that UK banks are "a pure bet on economic recovery", which may be true for bank shares, but it is worse than that; the banks are deleveraging too much and this must have a chain and ball drag effect on economic recovery. Serving the need to free up reserves, refinance funding gaps when interbank deposits and loans are still in retreat like a tidal undertow, and generally shrinking banks' balance sheets are contradictory demands. The government's pleas to banks in UK (and in USA)to maintain pre-crisis customer lending levels, followe by pleas (and verbal more than written agreements)to at least go some way to grow customer lending is looking like King Canute's bidding.
The banks are not getting it together to significantly assist economic recovery, and this must again raise questions about their wider responsibility and usefulness.
No comments:
Post a Comment