Back to the banks and their troubles

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by Shaun Richards

Tucked away in the Covid news over the past few business days has been one of our longest running themes. The original credit crunch story was one of the banks and their collapse and supposed renewal or as they are officially described these days a state of being “resilient”. On this road we saw interest-rate cuts on a grand scale and then central bank bond buying ( QE) to reduce longer-term interest-rates and bond yields. This was to boost their balance sheet via the assets that they have ( loans to us) which are improved by house prices being higher. Actually it did not work so then we saw the various credit easing policies to more directly support this area. The UK opened with the Funding for Lending Scheme which cut mortgage rates by up to 2% according to the Bank of England. Since then we have seen ever more negative bond yields including in the UK as well as the Euro area providing a direct subsidy to banks via the latest TLTROs offering -1% to qualifying banks. Oh and you qualify basically by being a bank in these circumstances.

Except that in spite of all of that we never really achieved “escape velocity” for the banks. They muddled on continuing to be a milch cow for directors and the like but a corner was always about to be turned on a Roman road and we have all been singing along to Talking Heads.

We’re on a road to nowhere
Come on inside
Taking that ride to nowhere
We’ll take that ride
I’m feeling okay this morning
And you know
We’re on the road to paradise
Here we go, here we go

Perhaps the most extreme example has been the Italian banks which have seen a litany of rights issues, a private-sector bailout ( Atlante) which made the stronger banks weaker. and outright bailouts which ignored Euro area rules. All that can-kicking crunched straight into the Coivid-19 pandemic. But if we return to the UK we have had our own issues.


This morning what is our largest bank these days has released its results and we are immediately placed om alert by the use of the word “resilient”.

Our performance in the first half of 2020 was heavily impacted by the COVID-19 outbreak. In Asia, our business was resilient, demonstrating the strength of our operations.

So resilient in fact that profits fell by 65%.

Reported profit before tax fell 65% to $4.3bn, amid higher expected credit losses and other credit impairment charges (ECL) and lower revenue. Reported ECL of $6.9bn were $5.7bn higher than in 1H19

As you can see we have had “bad loans” “sour loans” “non performing loans” and now “ECLs”. Indeed the use of an acronym is an especially worrying portent.

Here is the view of Group Chief Executive Noel Quinn

“We are helping our customers navigate their own path through uncertainty and acting with pace and decisiveness to adapt HSBC to an environment in which no business can afford to stand still.”

I wonder if he had any idea what that means?

Tucked away in his section we do get a snapshot of the economy as we note this.

Lending decreased by $18bn in the first half.
Customers initially drew on new and existing
credit lines in the first quarter in response to
the Covid-19 outbreak, but began to pay these
down in the second quarter as circumstances

So for all the rhetoric about recovery and banks helping we see that HSBC has in fact retrenched in loan terms. Also we get another insight to the rise in saving we have noted before.

Deposits rose by $93bn in the first
half, as customers increased their cash
reserves and reduced their spending
during lockdown.

This bit is also revealing.

Geopolitical uncertainty could
also weigh heavily on our clients, particularly
those impacted by heightened US-China and
UK-China tensions, and the future of UK-EU
trade relations.

Firstly Brexit is no longer at the top of the list which is both good and bad. But for HSBC we are reminded of its Far Eastern presence and footprint which is also good and bad. The Hong Kong bit is plainly bad right now and as for China well the jury remains out.

Royal Bank of Scotland

Things were so grim here that the only solution was provided by the way that the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield. So let me welcome the Nat West Group which of course is a type of back to the future.

However, NatWest Group has a robust capital position, underpinned by a resilient, capital generative and well diversified business.

( Chief Executive Officer Alison Rose)

This means that they are worried about their capital position and exposure to some areas. There are five key messages about this bank of which one caught my eye.

Focused on generating shareholder value. Committed to resuming capital distributions when appropriate

As a UK taxpayer I note that I was invested in this bank at around £5 and the share price as I type this is £1.06 so I think we as taxpayers should ask them to focus on something else!

The numbers are pretty poor.

H1 2020 operating loss before tax of £770 million and operating profit before impairment losses of £2,088 million.
● Net impairment losses of £2,858 million in H1 2020, or 159 basis points of gross customer loans, resulted in an expected
credit loss (ECL) coverage ratio of 1.72% across the Personal and Wholesale portfolios.

In essence banking is losing money whilst punting the markets or perhaps front running the central banks is doing well.

In comparison to H1 2019, across the retail and commercial businesses income decreased by 9.0% whilst NatWest Markets income excluding asset disposals/strategic risk reduction, own credit adjustments (OCA) and notable items increased by 44.4%.


When it reported last Thursday things looked not so bad for a while.

Trading surplus of £3.5 billion, a reduction of 26 per cent compared to the first six months of 2019, providing still significant
capacity to absorb impairment impacts of the coronavirus crisis

But if you looked further down.

Statutory loss before tax of £602 million and statutory profit after tax of £19 million, both impacted by income
developments and the increased impairment charge. Tangible net asset value per share of 51.6 pence.

Mr and Mrs Market do not seem convinced by that asset value as the share price is 26 pence. Surely this is an enormous opportunity for the directors to invest their own money based on their own published view? In the case of CEO Antonio Horta-Osario his £6.3 million a year would provide a solid boost.

Bank in the real world the hype.

Loan to deposit ratio now 100 per cent, providing significant potential to lend into recovery, with a strong liquidity position

becomes this.

Loans and advances at £440 billion were stable compared to the year end but reduced by £3 billion in the second quarter


Rather than go through the figures we can focus on the gap between tangible net assets per share of £2.84 and a share price of £1.01 as I type this.



When all this began the incoming Governor of the Bank of England assured us it would be different this time.

Well, I would just add that, as many of you know, we are still dealing with some of the more painful elements of the consequences of the last crises for small firms, and we don’t want that again, thank you, and there’s a very clear message to the banks-, and, by the way, which I think has
been reflected in things that a number of the banks have already said. So, it’s important to take that into
consideration, that, you know, you have all the resources and all the wherewithal to see through this
issue, the shock, and to support the economy and to support businesses, and that’s a very strong

Many of you may also recall when he said that they could lend 13 times as much to support businesses. Meanwhile the releases above show falls in bank lending.

Yet the blundering goes on.

Nationwide re-joined stalwart lenders such as HSBC to offer 90 per cent deals last month, exclusively for first-time buyers, with an additional condition.

Buyers will need to prove that at least 75 per cent of their deposit has come from their own savings, ruling out deposits that have been gifted entirely from parents.

For a bank the issue is repayments not deposits.

With all this success and resilience we should be……oh hang on.



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