Branch closure problem could be solved by caring, sharing banks
Bank branch closures can be very inconvenient, especially for rural customers (Lloyds axes 3,000 jobs and 200 branches, 29 July). Not all banking can be done online – small businesses regularly need to deposit cash and cheques. Couldn’t banks share a branch? There could be a cashier position from each of three or four banks in the same building, with independent IT systems but perhaps some shared back-office staff. This would enable more bank “branches” to remain open to their various customers, with significant reductions in property overheads. Steve Pardoe West Burton, North Yorkshire
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Hands up if you were right about the post-Brexit economy
The second episode of US political drama The West Wing is entitled Post Hoc, Ergo Propter Hoc – in which smarty-pants President Josiah Bartlet educates his minions on the meaning of the Latin phrase after his unpopularity in Texas is blamed on one of his gags. “After it, therefore because of it,” he puffs. “It means one thing follows the other, therefore it was caused by the other. But it’s not always true. In fact, it’s hardly ever true. We did not lose Texas because of the hat joke.”
The dialogue’s wonderfully self-satisfied, of course, but we could perhaps do with a touch of this kind of rebuttal in real-life politics here. When it comes to Brexit, each side seems to be indulging in the same kind of confirmation bias as Bartlet’s advisers, with each week bringing new economic data that convinces both campaigns they were right.
Last week the economy was shown to be either in rude health or about to crash following June’s vote. Prepare for more of this self-justification this week after the CBI’s “mixed picture” on the economy is published on Sunday, the thinktank NIESR issues an economic update on Wednesday, and the Bank of England has a big statistics day on Thursday.
The numbers will all show that everybody who opined on the referendum was right all along. There will be no exceptions.
Chasing the odds on Ladbrokes and Hill’s
Perhaps the only section of the UK that cannot now claim to have been right about the referendum is the bookmaking industry, which heroically managed to call events even more incorrectly than our opinion pollsters.
No matter, they will be out in force this week, with both Ladbrokes and bitter rival William Hill announcing results – which should be buoyed by decent returns at Euro 2016.
Still, unusually for a bookie, William Hill is in the middle of an unlucky streak that has involved it losing (a) at the Cheltenham festival; (b) its tag as the UK’s best run bookie; and (c) its chief executive, following the departure of James Henderson earlier this month. Hills is also now possibly the subject of a takeover deal involving online gambling group 888 Holdings and bingo hall operator Rank Group – which is a bit humbling: last year William Hill was bidding for 888.
Also up is Ladbrokes, which is about to merge with rival Coral – assuming the pair can sell between 350 and 400 betting shops to get the deal through competition regulators.
The market reckons the likely buyers will be Betfred or, possibly, Boyle Sports. Developing.
Borrowing? The drinks are on NatWest …
The doyen of City journalism, Christopher Fildes, has always been fond of quoting Sibley’s law. Giving capital to a bank (said the worldly banker, Nicholas Sibley) is like giving a gallon of beer to a drunk. You know what will become of it, but you don’t know which wall he will choose.
The financial crisis, of course, proved Sibley’s maxim yet again, but just because his words keep reflecting reality, please don’t think these things are achieved effortlessly: the challenge for bankers is to continue to find new ways of losing other people’s money – and last week they alighted on a gem.
Without a hint of irony, NatWest, part of the bailed-out-by-the-taxpayer Royal Bank of Scotland, paved the way for the introduction of negative interest rates for the first time in Britain. The warning could mean that an account holder with £1,000 in a NatWest account might see that shrink to £999 or less the following year.
Obviously NatWest is blaming extremely low global interest rates for this idea, but expect plenty more questions on the plan during the week, as RBS and rival HSBC report results – while the Bank of England’s monetary policy committee also meets to set interest rates. First question to NatWest: if you charge savers, how much will you pay borrowers?
Analysts surprised at poor performance of two UK high street banks under imagined scenarios of economic turbulence
Analysts are scrutinising the potential hit Royal Bank of Scotland and Barclays could take to their financial strength at times of market turbulence following the publication of EU-wide health checks on the financial sector.
The Bank of England said the stress tests, which were overseen by the pan-European banking regulator, showed the UK banking sector was resilient enough to cope with downturns in the economy and the markets.
Barclays, however, which on Friday had reported profits of £2bn for the first half of 2016, ends up with a 7.3% capital ratio - about a four-percentage-point knock - at the end of 2018 under the regulator’s three-year test conditions. RBS takes a seven-percentage-point hit and its capital ratio falls to 8%.
Of the 51 banks tested, one – Italy’s Banca Monte dei Paschi di Siena – had its entire capital base wiped out under the imaginary scenario of a big drop in economic growth.
Policymakers and investors had been on alert for a poor performance by the Italian bank. It announced a package of measures to shore up its financial position, a move it will hope prevents a meltdown in the Italian banking sector, which could send shock waves through the markets.
Banks from Italy, Ireland, Spain and Austria fared worst in the tests. None of the four UK banks – Lloyds and HSBC were also tested – dropped below the legal minimum of 4.5% capital ratios. The European Banking Authority did not set a pass or fail level as it did in 2014, when it last conducted tests and set a minimum of 5.5%.
Analysts at Bernstein said the drop in the capital levels of Barclays and RBS – which is 73% owned by the government – was a surprise, and forecasted a bigger knock than had been predicted during separate assessments conducted in previous years by the Bank of England’s regulation arm, the Prudential Regulation Authority.
“The adverse results on these two as compared to the PRA stress tests from last year definitely came as a surprise to us,” they said. “The EBA stress tests are an input into the capital process for the UK banks but the key test of the banks will actually be in the Bank of England stress tests later this year.”
The tests are set on each bank’s financial position at the end of 2015 and projects how they would fare by the end of 2018 without taking any steps to sell off businesses or other management efforts to raise capital.
The analysts at Bernstein said it “puts to bed any dividend hopes for the [RBS] till at least the end of next year”. The government is finding it tricky to sell off its stake because the share price is trading lower than the average 50.2p it paid. RBS shares are trading at about 190p.
Their view is that for Barclays the disposal of businesses such as those in Africa instigated by its new chief executive, Jes Staley, would be important.
Barclays said the stress tests result did not take account of these sell-offs. “The stress test has been carried out applying a static balance sheet assumption as at December 2015, and therefore does not take into account subsequent or future business strategies and management actions. It is not a forecast of Barclays’ profits.”
RBS’s finance director, Ewen Stevenson, said the results showed the bank’s “continued progress towards transforming the balance sheet to being safe and sustainable”. He said: “We are confident that in delivering our strategy, we will transform RBS into a low risk, resilient bank.”
HSBC’s capital falls to 8.7% under the scenarios and Lloyds Banking Group, which is 9% owned by the taxpayer, to just above 10%. “These results are significantly above the group’s minimum capital requirements,” said Lloyds. HSBC said: “Today’s results demonstrate HSBC’s continuing capital strength.”
No banks from Cyprus, Greece or Portugal were big enough to fall within the scope of the test, which looked at four main risks: a rise in bond yields; rising public and private sector debt; weak profits at banks; and stresses from outside the banking sector.
The cost of possible fines and legal action for wrongdoing was also included, and David Strachan, a partner at Deloitte, said 15 banks estimated an impact of so-called conduct risk of more than €1bn (£840m). “Analysts are likely to pore over the results for some time. Differences in capital positions between two banks could be superficial,” he said. “What matters more is to understand the full regulatory capital requirement for each bank, and its capacity and flexibility to take actions to respond to the shock. This complexity may add difficultly in initially understanding the results.”
Royal Bank of Scotland was third-most affected of 51 banks tested, while Barclays also fared poorly under stress scenario
The Royal Bank of Scotland has taken the biggest hit to its financial strength of any UK bank subjected to European-wide health checks on major banks.
The 73% taxpayer-owned bank insisted that despite being the third-most affected of any of the 51 banks, it was well on the way to becoming stronger and more risk-averse.
Its capital ratios fall by more than seven percentage points under the tests imposed by the European Banking Authority and, under the imaginary scenario, ends up with an 8% capital ratio. The absolute minimum is 4.5%.
It means that RBS, like Barclays, is among the 15 weakest banks tested.
But the tests do not allow the banks to take any actions, such as selling off risky operations between the test period of 2015 and 2018.
The Bank of England, which will conduct its own tests later in the year, said: “The results for the four banks [RBS, Barclays, Lloyds Banking Group and HSBC] are consistent with those of previous Bank of England stress tests.
“They provide evidence that major UK banks have the resilience necessary to maintain lending to the real economy, even in a macroeconomic stress scenario.”
Ewen Stevenson, RBS’s finance director, said the stress test results showed the bank’s “continued progress towards transforming the balance sheet to being safe and sustainable”.
“We are confident that in delivering our strategy, we will transform RBS into a low risk, resilient bank,” he said.
The Edinburgh-based bank, which publishes its results on 5 August, is braced for a penalty from US regulators for the way it sold mortgage bonds in the run up to the 2008 banking crisis, which could amount to £8bn.
When a bank closes its doors, lending to small businesses in the area declines, damaging the local economy
The news that Lloyds will be closing yet more branches will not come as much of a surprise given that almost two banks are closing their doors every single day and more than 1,500 communities no longer have access to even a single branch.
There will be more bad news to come, and it will be local businesses and ordinary people in deprived areas that will pay the price as banking executives grapple with the costs of Brexit on top of £75bn in fines, compensation and legal expenses thanks to previous misdeeds.
A bank closing its doors reduces SME lending growth in that areaby 63% on average, rising to 104% when the branch in question is the last in town. The impact is hugely damaging to the local economy, especially as in nine out of 10 cases the banks that are closing are situated in areas where median household income is below the national average of £27,600.
Move Your Money, a not-for-profit organisation that campaigns for ethical banking, has found that the closure of a bank branch sees lending to businesses in that postcode fall by £1.6m over the course of a year. This is a huge loss of investment in areas where unemployment is high and high streets are full of boarded up shop fronts.
Over two-thirds of small business customers state that having access to a bank branch is important to them, and the importance of a high street branch stretches far beyond traders having somewhere to go to deposit their cash or nascent firms having ready access to capital.
When a bank shuts up shop more often than not the cash machines disappear too and every local business in the vicinity suffers from the knock on effect. Despite the rise of chip and pin and contactless payment methods, cash still accounts for almost half of all high street sales and three-quarters of sales at newsagents and convenience stores.
Furthermore, for every withdrawal from an ATM £16 – amounting to £36bn a year – is injected directly into local stores, meaning more than a third of total high street spending is directly reliant on easy access to a cash machine.
Lloyds have not yet confirmed exactly which further branches will be closed, but in all likelihood it will branches in areas that are already struggling and can least afford to see the local economy atrophy in this way.
The banking industry and the government will continue to point to the Access to Banking Protocol as evidence that the public interest and local communities are being protected when banks close branches. But the Access to Banking Protocol is not fit for purpose – it is just window-dressing for the big banks and government alike to hide behind so it appears that they are doing something about branch closures.
What is the point of consulting with local people and businesses once the decision has already been taken? A consultation can only be meaningful if it takes place in advance of any decision on closure. An independent review of the Access to Banking Protocol is currently under way, but unless the government wakes up and stops listening to the banking lobbyists before it’s too late, the promises that will be inevitably made at every budget and autumn statement about supporting small businesses in this country should be taken with a large pinch of salt.
In their advertising and marketing campaigns, the big banks are keen to position themselves as the friends of small businesses, but nothing could be further from the truth. To paraphrase Saint Teresa of Avila, if this is how banks treat their friends, it is no wonder they have so few.
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Fund was over-optimistic, failed to spot scale of problem and gave impression it was treating Europe differently, says report
The IMF’s handling of the financial crisis in the eurozone has been criticised by the organisation’s own independent watchdog in a report that says the fund failed to spot the scale of the problem, was guilty of over-optimistic forecasts and left the impression that it was treating Europe differently.
While accepting that sorting out the problems of Greece, Ireland and Portugal “posed extraordinary challenges”, the IMF’s Independent Evaluation Office (IEO) said the fund had missed the buildup of banking system risks in some countries and shared the widely held “Europe is different” mindset.
The report looked into how the IMF handled the eurozone crisis, which began with the May 2010 bailout of Greece, but subsequently spread to Ireland, Portugal and Cyprus.
It found that the “IMF’s pre-crisis surveillance identified the right issues but did not foresee the magnitude of the risks that would later become paramount”.
The IEO added that by May 2010 the fund was worried about the risks of contagion and had to “modify” its own rules to allow exceptional financing for the government in Athens.
The terms of the bailouts for stricken eurozone countries were organised by the so-called troika of the IMF, the European commission and the European Central Bank. According to the IEO this was an efficient mechanism for conducting discussions with governments but at the expense of the IMF’s “characteristic agility as a crisis manager”.
Greece has seen the size of its economy shrink by about 30% over the past six years, a much worse performance than the fund anticipated. The IEO concluded that “IMF-supported programmes in Greece and Portugal incorporated overly optimistic growth projections; lessons from past crises were not always applied”.
Noting that conducting the evaluation had been “challenging”, the IEO said there had been a lack of clarity about what it could or could not evaluate. “The IMF’s handling of the euro area crisis raised issues of accountability and transparency, which helped create the perception that the IMF treated Europe differently.”
The IEO made five specific recommendations, including that the fund’s management and executive board should develop procedures to limit political meddling in the organisation’s technical analysis; that processes should be strengthened to ensure agreed procedures are followed and only changed after careful deliberation; and that there should be a renewed commitment to accountability and transparency.
Christine Lagarde, the fund’s managing director, said: “Overall, the conclusion I draw is that the fund’s involvement in the euro area crisis has been a qualified success.”
Lagarde added that the crisis in the euro area was unprecedented and that fund-supported programmes had “succeeded in buying time to build firewalls, preventing the crisis from spreading, and restoring growth and market access in three out of four cases” (Ireland, Portugal and Cyprus).
The IMF managing director admitted that with the benefit of hindsight, assumptions about growth in Greece had proved much too optimistic.
“Greece, however, was unique: while initial economic targets proved overly ambitious, the programme was beset by recurrent political crises, pushback from vested interests, and severe implementation problems that led to a much deeper than expected output contraction.
“On the other hand, Greece undertook enormous adjustment with unprecedented assistance from its international partners. This enabled Greece to remain a member of the euro area – a key goal for Greece and the euro area members.”
Lagarde said she did not accept that there had been political interference in the fund’s technical analysis but gave the IEO recommendations either full or qualified backing.
“In summary, the crisis in the euro area was extraordinary,” Lagarde said. “It posed unprecedented challenges that, with the global financial crisis providing tinder, could have rapidly spread through Europe and beyond. The fund, in conjunction with our membership, our partners in Europe, and the wider global community, took steps that averted what could have been a much more severe European and even global crisis.”
‘Market volatility’ postponed George Osborne’s plan for Lloyds retail offer – the new chancellor should play the long game
Be grateful, dear retail investor, that George Osborne never got a chance to unleash his mass-market offer of shares in Lloyds Banking Group. The former chancellor had planned to sell discounted stock to the populace at 70p apiece, or thereabouts. Lloyds’ shares now fetch just 52.5p in non-discounted form.
The other side of the story, of course, is that Osborne did well to shift more than a few Lloyds shares to City institutions at prices that now look pretty only from the seller’s point of view. The reduction in the state’s stake from 43% in 2009 to 9% today was achieved at an average price of 79p. It is a rare of example of the City being a medium-term loser in a government sell-off.
In January, “market volatility” was blamed for the postponement of the Lloyds retail offer. Now, Brexit has surely delayed the spectacle for ages. Philip Hammond, Osborne’s successor, would be silly to attempt a revival at the current share price when he has a credible alternative strategy: do nothing.
Brexit has dented the idea that Lloyds would suddenly turn into a dividend gusher, which is why the share price has fallen by 23% since the referendum. The bank’s capital-generating capacity may have reduced by about a fifth owing to various technical tweaks, like adjustments to risk weights. Low interest rates, for even longer, won’t help profit margins. And, if the UK’s short-term growth prospects are weaker, so is Lloyds’ earnings potential: as the country’s biggest bank, it is a geared bet on the UK economy.
But some details of Lloyds’ tale are unaltered by Brexit. Disasters like provisions for PPI mis-selling are washing out of the system, which was the main reason why statutory pretax profits doubled to £2.45bn in the first half of the year. Meanwhile, chief executive António Horta-Osório can continue his attack on costs; another 3,000 posts are going. And, barring a serious crash in house prices, the mortgage book looks sound.
Add it all up and Lloyds should still be able to afford a dividend this year of 2.55p a share, or maybe a touch more. It’s just that a special dividend sweetener probably won’t happen. But 2.55p equates to a dividend yield of 4.8%. That’s not so bad. Hold the shares, Mr Hammond, if you want to signal confidence in the UK’s post-Brexit prospects.
Could Hinkley Point C yet be derailed?
EDF of France has taken the plunge and will sign the contract to build a nuclear power station at Hinkley Point in Somerset. But should you really approve an £18bn project on the basis of a 10-7 boardroom majority?
That slim margin does not generate confidence. EDF’s executives could not convince the workers’ representatives on the board to show solidarity. And, before the crucial meeting, a state-appointed director resigned, saying Hinkley was “very risky”. EDF’s last finance director did the same a few months ago.
It is still hard to believe this project will proceed, whatever is said about the decision being “final”. The UK has offered a contract to a company that looks fundamentally divided, is carrying a mountain of debt and is permanently at the call of a changing cast of French politicians.
Meanwhile, our own National Audit Office has rightly questioned the economics of Hinkley, which look grotesque for UK consumers. This would be the world’s most expensive power station, to be constructed to a design that is not even proven.
Events could still derail this absurd adventure. Let’s hope so.
Rolls-Royce revs up but there’s a way to go
A share to have bought on 24 June was Rolls-Royce: it’s up by almost a third since the referendum. Part of that bounce is mechanical. It’s great to have half your costs in the UK when you are selling engines for dollars. The other part, which yielded a 13.5% rise in the share price on Thursday, is about confidence in management.
Chief executive Warren East has clearly learned from his predecessors’ mistakes. When he arrived from ARM Holdings a year ago, he set expectations low. He grumbled about accounting “fog” and pleaded for time to unpick a top-heavy management structure. The City was half-braced for yet another profits warning.
In the event, yesterday’s half-year numbers delivered the reverse. A break-even position was on the cards but Rolls produced underlying pretax profits of £104m. That was still 80% lower than a year ago, but East now sounds vaguely cheerful. The target was to achieve cost savings of £150m to £200m by the end of next year. At the current rate of progress, it will happen sooner.
For his next trick, East may have to contain shareholders’ excitement. Some may already be dreaming of the day that Rolls matches arch-rival General Electric’s profit margins and boosts its annual profits by £1bn. It’s a nice ambition to pursue but, in a long-term business like engine manufacturing, progress is measured over decades.
High street bank seeks to cut costs in anticipation of interest rate cut and cites 15% fall in use of branches
Lloyds Banking Group is to axe 3,000 jobs and close 200 branches as it races to reduce costs in anticipation of a cut in interest rates.
Mark Carney, the Bank of England governor, signalled that an interest rate cut would take place during the summer and the City now expects rates will be cut from their 0.5% historic low on 4 August.
Lloyds is also blaming a fall in the use of branches by customers for the job cuts, which come on top of 9,000 announced in a three-year cost-cutting programme in October 2014. These followed 45,000 jobs that went after the rescue of HBOS during the 2008 crisis. Lloyds, which also owns Halifax, now employs about 75,000 people.
The announcement came as Lloyds – which is 9% taxpayer-owned and the UK’s biggest mortgage lender – revealed it was being investigated by the Financial Conduct Authority for the way it handled customers who were having difficulty paying their mortgages.
Unions reacted furiously to the cuts. Ged Nichols, general secretary of the Accord union, which represents 22,000 staff who joined Lloyds from Halifax, said he was seeking urgent talks with the bank.
“The loyal, dedicated and customer-focused employees in the Lloyds Banking Group are still reeling from recent job losses. They will be bewildered by today’s news and wonder what has happened that is so catastrophic that these further job cuts and branch closures are necessary. Interest rates might be lower for longer but why are job losses higher and faster? Where will the axe fall next?” said Nichols.
Other union officials said customer service could be damaged. The Unite national officer Rob MacGregor said: “This grim news of yet more job losses and branch closures will send a shiver down the spine of Lloyds employees, who have worked hard to make the bank a success and deliver excellent customer service against a backdrop of continual uncertainty.”
The bank had already earmarked 200 branches for closure by 2017 so the latest announcement means that 400 will be shut by the end of next year.
António Horta-Osório, Lloyds’ chief executive, said the decision to cut jobs – which will save £400m – had been tough. But, he said, use of branches had fallen by 15% year on year, faster than had been the case at the time of the previous announcement to cut jobs.
He said he expected the Bank of England to cut rates to 0.25% but that policymakers would avoid negative rates because of the bad signal it would send about the economy. Neither did he expect to follow the move by Royal Bank of Scotland to warn customers that it might have to charge for deposits.
Horta-Osório was speaking as the bank reported a doubling of first half pre-tax profits to £2.5bn. He focused on the underlying profits – which exclude restructuring costs and other items – which were down 5% at £4.1bn.
In the immediate aftermath of the vote for Brexit the Lloyds share price dived below 50p – well below the 73.6p average price at which taxpayers bought their stake in the bank, which has fallen from 43%. After the results announcement, the shares were trading 4% lower in early trading at 53.5p.
Horta-Osório said: “Following the EU referendum the outlook for the UK economy is uncertain and, while the precise impact is dependent upon a number of factors, including EU negotiations and political and economic events, a deceleration of growth seems likely.
“Given the sustainable recovery in recent years, the UK economy enters this period of uncertainty from a position of strength and is well positioned to face any economic headwinds.”
The Brexit vote also drove sterling to 31-year lows at one stage and this has reduced the amount of capital the bank holds as it increases the value of its riskiest assets. Horta-Osório admitted that it might be difficult to generate as much surplus capital – which might be paid out in dividends – as might have been the case.
“Given the uncertainty, it is too early to determine the impact on our formal longer term guidance at this stage. However, while the business will remain highly capital generative, it is possible that this capital generation may be somewhat lower in future years than previously guided. We will formally update guidance when we have a clearer view of likely outcomes,” he said.
As a result of buying HBOS – which includes the former Halifax building society – Lloyds has 2.7 million retail investors and is paying a 0.85p per share dividend, up 13%.
George Osborne, when he was chancellor, had promised to sell the remaining taxpayer stake to the public at a discount but it is not clear how his successor, Philip Hammond, will tackle any sell-off given the fall in the share price.
The bank maintained its profit guidance – measured by net interest margin – for 2016 but did not spell out what it expected next year.
The prospect of special dividends had helped propel the share price last year. “Lower capital generation impinges on the bank’s ability to return cash to shareholders,” said Laith Khalaf, a senior analyst at the broker Hargreaves Lansdown. “Lloyds has increased its interim dividend significantly, but if the Brexit axe is to fall anywhere it’s likely to be on the special dividend at the end of the year.”
Figures are published before latest EU bank health check results are revealed
Profits at Deutsche Bank fell sharply in the first half of the year, Germany’s biggest lender has revealed, as the markets await the results of health checks on EU banks which could shed light on its financial strength.
Deutsche’s chief executive said he may have to accelerate cost-cutting measures after revealing pre-tax profits in the second quarter of the year had fallen 67% and after tax had collapsed by 98% to €20m (£17m).
“We have continued to de-risk our balance sheet, to invest in our processes and to modernise our infrastructure. However, if the current weak economic environment persists, we will need to be yet more ambitious in the timing and intensity of our restructuring,” said John Cryan, the Briton appointed to turn around the German bank’s fortunes.
In the first half of the year, its profits fell to €987m from €2.7bn but the results were better than expected and the shares rose 3%.
The new figures are published before the publication of the latest round of stress tests on EU banks – the outcome of which will be known at 9pm London time on Friday – with much of the focus on Italy, particularly Monte dei Paschi di Siena (MPS), the world’s oldest bank. The tests assess banks’ ability to withstand economic shocks such as a stock market crash.
But analysts at Barclays said Deutsche Bank was “potentially in regulators’ crosshairs, too”. According to their calculations, Deutsche was second only to MPS when it re-ran this year’s stress tests against the last ones in 2014.
MPS, Deutsche Bank, BNP Paribas, Unicredit potentially most vulnerable. Photograph: Barclays
Unlike in previous years – since the financial crisis in 2008 stress tests have been run in 2011 and 2014 – there is no pass or fail hurdle rate for the 51 banks being tested. The Barclays analysts, however, compared their estimated results for the 2016 tests with the pass rate of 5.5% used two years ago. On one reading, only MPS would be vulnerable. But they said the market might look for capital strength closer to 7.5%.
“This would imply that Deutsche Bank, BNP Paribas and UniCredit are potentially vulnerable, too,” the Barclays said.
Deutsche Bank’s closely watched capital ratio, a measure of its financial strength, rose slightly to 10.8% at the end of June and will rise further once the sale of a Chinese business in completed. The bank is €25bn ahead of its capital requirements for 2019.
The bank – described by the International Monetary Fund as the riskiest of all the big banks – was caught up the stock market rout at the start of the year when its shares were pummelled and it was forced to issue statements about its financial health. On Wednesday, Cryan said he was “satisfied with the progress we are making”.
Cryan is aiming to tackle a number of regulatory investigations facing the bank this year, including one with the US justice department with which Deutsche has started talks over the way it sold mortgage bonds in the run-up to the 2008 banking crisis.
Deutsche bank, which employs 11,000 in the UK, included a statement about the impact on its operations as a result of the vote for Brexit.
“Following the UK referendum on EU membership, we do not currently believe significant changes will be required to our current UK structure or business model in the short term as a result of the referendum.” the bank said.
The Barclays analysts said the stress tests results may “act as a catalyst for finding a way forward” with the bad debts hanging over Italian banks and MPS in particular.
“The absence of a solution for Monte dei Paschi would likely incur a severely negative market reaction,” Barclays said.
The accountancy firm is keen to shout about the importance of accepting responsibility – but not when it comes to acting for Dominic Chappell
As Sir Philip Green attempts to “sort” the deficit in BHS’s pension funds by taking his gin palace on a tour of the Mediterranean, let’s not forget the minor players in the debacle. Take accountancy firm Grant Thornton, which advised Dominic Chappell, the “wholly unsuitable” three-time bankrupt who bought the business.
The two committees of MPs were scathing in their assessment of the roles played by Grant Thornton and fellow adviser Olswang, a legal firm. These City outfits were “increasingly aware” of the “manifold weaknesses” of Chappell’s acquisition vehicle, yet were “content to take generous fees and lend both their names and their reputations to the deal”.
We don’t know how generous those fees were, because neither firm will say. Indeed, they pleaded client confidentiality on several matters. The MPs took a dim view of this, too. The firms “adopted a very wide interpretation of confidentiality” and “sheltered behind these duties when their interests – and that of the public – would have been better served by full and frank disclosure to legitimate parliamentary scrutiny”.
Presented with such strong criticisms, you might expect Grant Thornton, in particular, to engage in some self-examination. The firm, after all, aspires to be grander than a mere bean-counter. Sacha Romanovitch, the new chief executive, is on a mission to display Grant Thornton’s cuddly, inclusive side.
In Director magazine in April, she described her “vibrant economy” initiative: “All of us in the UK, if we’re going to thrive, and pass on something better to the next generation, we’ve all got a responsibility to step up and drive the things that are going to create growth.”
Jolly nice, but how about stepping up and driving a review of the type of clients Grant Thornton is prepared to accept? A rethink on confidentiality policies would also be useful to avoid coming across as evasive in front of MPs.
Neither thought was mentioned in the firm’s brief and defensive response to the committees’ report. Instead, Grant Thornton pleaded that it was only doing “financial due diligence” for Chappell’s crew in the pre-acquisition period. Its post-deal consultancy work was undertaken because it believed it had “experience of real value to share with BHS and its management”. There was no admission that Grant Thornton lost its moral compass or has lessons to learn.
Note to Ms Romanovitch: if you really want to pass on something better to the next generation, try addressing the criticisms of the current generation of MPs.
Skirting around the issue of executive pay
Here’s a gift for Theresa May as she attempts to solve the troubling question of executive pay: a 10-point plan. What’s more, it comes from a panel assembled by the Investment Association, a body that carries clout because its members manage £5.5tn in assets. Better still, the chair of the panel is Nigel Wilson, who in his day job as chief executive of Legal & General has established a reputation as a free-thinker who doesn’t tolerate waffle.
But, oh dear, Wilson has become a pussycat. About eight of the 10 points are utterly mundane. “Remuneration committees need to exercise independent judgment and not be overreliant on their remuneration consultants,” reads one recommendation.
Well, yes, but that means simply that non-executive directors should do what they are paid to do and make up their own minds. It doesn’t address a broader governance problem identified by the prime minister: that, in practice, non-executives “are drawn from the same narrow social and professional circles as the executive team and – as we have seen time and time again – the scrutiny they provide is just not good enough”.
This diagnosis led May to propose putting employee and consumer representatives on boards. We wait to see if she is serious. But, if you’re opining on pay and name-checking May in your introduction, surely you are obliged to address her big idea. Wilson’s panel didn’t.
It also sidestepped the issue of the sheer size of pay packets at some FTSE 100 companies. “The working group does not feel it is their role to recommend absolute levels of remuneration; this is a matter for individual boards.” So, was it OK for BP to pay its chief executive Bob Dudley £14m despite the objections of shareholders expressed in an advisory vote? It’s hard to tell, because the panel couldn’t even make up its mind on binding votes.
“We need to restore public confidence in executive pay,” declared Wilson at the launch of the report. You won’t succeed with a 10-point plan as limp as this one.
Returning to Europe – in a manner of speaking
Welcome to Standard Chartered, José Viñals, formerly deputy governor of the Spanish central bank and a departmental head at the International Monetary Fund in Washington. But are you sure you’ve chosen the right bank to chair?
The press release from the IMF says you want to “return to Europe for family reasons”. Standard Chartered’s operations in Europe are tiny. For £1.25m a year, the chairman is expected to spend a lot of time hob-nobbing with important folk in China, India and Africa.
Former Portuguese PM and head of EU commission will help Wall Street firm deal with fallout of Brexit vote in non-executive advisory role
José Manuel Barroso, the former Portuguese prime minister and one-time head of the European commission, has been hired by Goldman Sachs to help it deal with the fallout from the UK’s shock vote to leave the European Union.
Barroso, who was president of the European commission for 10 years until 2014, is becoming chairman of Goldman Sachs International – the bank’s UK and European operations – and will also be an adviser. His pay has not been disclosed.
He replaces Ireland’s former attorney general Peter Sutherland who left in May 2015 and whose position had been temporarily filled by the Swedish businessman Claes Dahlback, another non-executive director.
Barroso joins Goldman Sachs as the investment bank is not only tackling Brexit but is also facing questions about its involvement in BHS, the retailer that collapsed in April. It is also fighting a court case brought by the Libyan Investment Authority for losses on trades during the 2008 financial crisis.
He told the Financial Times (£) that one of the most difficult elements in the UK’s Brexit negotiations would be over passporting rights – the ability to trade from the UK across to what will now be a 27 nation bloc.
“What I know for sure is that on both sides it will be intelligent and wise to have a fair negotiation,” he told the FT. “Nobody wins from a confrontation.”
He said he would attempt to mitigate the negative effects of the referendum result. “Of course I know well the EU, I also know relatively well the UK environment,” Barroso said. “If my advice can be helpful in this circumstance I’m ready to contribute, of course.”
During his final period of tenure at the commission, Barroso was critical of David Cameron’s handling of the EU and the prime minister’s ambitions to impose a cap on immigrants from eastern Europe. While he was head of the commission, Barroso was at heart of the banking crisis and the ensuing fallout which gripped the eurozone. He has been critical of the behaviour of banks.
“As president of the EC, I was leading an overall effort of regulation and supervision, including the creation of banking union in the euro area, to bring back stability, credibility to the financial sector,” Barroso told the FT.
Before taking the EC role, Barroso was prime minister of Portugal between 2002 and 2004.
The co-heads of Goldman Sachs International, Michael Sherwood and Richard Gnodde, said that Barroso had been hired for his understanding of Europe. “We look forward to working with him as we continue to help our clients navigate the challenging and uncertain economic and market environment,” they said in a joint statement.
Documents show FCA twice told Bank about potentially serious outflows from commercial property trusts and that funds could be suspended
The Bank of England was warned of the possibility that commercial property funds may be suspended because of the rate of withdrawals prompted by the Brexit vote.
Documents released by Threadneedle Street show that policymakers were told in meetings on 28 June and 1 July of the outflows from funds investing in commercial property.
These funds usually offer instant access to cash but as they are invested in properties such as office blocks and warehouses, their assets are hard to sell quickly. Since 4 July, seven funds have taken steps to either stop withdrawals by suspending trading or reducing the fund’s value. Aberdeen Asset Management is cutting the value of its fund by 17%, the largest reduction yet.
The record of the meeting of the financial policy committee (FPC) – established to look for risks in the financial system – shows that the City regulator, the Financial Conduct Authority (FCA), had issued a briefing on commercial property funds.
“The FPC was briefed by the FCA on the extent of outflows from these funds and on the possibility that funds could suspend redemptions in the near term,” the record of meetings on 28 June and 1 July shows.
The record is published a week after the FPC announced a further £150bn would be freed up by banks to encourage lending and also warned that property funds could exacerbate movements on prices if they were forced to sell.
The FPC is chaired by the Bank of England governor, Mark Carney. The Bank also released two paragraphs redacted from the last quarterly meeting in March outlining aspects of contingency planning made ahead of the 23 June referendum.
As well as being ready to pump billions of pounds into the financial system, the Bank said “supervisors were engaging with banks, insurers and central counterparties on their contingency plans for risks related to the referendum, including for managing funding and liquidity risks in sterling and foreign currency”.
“Several firms had reported that they were conducting stress tests with referendum-related strategies of varying severity.” This was not reported in March as it was deemed to be against the public interest.
Following the referendum result, banking shares fell 20% and volatility in sterling against the dollar hit its highest level in postwar history, the Bank said.
Which? calls for a cap on ‘punitive’ charges after research shows bank rates harming vulnerable customers
Going overdrawn on a current account without permission can now be up to four times more costly than taking out a payday loan, according to new research from consumer body Which?
The organisation said its findings showed that regulators needed to crack down on “punitive” unauthorised overdraft charges that were causing harm to vulnerable customers.
Which? suggested that unauthorised overdrafts were now more expensive than payday loans, which are notorious for their high interest rates: Wonga charges a representative APR of 1,509%.
However, the UK’s largest consumer body said unauthorised overdrafts can be “much more costly” when people are borrowing for the short term – up to 12.5 times more if the period in question is just 24 hours.
This is linked to the fact that in January 2015 the Financial Conduct Authority (FCA) introduced price caps on payday loans, with interest and fees capped at 0.8% per day of the amount borrowed.
This means someone taking out a £100 payday loan for 28 days and paying it back on time will never pay more than £22.40 in fees and charges.
However, with no such caps in the current account market, if that individual had borrowed the same amount via a high street bank’s unauthorised overdraft, he or she would face a bill of £90 at NatWest and its parent, Royal Bank of Scotland.
With NatWest and RBS, if a customer goes into unauthorised overdraft by more than £10, they are charged a fee of £6 for each day they remain in that position, capped at £90 per “charging period”. A charging period runs from month to month.
With charging structures differing from bank to bank, there is a wide variation in the amounts charged when customers go into the red without permission. At Barclays the equivalent cost would be £29.75, whereas at Santander it would be £67, said Which? Meanwhile, Lloyds, HSBC and TSB would each charge £80.
A spokeswoman for Which? said the charges could be even higher if interest payments or possible unpaid item fees were included, or the money was borrowed over two monthly charging periods, because the maximum charge related to the charging period and not how long the money was borrowed for.
Which? said that when it came to borrowing £100 for just one day, the charges imposed by some high street banks were 12.5 times higher than the amounts payday lenders were allowed to charge. The FCA cap for one day would be 80p, compared with £10 for the Lloyds classic account.
The Which? spokeswoman said it was calling for unauthorised overdraft fees to be set at the same level as authorised overdraft charges, and for the FCA to review overdraft charges in the context of other forms of credit.
Alex Neill, Which? director of policy and campaigns, said: “People with a shortfall in their finances can face much higher charges from some of the big high street banks than they would from payday loan companies. The regulator has shown it’s prepared to take tough action to stamp out unscrupulous practices in the payday loans market, and must now tackle punitive unarranged overdraft charges that cause significant harm to some of the most vulnerable customers.”
RBS’s response to Which? was that it encouraged all its customers to get in touch if they were going to enter unarranged overdraft territory, regardless of the amount or the length of time. It added: “This is an expensive method of borrowing, and there could be a number of alternative solutions, such as putting an arranged overdraft in place, and the costs are considerably less. Our Act Now Alert service would alert the customer to being in unarranged borrowing and that they should take action.”
Lloyds’s response was that “the vast majority” of its customers who used their overdraft remained within their planned limit in an average month.
Sluggish growth and high levels of unemployment are reflected in the high level of non-performing loans that are now hobbling Italian banks
First it was Grexit, then it was Brexit. Now the looming threat for Europe is Quitaly, the fear that Italy might decide it has had enough of the single currency and go back to the lira.
Put simply, Italy’s economy is floundering and has been for the past two decades during which time there has been virtually no growth and Italian goods have become less and less competitive in export markets.
Sluggish growth and high levels of unemployment are reflected in the high level of non-performing loans that are now hobbling Italian banks. Potential bad debts have almost doubled to €360bn (£300bn) in the past five years and now account for 18% of all outstanding loans.
Non-performing loans of European banks Non-performing loans of European banks.
What is clear, though, is that the non-performing loans reflect a non-performing economy. They are the symptom of the problem and not its cause.
Unlike Greece, Ireland or Spain, Italy did not go through a period of economic boom before the Great Recession of 2008-09. Instead, its performance has been unremittingly poor. The economy is 10% smaller than it was before the financial crisis and as a result unemployment is high, especially in the poorer southern half of the country.
In the days before it joined the euro, Italy would have been able to make itself more competitive by devaluing the lira. That option is no longer available.
The risk, therefore, is obvious. Europe suffers a fresh slowdown as a result of the shock imparted by Brexit. An already weak Italy suffers more than most and its banks start to fail. Small investors are told that European rules mean that they have to shoulder some of the losses.
Matteo Renzi’s centre left government loses power and is replaced by the Five Star Movement, which has pledged to hold a referendum on leaving the euro. Given the state of the economy, Quitaly could not be ruled out. If it happened, the single currency would collapse.
CEO Jamie Dimon says ‘a pay increase is the right thing to do’ after bank sets baseline pay in line with ‘Fight for $15’ movement
JPMorgan Chase is to raise its guaranteed minimum wage for employees by a fifth, placing its baseline pay in line with the national “Fight for $15” movement.
“A pay increase is the right thing to do,” the chairman and chief executive, Jamie Dimon, wrote in an opinion piece published in the New York Times.
“Wages for many Americans have gone nowhere for too long. Many employees who will receive this increase work as bank tellers and customer service representatives. Above all it enables more people to begin to share in the rewards of economic growth.”
Under the new guidelines, the bank will raise pay for 18,000 employees to between $12 and $16.50 an hour for full-time, part-time and new employees, depending on location and division. The bank’s current minimum wage is $10.15 an hour (plus benefits), about $3 above the current national minimum.
JPMorgan is the first of the major US banks to take action in the minimum wage debate, having allowed smaller institutions such as Amalgamated Bank to take the lead.
But the latest move will be contrasted against Dimon’s own pay package.
Dimon’s total pay for 2015 rose to $27m from $20m last year. In January, JPMorgan increased Dimon’s pay by more than a third, subject to various performance tests over three years before he is paid out in full. His base salary remains at $1.5m, but he receives a cash bonus of $5m, down from $7.4m last year. The remaining $20.5m comes in the form of performance share units (PSUs).
Dimon’s package nonetheless reflects the banking industry’s changing sentiments over executive pay. Last year JPMorgan shareholders voted against existing executive pay policies, forcing the bank to reform the ties between pay and performance. Dimon came under criticism for a $7.4m cash bonus that institutional shareholder groups ISS and Glass Lewis described as lacking “a compelling rationale”.
Dimon, one of Wall Street’s longest-serving executives, saw his pay award peak at $30m in 2007. During the financial crisis the following year, his remuneration package dropped to a salary of $1m and no incentives.
However, in recent years executive pay has risen again to near pre-recession levels even as bank profits have remained constricted by low interest rates and problematic global economic conditions. Pay for big bank chief executives jumped nearly 7.6% in 2015, 10 times faster than a year earlier, according to analysis by the compensation company Equilar and the Financial Times.
The pay packages for chief executives at the top six US banks rose by an average of 10%, or almost twice the rate of their European rivals. In 2015, the chiefs of JPMorgan Chase, Goldman Sachs, Citi, Wells Fargo, Bank of America and Morgan Stanley were paid an average of $20.7m including salaries, bonuses and pension contributions.
Of those, Jamie Dimon was the highest-paid executive with a pay package of $27.6m. That contrasts with a 2014 government study that found of about 1.7 million people working in retail banking in the US, almost one-third – more than 500,000 people – are in jobs with median hourly wages below $15.
Reports on Coutts office come as property funds look to raise billlions to meet demands of investor wanting money back
Landmark buildings such as the head office of Coutts, the bank used by the Queen, are being prepared for sale as property funds look for ways to raise billions of pounds to meet the demands of investors who want their money back after the UK voted to leave to the EU.
Estimates that up to £5bn of warehouses, office blocks and shopping centres could be put on the market were made last week and Richard Sharp, a Bank of England policymaker, told MPs on the Treasury select committee that funds were starting to consider selling properties.
Seven UK commercial property funds have taken steps to either suspend dealing or cut valuations in response to the 23 June referendum, which has sparked fears that commercial property will be a less attractive investment. The Financial Conduct Authority, the City regulator, last week warned funds not to race into fire sales to ensure that some investors were not financially penalised by the offloading of property.
Henderson Global Investors would not comment on reports that TH Real Estate, which manages its property fund, was preparing to sell 440 The Strand, in London, the distinctive office of Coutts, the private banking arm of Royal Bank of Scotland. Henderson is among the funds to have suspended dealings and the Coutts office was bought in 2014 for £175m, according to reports.
Aberdeen Asset Management, which aims to resume dealings in its property fund on Wednesday after cutting its value by 17%, said it was looking at the sale of a number of properties.
Gerry Ferguson, head of Aberdeen’s UK property pooled funds, said: “Following a period of higher than normal redemptions from the fund after the EU referendum result and the suspension of other funds’ trading, the fund is now seeking to rebuild its liquidity position. A limited number of properties are being marketed and we will seek the highest prices achievable for our investors as is our normal practice.”
No details were given but a BT office in Leicestershire was among the properties Aberdeen was said to be considering selling along with an office development in Hammersmith.
However, some big commercial property deals have been announced since the referendum result. Last week British Land announced it had sold the Oxford Street branch of Debenhams for £400m to an unnamed private investor. It did not given details of any profit made from the sale of the seven-storey flagship department-store building.
The Bank of England has been on alert for problems in the commercial property sector and has already outlined possible risks from the kind of funds that are being suspended. These so-called open ended funds allow instant access to funds but are based on assets – property – that are difficult to sell.
The Bank’s half-yearly assessment of risks to the financial system, published last week, showed that there had been sharp slowdown in activity in commercial property between January and June when prices were flat. Foreign investors, who have fuelled the market since the financial crisis when it was dominated by UK banks, had cut their investments in the first quarter of 2016.
The FCA had told the Bank of England about the possibility of suspension of funds following the referendum and its new chief executive, Andrew Bailey, said last week the structure of these funds might need to be changed.
A new body should be given the ability to issue fines and bans to tackle City wrongdoing, says Treasury select committee
The Financial Conduct Authority (FCA) should be stripped of its powers to fine and ban individuals for wrongdoing, according to a report by MPs that calls on new chancellor Philip Hammond to commission an independent review into whether an alternative investigatory body should be set up.
The Treasury select committee said a new enforcement function should be set up outside the FCA and the Bank of England. Such a move would address the issues raised by the report into the collapse of HBOS, which was published in November 2015.
That report laid the blame for HBOS’s collapse on its former bosses but also questioned why only one former executive faced sanctions.
The select committee’s report said: “The current system, whereby the same organisation both supervises, applies and prosecutes the law is outdated and can be construed as unfair. By moving enforcement away from supervision, it can focus independently on undertaking its key functions: interrogating evidence and assessing whether a regulatory breach has been committed”.
In calling for a separate enforcement body to be set up, the Treasury select committee is repeating a suggestion in 2013 by the parliamentary commission on banking standards that was rejected by the then chancellor, George Osborne.
Andrew Tyrie, chair of the Treasury select committee, said: “A separate body would bolster the perception of the enforcement function’s independence, and provide the regulators with greater clarity over their objectives. The case for separation merits serious re-examination. The Treasury should appoint an independent person to undertake a review”.
The regulator at the time of the HBOS collapse was the Financial Services Authority – now split between the FCA and the Bank under changes brought in by the 2010 coalition government. The Treasury select committee said the ultimate responsibility for the “omission and failures” that led to an investigation into one former HBOS executive lay with the then FSA chief executive, Sir Hector Sants.
Sants, it had emerged at the time of the November 2015 report, had wanted to pursue enforcement action and had not been told there were grounds to investigate executives other than Peter Cummings. Sants declined to comment.
Tyrie said the new regulators were an opportunity to “exhibit greater vigilance and energy if they are to win public confidence, which has on occasion been lacking”. He added that the FCA was still “work in progress”.
The Treasury said it would respond formally at a later date. “The shortcomings that led to the failure of HBOS in 2008 prove that the government was absolutely right to overhaul our system of financial regulation,” a Treasury spokesperson said.
“Our reforms directly address the regulatory failings identified in this report,” the Treasury spokesperson said.
The FCA said separating its enforcement division would “potentially lessen our ability to be an effective regulator and impact our ability to protect consumers and ensure the integrity of the UK financial system”.
The Treasury committee said that in the event of another bank failure, the public should not have to wait so long – seven years – for a report into what went wrong.
It also criticised the accounting body, the Financial Reporting Council, for “a lack of curiosity” in not investigating the auditing of HBOS sooner. The FRC announced an investigation last month.
Bank warns business customers it may have to charge to accept deposits but says it has no plans to do so for personal accounts
A major high street bank has paved the way for the introduction of negative interest rates for the first time in Britain by warning customers it may have to charge them to accept deposits.
The warning by NatWest was made in a letter changing the terms and conditions for the bank’s 850,000 business customers, which range from self-employed traders, charities and clubs to big corporations.
It could mean that an account holder with £1,000 in a NatWest account could see that shrink to £999 or less the following year as the bank charges a negative rate of interest.
In its letter to customers, NatWest said: “Global interest rates remain at very low levels and in some markets are currently negative. Dependent on future market conditions, this could result in us charging interest on credit balances.”
The taxpayer-owned bank – whose parent is Royal Bank of Scotland – said it had no plans to make changes to the terms and conditions of personal account holders to allow it to charge negative rates.
Interest rates on government and corporate bonds fell steeply in the political turmoil that followed the Brexit vote. The Bank of England is now under intense pressure to cut its already historically low base rate from 0.5% to kickstart the economy, although a move into negative territory is not likely in the short term.
NatWest business customers are asking if negative interest rates are legal. They are asking whether they should take their cash out of the accounts and put it under the mattress to maintain its value.
One treasurer of a local community council, who received a letter but asked not to be named, said: “Can they do that, is it legal? The letter goes on to say that they ‘value our relationship with you’, but I may need to review how much I can afford to have a relationship with them!”
Another customer, who holds funds for her grandchildren in a business bank account, said: “Will this spread to all high street banks? I can’t access it myself to put it under the mattress.”
Other high street banks contacted by the Guardian said they had no plans, for now, to change contracts to allow them to impose negative rates.
The prospect of banks levying a charge on deposits rather than paying interest turns traditional banking upside down.
“It is going to make businesses much less keen to hold significant balances in their accounts,” said mortgage and savings expert Ray Boulger. “If NatWest start doing this, other banks are likely to follow. Eventually personal customers with large balances could be hit, but the banks may decide that is going too far and take the hit themselves.”
Negative interest rates could have widespread undesirable effects across the economy. Not only may customers decide to hoard cash rather than deposit it, banks may take excessive risks in lending in order to obtain returns, while pension companies will struggle to meet their liabilities.
So-called “voodoo banking” is already happening in some countries gripped by deflation.
The European Central Bank charges other banks 0.4% to deposit cash, while the Swiss National Bank charges domestic banks up to 0.75%.
Last week, ABN Amro, a major Dutch bank, told customers that because of “exceptional market conditions”, it may be necessary to charge negative interest rates at some time in the future.
After the Brexit vote, interest rates on government bonds – otherwise known as the “yield” – dived to record lows. When rates drop below zero, it effectively means people are paying the government to lend money to them.
The Bank of England earlier this month chose to hold base rate at 0.5%, but in the City it is widely anticipated that governor Mark Carney will cut the rate to 0.25% on 4 August, as well as introduce other measures to boost the economy.
The prospect of negative interest rates has been mooted by individual policymakers but they are not seen as likely for the UK any time soon. In April, Jan Vlieghe, a member of the BoE’s nine-strong monetary policy committee (MPC), floated the possibility of interest rates being cut below zero, meaning companies would pay to deposit their money with banks. His fellow MPC member, the Bank’s chief economist, Andy Haldane, also raised the prospect of cutting official borrowing costs to zero or perhaps even lower in a speech last September. But governor Mark Carney has appeared to oppose negative interest rates. Questioned by MPs in April, Carney said: “We think we could move base rate closer to zero but have not said we have an appetite for negative interest rates.”
Millions of customers with savings accounts in Britain are already suffering from historically low returns, with many accounts already paying close to zero. The Financial Conduct Authority last week named HSBC, First Direct and the Post Office as all having easy access accounts that in some circumstances pay no interest.
The introduction of negative interest rates on deposits could spark a legal challenge from customers.
Shortly before the credit crunch, building society Cheltenham & Gloucester launched a mortgage deal that tracked the main Bank of England lending rate minus 1.01%. When the Bank cut interest rates to 0.5% in 2009, that suggested borrowers would have to pay -0.51%. Instead, C&G cut the rate to 0.01% – its computers could not handle mortgages at 0% – but did not actually go negative. Any challenge to negative interest on deposit accounts may cite the example of C&G.
But there will be winners if interest rates move to zero or below. Since the Brexit vote, a number of lenders have cut interest rates on mortgage deals, with the biggest change to five- and 10-year fixed-rate deals, now on offer at little more than 2% interest.
Goldman Sachs has hired José Manuel Barroso as adviser and non-exec chairman of its international business
The French government called on former European commission chief José Manuel Barroso on Wednesday to drop plans to take a senior job at US investment bank Goldman Sachs, part of a growing outcry against the move.
The bank said last week it had hired Barroso, a conservative Portuguese ex-premier who headed the European Union’s executive arm from 2004-2014, to be an adviser and non-executive chairman of its international business.
The French European affairs minister, Harlem Désir, said the “scandalous” move raised questions about the EU’s conflict of interest rules and said they needed to be tightened.
“It’s a mistake on the part of Mr Barroso and the worst disservice that a former commission president could do to the European project at a moment in history when it needs to be supported and strengthened,” Désir said during a question and answer session in the lower house of France’s parliament.
Barroso was hired 20 months after stepping down, shortly after an 18-month “cooling off” period when ex-commissioners must seek clearance for new jobs to avoid conflicts of interest.
“The European commission president should be above the pressures of private interest. The restriction on being hired by a private company should be extended,” Désir said.
In reaction to news of Barroso’s move, the European ombudsman called on Tuesday for the EU to tighten rules on commissioners taking appointments on leaving office.
The EU economics commissioner, Pierre Moscovici, criticised the appointment as bad for the commission’s image at a time when it is under attack as Britain prepares to leave the European Union.
“When a public person leaves public life and goes to the private sector, he also has to think about the image it projects,” Moscovici said on France’s Europe 1 radio. “I can assure you I won’t go to Goldman Sachs,” he added.
Barroso has said he aims to bring his experience in EU affairs to help the bank prepare for Britain’s departure from the bloc.
He was president of the commission, which polices EU countries’ public finances, when it came to light that Goldman had helped Greece in the past to reduce its debt burden with cross-currency derivatives, worsening its debt crisis.
Newsagent-style shops sold to convenience store group for £117m as Co-op seeks larger premises for new outlets
The Co-operative Group has sold 298 small shops to convenience store specialist McColl’s Retail Group for £117m.
The deal, which is subject to approval by the competition watchdog, leaves the Co-op with about 2,450 stores after the sale of 100 properties including 36 stores to Hilco in May.
Earlier this year, the mutual appointed the investment bank Rothschild to find prospective buyers for about 300 shops, equating to nearly 10% of its estate, as it tries to keep a lid on debt and expand and modernise its successful convenience store business.
Steve Murrells, chief executive of the Co-op’s food division said: “Today’s announcement is completely in line with our strategy, as these stores did not allow us to provide a sufficiently compelling own-brand offer for our members going forwards. The proceeds will be reinvested to drive sustainable growth for our members.”
All 3,800 Co-op staff working in the stores being bought by McColl’s will transfer over when the handover of stores is finalised in November.
The Co-op is aiming to open 100 new stores this year and a similar number next year but wants stores larger than the average 1,700 sq ft newsagent-style premises it is selling to McColl’s. It recently bought six outlets from administrators to My Local, the convenience chain which went bust last month.
McColl’s, which listed on the London Stock Exchange in 2014, said it would be placing 10.5m shares to existing investors to raise £13.1m to help fund the acquisition of the Co-op stores. The size of the deal for McColl’s also means it will have to seek approval from shareholders.
Jonathan Miller, chief executive of McColl’s, said: “This opportunity substantially accelerates our growth strategy and expands our neighbourhood presence for the benefit of our customers. These stores are profitable, well invested, and the perfect size for our operating model.”
Parliamentary BHS report will complete Wright’s ‘worst of Britain’ series
Iain Wright has been a busy man. Like a university student cramming to get his essays done before school’s out for summer, the chairman of the business, innovation and skills (BIS) select committee has been knocking out reports during the final few days before the parliamentary recess.
On Friday, the committee’s take on the working practices at retailer Sports Direct was released, which pulled few punches, and contained words such as “punitive”, “appalling”, “unreasonable”, “excessive” and “contempt”.
Anyway, Wright’s work will be back in front of the invigilators again on Monday, with the publication of the investigation into the collapse of BHS, which the BIS committee has conducted jointly with Frank Field’s work and pensions gang.
It is hard to envisage this making great reading for Sir Philip Green, the former owner of BHS, or Dominic Chappell, the “Walter Mitty” who Green decided was a suitable buyer of a business safeguarding 11,000 jobs and a £571m pension deficit. Westminster gossips suggest the BHS report will be even punchier than Sports Direct.
All of which wraps up Wright’s coursework for the year, which might one day form part of some weightier thesis. How about “the worst of British business” as a possible title?
Arrests, falling shares, gloom – that’s banking
Another terrible few days for the banks, which obviously pains us all.
Last week, Mark Johnson, a British citizen and HSBC’s global head of foreign exchange trading, got nicked by the FBI and charged with fraudulently rigging a multibillion-dollar currency exchange deal. Meanwhile, back in the UK, more mundane problems persist. Shares in Virgin Money, which is run by Jayne-Anne Gadhia and reports numbers this week, are wallowing near all-time lows, while the stock of Lloyds Banking Group (still 9% owned by the UK taxpayer and also reporting this week) isn’t doing much better.
This is an inconvenience to Lloyds’ dashing chief, António Horta-Osório, who everybody assumed would be mounting his black horse for a victory lap by now. But Brexit and low interest rates are making his life pretty tough.
Lloyds shares closed on Friday at 55.58p, some way below the taxpayer’s supposed break-even price of 73.6p.
Still, if you count the dividends, fees and other proceeds we’ve received, there’s a view we could get our money back by flogging the rest of our stake for 8.4p a share. That’s if you believe Hargreaves Lansdown – which might make a few quid from any retail offer.
Has ARM’s new owner gone out on a limb?
“It would be a dreadful shame if this acquisition followed form – job losses, investment drain and, worst of all, new technologies and skills ebbing out of our economy. [The business secretary] must surely be regretting dragging his heels on his promised Cadbury law [which would make it more difficult for foreign takeovers to succeed].”
It is a topical view, following the announcement of the £24bn takeover of UK chip designer ARM Holdings by Japan’s SoftBank last week, even if the words were said about Vince Cable in 2011 by Unite’s Tony Burke.
Burke, of course, was speaking about US technology giant Hewlett-Packard, which had just taken over Cambridge-based software firm Autonomy, then the darling of Britain’s tech sector, for £7bn. Yet if anybody is regretting HM government’s inaction on that one, it is probably HP boss Meg Whitman, since the US group ended up taking a $5bn charge on the deal.
That is not to say that the ARM transaction will also be unsuccessful – or that Burke’s view is invalid – but it does illustrate that these things can work both ways.
Anyway, there’ll be plenty more scope to debate this one, starting this week. With delicious timing, ARM’s half-year results are due on Wednesday.
Lloyds among high street operators facing pressures sparked by Brexit vote, which could lead to further job cuts and closures
High street banks are preparing to set out how they will respond to the interest rate cuts likely to be sparked by the Brexit vote, amid expectations it could pressure them to cut jobs and earmark more branches for closure.
Lloyds Banking Group, in which taxpayers have a 9% stake, is facing questions from the City about any plans to step up its cost-cutting measures. This is because it is more closely linked to the UK economy than rivals with international operations.
The bank has embarked on a programme to cut £1bn from costs in the three years to 2017, which already involves 9,000 job cuts and 200 branch closures. There are expectations that this will be accelerated.
The bailed-out bank is among a number of high street banks reporting their results this week. Barclays and Virgin Money are also publishing their six-month figures at a time when bank share prices have been pummelled in the wake of the vote to leave the EU. The following week HSBC, Standard Chartered and the 73% taxpayer-owned Royal Bank of Scotland will report their trading for the first six months of 2016.
But analysts are more interested in banks’ reaction to the EU vote, which could have a dramatic impact on the domestically focused banks if the economy slows and bad debts – or impairment charges – rise. Expectations are also mounting that the Bank of England will cut interest rates from an already historic low of 0.5% on 4 August, which will put pressure on bank profits.
Analysts at Morgan Stanley said: “We think the focus will be updates to guidance for core UK earnings post-referendum. We cut domestic UK banking earnings [by approximately] 20% post the vote as we expect margin pressure, lower loan growth and normalisation in impairment trends.”
Gary Greenwood, an analyst at Shore Capital, said it would be difficult for banks to provide a clear outlook statement. “We might get more announcements around cost-cutting,” he said. “The reasons why Lloyds could be aggressive on costs is their margins are being squeezed on low interest rates.”
Approximately 45,000 roles had already gone at Lloyds since HBOS was rescued in 2008, before the latest round of cuts, and the workforce has fallen to about 75,000. In February, at the time of its results for 2015, Lloyds said it was ahead of its October 2014 plan to cut costs but provided no further detail.
Analysts will be waiting to see if António Horta-Osório, the chief executive, can decide how to wring further costs out of the business, which also owns Halifax. Lloyds would not comment on expectations of cost-cutting measures.
Analysts at Deutsche Bank: “Given the more difficult revenue environment we expect questions to management on potential further cost rationalisation.”
The government has put on hold its plans to sell shares to the public and the views of the chancellor, Philip Hammond, on such a share offering are unclear. Its shares closed on Friday at 55.5p – below the 73.6p at which taxpayers break even on their stake – and amid expectations that plans for major dividends could be delayed.
At Barclays, which will report on Friday, its new chief executive, Jes Staley, will face questions about the bank’s growth prospects and progress on selling its African arm.
It is a crunch week for banks across Europe as the results of stress tests on EU banks, including those in the UK, are published by the pan-European banking regulator on Friday.
The European Banking Authority is not issuing a pass or fail on the results, which are being announced while the focus is on Italian banks and the possibility they will need to raise more capital.
Analysts at Credit Suisse said that a “shallow recession is already priced in” for bank shares on stock markets across Europe. They added: “The EBA test could be a positive market event, showing the sector has improved its ability to withstand economic shocks.”
One month after the referendum, are predictions of Brexit blight coming true?
The overall impact of the historic referendum that saw the UK unexpectedly vote to leave the European Union has so far, in the space of a month, been less severe than some of the more apocalyptic warnings had suggested. But there have been winners and losers across the economy.
The pound
Sterling went on a rollercoaster ride on referendum night, ending up down 8% against the dollar as the results confirmed a victory for the Leave camp. Since then, its decline has continued and the pound is now at levels not seen since 1985, having lost about 12% against the US currency. Compared with the euro, the pound has fallen by 9% since the vote and is at a three-year low – making holidays in euroland more expensive.
The decline comes as investors worry about weakness in the UK economy and the prospect of interest rate cuts to boost demand. This month the Bank of England left rates on hold but said most members of its monetary policy committee expected a cut in August if the economy did not improve.
The weak pound is a boon to exporters but will make imported goods more expensive. On Thursday, Unilever – the business behind brands including Dove, Flora, Bertolli, Hellman’s and Persil – became the first major food and consumer goods company to warn that companies were likely to pass on increased costs to customers.
Stock markets
Markets were caught by surprise by the Leave result and a record $2tn was wiped off the value of global shares. But since then, there has been something of a recovery, particularly for the FTSE 100, which has regained all lost ground and more, and is currently at 11-month highs. However, the leading UK index is chock-full of companies with international operations, which are less exposed to any slump in the UK economy, and which earn in dollars, thus gaining from the new lower exchange rate.
The weak pound has also raised the prospect of UK-listed companies being snapped up by foreign rivals because suddenly they look cheap. Just last week chip designer ARM agreed to be taken over by Japan’s SoftBank for £24bn, while South African retailer Steinhoff has agreed to buy Poundland. Analysts believe more deals will follow.
Markets have also been lifted by bargain hunters who believed valuations had fallen too far, as well as by the quick resolution to the political crisis threatening to engulf the government following Theresa May’s appointment as prime minister.
However, the mid-cap FTSE 250, which is more exposed to the UK economy than the 100 index, has yet to reach the level it was sitting at before the referendum result, despite recovering more than 13% from its lows. It is now down 2% from its pre-Brexit level.
Housing market
There has been a spate of profit warnings from estate agents, and many are making gloomy forecasts for the rest of the year. Agents in some upmarket parts of London have reported a bounce in interest from overseas buyers keen to take advantage of weak sterling, but for the mainstream market there are signs both interest and price growth have cooled.
On Friday, LSL, Britain’s second-biggest estate agent group – owner of Your Move and Marsh & Parsons among others – said business had slowed since the vote and warned that its annual profits would be “significantly lower than anticipated”. London-focused Foxtons issued a similar warning in late June.
Forecasts for the rest of the year are for falling interest from buyers and price drops, particularly in the most expensive parts of the market. French bank Société Générale said last week that “a price correction of even 40-50% in the most expensive London boroughs” could be possible.
The Royal Institution of Chartered Surveyors (Rics) says its members expect sales to slump over the summer, because buyer inquiries fell “significantly” in June. Rics’s findings were cited by the Bank of England when it announced that it was revising down its forecast for price rises.
Housebuilders
Shares in housebuilders lost around 40% of their value in the immediate aftermath of the Brexit vote, with investors worried that an economic slowdown in the UK would hit their business, despite the country seeing record low interest rates.
There has been some recovery since then, but the companies have failed to regain all their losses. Barratt Developments, Britain’s biggest housebuilder, is still down around 28%, and it has said that it may build fewer homes because of the current uncertainty.
Even before the vote, upmarket rival Berkeley had warned in June of a 20% drop in reservations of new homes.
Barratt’s share price is down 28%. Photograph: Bloomberg via Getty Images
Commercial property
The commercial property market was already stalling in the months running up to the referendum as investors put plans on hold to await the result. The UK’s decision to leave the EU has not encouraged them back.
Rics said last week that there had been “a significant drop” in confidence and demand among investors and tenants since the vote. “Both rent and capital value expectations are now in negative territory,” it reported, adding that office and retail properties have been hardest hit.
Funds invested in commercial property were forced to close their doors for a while, as panicked savers tried to withdraw their cash. Those barring withdrawals included funds run by Standard Life, M&G Investments and Aviva Investors. Last week, they started to reopen for business, but some investors who want to get their money out will take a hit. Aberdeen Asset Management, for example, is adjusting payments downwards by 7%.
Banks
The banking sector has been hard hit by the Brexit fallout, thanks to a combination of low interest rates, worries about future access to European financial markets and the prospect of a general downturn.
With expectations of another rate cut in August, the banks are braced for more strain on their stretched balance sheets, at the same time as the economy is slowing and the risk of bad debts is increasing.
Moreover, so-called passporting arrangements, under which banks can sell financial products throughout Europe even though the UK is not part of the single currency, could come under threat after Brexit.
Banks most exposed to the UK market have been hardest hit, with Lloyds Banking Group and Royal Bank of Scotland down 25% and challenger bank Virgin Money falling 35%.
Profit warnings
Estate agents have been the only businesses to issue profit warnings following the Brexit vote. However, British Airways owner International Airlines Group was quick off the mark to say the uncertainty would hit demand, closely following by easyJet. Last week, the budget airline added that the fall in the pound had cost it £40m.
Other travel companies are also suffering as, along with increased concerns about terror attacks, they face the prospect of UK holidaymakers ditching more expensive overseas trips and staying at home.
But executives at Heathrow airport said on Friday that the Leave vote had been good for business, with the falling pound encouraging international visitors to spend more in its shops, as well as making it easier to raise money from foreign investors.
FIRST SIGNS OF ECONOMIC IMPACT
The first real sign that Brexit is having an impact on the economy emerged last Friday, with a Markit survey showing business activity in services and manufacturing shrinking in July at its fastest rate since the global financial crisis in 2009. The data suggested that UK GDP could contract by 0.4% in the third quarter, according to Markit.
Until then, the data had been equivocal. The International Monetary Fund, which before the referendum had warned of possible recession if the Leave campaign won, cut its forecast for UK growth in 2017 by 0.9% points to 1.3% from its April estimate. But that is still similar to its forecasts for Germany and France.
A report from the Bank of England’s regional agents last week showed that a majority of firms were not planning to mothball investment or change their hiring plans.
The latest job figures looked upbeat: showing unemployment at its lowest level for more than a decade, with 31.7 million people in work in the three months to the end of May – 176,000 more than for the three months to February 2016.
On the high street, however, the volume of retail sales fell by 0.9% between May and June. This compared to a rise of the same amount in the previous three months, and showed the effect of falling consumer confidence in the run-up to and immediate aftermath of the EU vote.
This was backed up by a survey from the British Retail Consortium and KPMG showing retail sales in the three months before the vote at their weakest for seven years, while market research group GfK recorded the biggest slide in consumer confidence for 21 years in a one-off poll following the referendum.
Inflation is on the rise, with official figures showing that dearer air fares and driving costs helped to push the consumer price index up by 0.5% in the year ending in June, up from 0.3% previously.
With higher prices on the way after the Brexit vote, inflation could breach its 2% target during 2017.
