Stop banker bashing and start the banker reformation

So this morning RBS announce losses of £1.4 billion this morning, with various headlines reporting the news:

• RBS losses shrink on sharp fall in bad loans - The Telegraph
• RBS Narrows Third-Quarter Loss as Provisions Decline - Business Week
• The Royal Bank of Scotland sinks £1.4bn into the red – BBC

Admittedly RBS has taken a battering, but their management through the post-crisis hurricane has been pretty good so far, as evidenced by the interview with Stephen Hester the other day, and by his comment in the interim statement: “Our third-quarter results demonstrate that we continue to make good progress in our recovery. We are delivering what we set out to achieve.”

You wouldn’t believe it from that BBC headline above, but here are the real highlights:

• The Royal Bank of Scotland Group reports a third quarter operating profit of £726 million, excluding fair value of own debt (FVOD), up £476 million versus Q2 2010
• Including an £858 million FVOD charge, Q3 2010 operating loss was £132 million
• Attributable loss of £1,146 million for Q3 includes APS charge of £825 million
• Core RBS operating profit, excluding FVOD, up 10% on the second quarter, to £1,732 million
• Group impairments down 21% versus Q2 2010; Non-Core assets down £20 billion in Q3 2010;
• Core Tier 1 ratio 10.2%

Bottom-line: impairment charges tumbled a better-than-expected 40% to £1.95 billion compared with the same three months last year, pushing net losses down from £1.8 billion to £1.15 billion.

Like Lloyds’ comments and changes this week, this shows continued recovery in the UK bank sector which is on target for recovery by 2012, as previously blogged.

HSBC have also just announced a healthy profit forecast, without detailing the numbers, and Barclays report next Tuesday.

But, in looking at these announcements, I started writing down the challenges these banks face and was surprised to find how long the list became.

Here are the headlines:

Changes of Leadership

The banks have all just changed leaders with John Varley (Barclays), Michael Geoghegan (HSBC) and Eric Daniels (Lloyds) all stepping down to be replaced by internal candidates Bob Diamond (Barclays) and Stuart Gulliver (HSBC), shock move to Santander’s UK CEO Antonio Horta-Osorio for Lloyds.

Any organisation with a new leader has challenges.

In Barclays case, tic will be how to get Mr. Diamond, who is an investment banker through and through, to deal with the retail and commercial banking areas and avoid the bank just becoming another Goldman Sachs. Mind you, that’s no bad thing is it?

In HSBC’s case, it’s all about continuity and management of the great ship as one bank globally. Or rather, it’s how to continue Asian growth whilst dealing with the mess of regulations that will impact its global business portfolio.

For Lloyds, it’s all about keeping a tight ship and making sure the bank steers towards profitable growth in the UK markets through the new streamlined operations as HBOS and Lloyds TSB merge. That merger is already delivering £1.5 billion of savings per year and £2 billion next year. In selecting the charismatic Portuguese leader of Santander UK, the bank obviously sees this as being priority and that this is the man to do it. Nevertheless, it does raise questions in my mind, as Mr. Horta-Osorio strikes me more of a cost efficiency numbers man than a customer-centric banker.

Lending

Lending comes up all the time in UK bank dialogue, as evidenced last week:

Martin Woolf: “There is this big hullabaloo about lending. What is your stance on lending in Britain?”

Stephen Hester: “There is excessive critique about unsafe lending. That is what caused this crisis and yet the political criticism could be encouraging us to do that again. We take the view that we are guided by our goals, which is to support customers to be safe and reward our shareholders appropriately. Therefore, if part of what our customers need is lending and if our customers can pay us back, why wouldn’t we be lending to them?”

Well, the lending area is now driven by targets, with Lloyds and RBS on track to meet targets set by the UK Government for small business lending this year. However, there is still dwindling availability of mortgages and bad debts are still a big issue, so this little nugget won’t go away.

This is why the British Banker’s Association (BBA) set up a taskforce in August that reported to the UK Chancellor George Osborne with an action plan to create new credit capabilities through a 17-step action plan. The key point picked up by the press is the £1.5 billion stake in small business equity.

Neverthless, lending, bad debts and impairments is still an issue and hot topic, and will remain so for the foreseeable.

The Banking Commission

Talking of Martin Woolf Martin Wolf (Associate Editor and Chief Economics Commentator at the Financial Times, London) above, he’s part of the panel of the Banking Commission alongside:

• Sir John Vickers (formerly Chief Economist at the Bank of England; member of the Monetary Policy Committee; Director General/Chairman of the Office of Fair Trading; and President of the Royal Economic Society);
• Clare Spottiswoode (Chair of Gas Strategies and European Chair and NED of Energy Solutions);
• Martin Taylor (Chair of Syngenta AG and formerly Chief Executive of Barclays and an international adviser to Goldman Sachs from 1999 to 2005); and
• Bill Winters (Co-CEO of JPMorgan Investment Bank, 2003-2010)

What is the Commission?

It’s an independent Commission on banking, created and launched in June 2010 with the mission to consider structural and non-structural reforms to the UK banking sector to promote financial stability and competition, and to make recommendations to the Government by the end of September 2011 .

This will be through a series of hearings that start in December in Leeds, Cardiff, Edinburgh and London, with the bank chiefs called into account to give evidence.

Like a Treasury Select Committee, the Banking Commission will focus upon how to recreate UK banking through consultation and then recommendations for reform.

Regulation

Talking of regulations and reform, there’s a huge amount of this going on from the Basel III rules to OTC Derivatives, along with all the existing issues of previous regulations on liquidity and markets, payments, clearing and settlement and more.

In fact, there’s a whole mess of regulation, with different rules in different regions and different perspectives from different individuals in each regulatory and influencing authority. If I was a banker, I would probably find that recruitment to regulatory compliance functions is excessive whilst layoffs everywhere else in the bank are the same.

In particular, regulatory reform is potentially happening too fast and too uncoordinated. As Karen Fawcett, Senior Managing Director and Group Head of Transaction Banking at Standard Chartered Bank said at this year’s SIBOS: “If the regulations are implemented as they are currently written, we could be seeing a 2% fall in global trade and a 0.5% fall in global GDP.”

Or, as another session asked: “Is Basel Faulty?” 

Or, as we debated in March this year: “We think Basel's liquidity standards are rubbish”.

Take Basel and substitute with any other regulatory title and you get the idea: the banks cheese is moving and no-one, including the regulators, seem to know where it’s moving to.

Add in a mess of other stuff such as:

• investment banking markets being deflated and flat;
• a big issue for UK banks with £5 billion plus potentially to be paid out for the mis-selling of personal protection insurance (PPI);
• bonus rows; and
• the general outlook for the economy, which is still uncertain;

And if I were Mr. Diamond, Mr. Gulliver, Sr. Horta-Osorio or Mr. Hester, then I would be pretty pleased to have turned in any profit or value at all so far this year.

Maybe it’s time to stop the banker bashing and start the banker reformation?

 

Comments

[Hugh]

The banks were run by a bunch of incompetent people who could only think about their own selfish greed. Unfortunately nothing has been done to remedy this shameful situation. Things will only chane for the better when the big supermarket companies become a serious threat to the banks; it has to be remembered that most members of the public trust Tesco more than the failures at Lloyds or Northern Rock.

[Pragmatist]

A great overview, Chris.

I find it troubling that the focal point for 'reform' is these hugely inefficient, exploitative, heavily subsidised, mightily challenged beasts, rather than facilitating the growth of lean, low cost, low risk alternatives.

Then again, maybe it's no bad thing to keep the 'great and the good' safely out of the way for a while...

[mike]

Well said. Its not the banks that are the problem, its the vast debts that have been accumulated by the government.

I think you'd like this article which talks of the scandal of government debt: http://www.cutthedebt.co.uk/2011/why-banker-bashing-is-letting-the-real-culprits-of-the-hook/