Amid all the hubbub over Northern Rock’s nationalisation you may not have noticed that there was some good news for UK banks this week – but you should take it with a massive pinch of salt.
Barclays’ results on Tuesday found the banking giant (which you may remember was plagued by various rumours about its finances around about the same time as Northern Rock was going to the wall) awarding itself a comparatively clean bill of health. True, there was a £1.6bn writedown of credit-related securities and the bank did warn (as if anyone needed to be reminded) that 2008 would be a “less benign year”. But by the standards of the current credit crisis, the loss of a billion or so just isn’t that bad. And a 10% hike in the dividend seemed to confirm the upbeat tone.
The real trouble is, as Anthony Hilton pointed out in the Evening Standard, that Barclays’ Swiss peer Credit Suisse “made a statement remarkably similar in tone to that of Barclays” merely days before it “discovered” a pile of assets that had been overvalued by £1.5bn. So, as Hilton says, “whom do you believe”? I’m inclined to side with the sceptics. Banks are facing pressure from so many angles that I can’t believe we won’t see a fresh stream of writedowns and nasty surprises throughout this year.
For example, the FT points out that Barclays has written off a total of just £188m of the £7.37bn of loans it has made to private equity groups – despite the fact that many such loans “are now changing hands for less than 90% of their original face value”. And, of course, it’s not just subprime debt, or leveraged loans, or complicated derivatives that banks have to worry about. As we point out in our cover story this week, anyone with old-fashioned, plain-vanilla mortgage or credit-card exposure to the UK should be worried.
The pundits are still trying to downplay the likelihood of house price falls in the UK – the most bearish comment we’ve heard from anyone in authority came from Monetary Policy Committee member Kate Barker, who rather carefully warned that house price “falls in nominal terms cannot be ruled out”.
But I don’t see how they can be avoided. The range of mortgages available is shrinking by the day – the latest to go are all those 100%-plus mortgages that we were told made perfect sense when they were launched just a few years ago. I feel sorry for anyone trying to remortgage one of those loans any time in the next two years – but I can’t say I feel sorry for the idiot lenders who gave out the money in the first place, and will now most likely end up with a repossessed property worth half the money secured against it.
As the US subprime crisis has shown, the fate of banks and global property markets are intertwined. That’s why I’d rather not buy into banks just now. And so I’m more than a little peeved – as should you be – that my money is being used to prop up Northern Rock, whether I like it or not.