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It’s not been a great week for banks, but neither has it been as bad as some might have feared.
Royal Bank of Scotland (RBS) had a similar set of results to other banks this week – bad, but not that bad.
There were plenty of write-downs, but trading overall was better than expected, and chief executive Sir Fred Goodwin was in a cautious, but broadly bullish mood, defending the bank’s recent acquisition of ABN Amro as being a good deal.
The bank also hiked its dividend, just to prove it still can. But with the future far from certain, that might be something it comes to regret at a later date…
Royal Bank of Scotland’s results contained no real surprises. Trading was actually stronger than expected in both its high street and commercial banking divisions. On the downside, the group revealed more write-downs related to the credit crunch. Provisions were doubled to £2.5bn with about £756m written down due to the woes with the monoline bond insurers.
And not only does it have another £2.2bn in exposure to ‘Alt-A’ mortgages (which are somewhere between prime and sub-prime), it’s also exposed to £8.8bn in commercial mortgages.
The bank also has the lowest tier one capital ratio of any of its peers, at 4.5%. This is a core measure of a bank’s financial strength, affecting its borrowing costs and how much it can lend. Anything below 4% is considered a worry.
All the same, it’s reassuring to see that chief executive Sir Fred Goodwin has a more realistic view of prospects than some of his peers, when it comes to the extent of the credit crunch. “You won’t find many rational people saying it will get better in the first half. Some say things will improve in the second half, but that is more hope [than belief],” quotes The Telegraph.
Yet RBS still hiked its dividend by 10%. I realise this is something that all the banks feel they have to do at the moment to boost confidence. Given that their rivals have done the same, anyone not raising their dividends is bound to drive speculation that there’s something wrong.
But if I was running a bank at the moment, heading into some of the hardest times we’ve seen for a long while, I’d be holding onto every spare piece of cash I could lay hands on. The shareholders might not thank you now, but better to freeze the dividend now rather than cut it later, if (or rather, when) those ropey-looking assets on the balance sheet turn out to be even further past their sell-by date than expected.
After all, they have enough to worry about even without all the subprime debt on their books. Plain old-fashioned mortgage lending looks dangerous enough. Another lender has upped its minimum deposit – Lloyds TSB-owned Cheltenham & Gloucester now requires would-be buyers to pay at least 10% towards the cost of their house. Given the average house price (according to Halifax) of around £175,000, that means a £17,500 deposit. For many first-time buyers that’s easily a full-year’s wage, after tax, particularly if you consider you’ve got to lump stamp duty on top of that.
Even industry pundits are suggesting property prices could fall
Ray Boulger of mortgage broker John Charcol put it bluntly when he said: “For a lender the size of Lloyds to do this is quite worrying. If we start to see too many lenders restricting loan-to-value ratios it will affect the property market and prices could dip.” That’s pretty negative for a property industry pundit.
And Nationwide has just revealed that house prices fell for the fourth month in a row this month. Annual house price inflation is now down to just 2.7%, from 4.2% in January. With consumer price index inflation at 2.2%, that’s real-terms growth of just 0.5%. And if you take the old RPIX measure (retail prices excluding mortgage interest payments) of 3.4%, then in fact you’ve got house prices falling at an annual rate of 0.7% in real terms.
That’s before the real tightening has begun. This is going to get a lot worse before it gets any better – and that’s why you should be avoiding banks.
Oh, and before we go. A quick word of warning to those tempted to spreadbet on the commodity markets: always use a stop loss. A wheat trader at commodities broker MF Global just lost $141.5m (and his job) by shorting wheat, which saw prices plunge 11% then leap 20% on Wednesday. The company said the trades were unauthorised, though it also seems that controls have been relaxed to allow traders to operate more quickly, as customers flock to place orders in what has become the world’s latest ‘hot’ market.
You can read more about agricultural commodities and which ones we think look most interesting just now in the latest issue of MoneyWeek, out today. If you’re not already a subscriber, you can get your first three issues free by clicking here: Free trial
Turning to the wider markets…
London market close: FTSE 100 – 5,965.70 (-110.8)
European markets:
US markets: Dow Jones Industrial Average – 12,582.18 (-112.10); S&P 500 – 1,367.68 (-10.48); Nasdaq – 2,331.57 (-10.99).
Crude oil: $102.200. Brent spot: $100.440.
Gold $974.900. Silver: $19.860.
Currencies: pound/dollar: 1.9845; pound/euro: 1.3040; dollar/euro: 0.6571; dollar/yen: 104.4300.
Our recommended articles for today…
How regulation made markets riskier
– Our financial regulators have been known by many aN acronym since compulsory regulation was introduced in 1986, but they all have one thing in common: from pensions misselling to Northern Rock, they have failed to protect investors. To find out why investors would be better served by remembering the old rule, ‘buyer beware, see: How regulation made markets riskier
America is at war with itself over water
– The US has started fighting water wars using a very American weapon: lawyers. For more on why you can expect to see more disputes between states – and between the US and its nearest neighbours – as water supplies come under ever increasing pressure, read: America is at war with itself over water