20th June 2013
Maybe the Treasury has taken note of criticisms such as that voiced by Justin Urquhart Stewart on MindfulMoney earlier this week. Urquhart Stewart had compared an early sell-off of the banks simply to get money into the Treasury coffers as comparable to Gordon Brown’s notorious gold sell off at the bottom of the market. That and other similar criticisms in City circles will not have been welcome in the Treasury’s Parliament Street offices.
Now the Chancellor George Osborne has outlined a new plan. He wants to return the Government’s Lloyds Bank shareholdings to private ownership by 2015. But in the case of RBS, he wants to look at breaking up the institution into a good and bad bank and then consider returning the good half to the market while presumably managing down the other book.
This would, eventually, return another fully functioning banking player back to the British High Street hopefully with a beneficial outcome for the country’s small businesses and other borrowers.
At the very least, the Treasury cannot be accused of employing unseemly haste in RBS’s case. In the process, it is also accepting one major recommendation of this week’s Parliamentary Commission on Banking Standards which wanted the good bank, bad bank proposal given some serious thought.
In fact, though it is not widely remembered the UK already has a bad bank. UK Asset Resolution (UKAR) holds £68.7 billion of loans. This includes, among other grizzly items some toxic loans from the now defunct Bradford & Bingley – though it may have bought some of those books of loans from other lenders, and from the poorly run (under its previous management) Northern Rock. In the case of the former, the good bit of B&B is now contained within Santander. Northern Rock’s good bits are now part of Virgin Money. Now, of course, not all of even those supposedly poor quality loans are toxic. But it would leave the UK with either one very large bad bank or two medium bad banks. And we don’t know what happens when interest rates shoot up because some of those loans and borrowers must be vulnerable.
Back to Lloyds though. It is still possible that Government could be accused of rushing to return the 40 odd per cent stake in the Lloyds HBoS group and underpricing the investment.
However if you are one of the prospective buyers there are a host of things to think about. Among other things, you will want to consider the impact of the sell-off of TSB branches (once destined to end up with another bank that got itself in a little difficulty Co-operative). There is that interest rate/end of QE risk again although that may be mitigated at little by an economic recovery even if it is a sluggish one.
In addition, as the BBC reports today and possibly lost amid the other headlines is the fact that the Prudential Regulatory Authority wants a host of banks to hold more capital.
Barclays, Lloyds Banking Group and Royal Bank of Scotland (RBS) account for much of what the PRA says is a capital shortfall though Nationwide is mentioned as well. The state -backed RBS alone must find £13.6 billion, with Lloyds lacking £8.6 billion in capital. Barclays must boost its capital by £3 billion.
The BBC’s business correspondent Robert Peston suggests that it is Barclays and Nationwide which will be most miffed because they have been doing what the Government wants them to do and are lending more only for another admittedly arms length arm of government the PRA to require them to hold more capital as a result.
So if you are thinking about scooping up some Lloyds investment, you need to ask what exactly has and has not been priced in.
You may decide it is best to leave bank investing to specialist financials or recovery play fund managers. If you are investing personally, don’t expect investing in the high street banks to be a ‘normal’ investment for some while to come.
Of course, if the Chancellor is being hasty as an owner of LLoyds (through the Government’s holdings) you may be getting short-changed, but if the price is lower than it might be, then as a private investor it might be a good buy.
* For an entirely different take on things, this is video about what a good bank looks like held at St Pauls earlier this month and featuring among others, the Archbishop of Canterbury Justin Welby.