Well, the lobbying seems to be paying off…
On Thursday morning, Britain’s banks are dominating the FTSE 100 leaderboard (Barclays +2.08, RBS +4.09 and Lloyds +2.96 per cent at pixel time) on the back of this front-page FT story:
George Osborne is looking at ways in which Britain’s tough bank liquidity rules might be eased, potentially saving banks hundreds of millions of pounds and releasing funds for lending to businesses and homeowners.
The chancellor is said to be looking sympathetically at claims by the banks that Britain’s regulators have gone too far in their efforts to avoid another Lehman Brothers-style crisis and have put the City at an international disadvantage.
Cue the UK bank share price reaction then — these crisis-imposed liquidity buffers are expensive things to maintain, as Cannacord Genuity’s Cormac Leech points out:
• Chancellor Osborne investigating ways to ease liquidity rules for UK banks according to FT overnight.
• Assuming a 50% reduction in cost of liquidity buffers boosts Lloyds PBT by >5%.
• The Liquidity Coverage Ratio(LCR) and Net Stable Funding Ratio(NSFR/LCR ratios) are not widely disclosed except for Barclays (End 2010: LCR 80%; NSFR 94%) which guides a liquidity buffer cost of £0.9bn per annum equivalent to c9.5% of 2012E Group PBT.
• Given Lloyds generally weaker liquidity position the benefit of easier liquidity is likely to be greater. Tougher liquidity rules have been a key concern re: LLOY’s NIM going forward; Other UK banks also clearly benefit but to lesser extent.
• Hint of easier liquidity rules being investigated by Osborne is consistent with Mervyn King’s (regulatory hawk) influence on FSA being reduced. The BoE governor will only become head of FSA after King retires in 2013 – which some believe has been deliberately timed- which could be a positive for the banks in the short term.
Which dovetails nicely with a Thursday thought from Merrill Lynch:
Following the crisis the UK Banks were forced to adapt to liquidity rules much tougher than those used by European counterparts and indeed those set out in Basel 3. For example Barclays now holds £154bn of liquidity, which cost it c. £900mn last year, Lloyds has c. £150bn and RBS c. £140bn. The banks are arguing that easing this requirement would allow them to lend more into the economy.
The FT article refers to project Merlin and the banks lobbying for level playing fields. We think this is a VERY important article for 2 reasons.
(1) It is the first piece of press we have seen that refers to project Merlin being more than just about pay – it is about level playing fields for UK banks and international counterparts.
(2) If this view becomes more widely held it has VERY significant implications for the way that investors view the political risk in the sector, how the government might react to the recommendations of the IBC, and what capital/liquidity rules the banks might have to follow.
We flagged in the Barclays results that the new 9% core tier 1 target could be a reflection of project Merlin. If this article is anything to go by I think that view is enhanced and therefore, as we suggested, Barclays core tier 1 target of 9% is a VERY important read across for the sector.
We continue to think 2011 is “the year of the bank”. Investors are underweight and if we do not double dip this is the year when banks deliver and we finally get clarity on valuation. We continue to favour domestic UK banks over the Asia-UK banks. Top pick is Barclays, but note that Lloyds is looking increasingly left behind in this rally.
Laughing all the way to the bank(s) then.
Related links:
Mervyn King: From Bagehot to Basel, and back again - London Banker
Project Merlin’s (unprofitable) magic wand - FT Alphaville
UK mortgages, and the bank lending blame game – FT Alphaville