Compare and contrast.
Selected UK banks on Monday morning:
Selected European banks on Monday morning:
The outperformance of the UK banks is probably not surprising. After huge amount of kite-flying the final report from the Independent Commission of Banking doesn’t on first read deliver any surprises. If anything the conclusions are rather more bank friendly that feared, especially for Lloyds.
Instead of having to sell more branches to create a viable competitor, the ICB has come up with this fudge.
Improving prospects for a strong and effective challenger
In the light of further evidence, the Commission confirms its view that the prospects for competition in UK retail banking would be much improved by the creation of a strong and effective new challenger by way of the Lloyds divestiture. (The required RBS divestiture has already taken place.)Since the currently proposed divestiture has important limitations, its substantial enhancement would be desirable. This is not simply a question of the number and quality of divested branches, or of the related share of personal current accounts, which at 4.6% is at the low end of the range associated with effective competitive challenge in the past.
The funding position of the divested entity is also important for competitive prospects. In particular, unless remedied, its large funding gap – i.e. high loan-to-deposit ratio – would blunt the incentive of the divested entity to compete effectively as a credit provider, and might raise its funding cost base, thereby weakening its ability to compete generally. The Commission therefore recommends that the Government seek agreement with Lloyds to ensure that the divestiture leads to the emergence of a strong challenger bank.
So the rumoured £30bn funding gap has wrecked any hopes of creating a bank that can challenge the monopoly position of the big four high street banks. And all Lloyds has to do is make sure the sale of 632 branches, equivalent to 22 per cent of its branch network, leads to the emergence of a strong challenger bank.
And by that the ICB means the following:
António Horta-Osório will be pleased. He won’t have to sell more branches but he will have to get the personal current account market share of Challenger increased from 4.6 per cent to at least 6 per cent.
Diamond Bob at Barclays, not so much. He who won’t be happy with the recommendations on capital requirements, says Joseph Dickerson at Espirito Santo:
The capital requirements recommended by the ICB are particularly onerous and are somewhat akin to the “Swiss Finish” recommendations.
It is recommended that G-SIB banks (i.e. HSBC, RBS and Barclays), and ring-fenced banks with a ratio of RWAs to UK GDP of 3% or more, should be required to have capital and bail-in bonds (together, primary loss absorbing capacity) equal to at least 17% of RWAs, within which there is a minimum equity to RWA ratio of 10%. The implicit hybrid capital requirement is therefore a minimum of 7% (compared to 9% under the “Swiss Finish”. We have not seen what form the hybrid capital should take, but we imagine it to be essentially COCOS. The banks will have until 2019 to implement this and other plans. This is a big negative given BARC’s Tier 1 ratio of 13.5%, HSBC’s Tier 1 ratio of 12.1% and RBS’s of 12.9% are below this level (and note this is on a Basel 2 basis, not the more onerous Basel 3 regulations).
But things could have been so much worse, says Ian Gordon, the banks analyst at Evolution Securities.
Today’s ICB report is unwelcome and unhelpful, but it could easily have been a whole lot worse. A (recommended) “delay” in implementation until 2019 should cause materially less transitional damage than might otherwise have been the case.
Accepting the fact that the report was only ever going to represent bad news, there is cause for not immaterial relief this morning. Most importantly, the ICB recommends a final mandatory implantation date of 2019. With a nod to political sensitivities, there is a call for an immediate commencement of implementation work, but, if accepted, the additional breathing space will certainly avoid any lingering fears of a requirement for fresh equity issuance, and most importantly, allows banks some planning time to mitigate the likely adverse impact of segmentation on funding costs.
This is particularly true given the apparent scope for the banks themselves to partially determine what falls inside or outside the retail “firewall”. Retail banking and SME business falls inside, so-called “casino” banking falls outside, but (for example) the provision of many services to large corporates may be placed on either side of the firewall.
Much much worse.
A victory of sorts for the banking lobby, then?
Sort of, reckons Gordon.
Whereas we continue to regard the recommendations of the ICB as likely to permanently increase the risk of instability within the UK financial services sector, with materially adverse consequences for the broader UK economy, some of the worst excesses of the extremist “reform” agenda appear to have been mitigated. We accept that may sound a somewhat peculiar comment when even the ICB still estimates a GBP4-7bn price-tag for implementing its dangerous “firewall” proposals.
Related link:
Sweeping changes proposed to UK banks – FT
SocGen’s ‘hard facts’ – FT Alphaville