Blain’s Morning Porridge – September 24th 2019
“We have banks that are not only too big to fail, but too big to be held accountable… ”
In the headlines this morning: https://morningporridge.com/stuff-im-watching
Sept 24th 2019 – Lots of stuff to think about today:
- European economic data confirms something very wrong in terms of growth prospects– fish rot from the head: ECB policies are leading nowhere, yet it’s Germany that is slowing fastest.
- The failure of UK challenger bank Metro Bank to find buyers for its £200mm MREL senior non-pref bonds illustrates a failure of banking policy and a level playing field, rather than any unfixable issue with the troubled bank.
- VisionFund – just how damaged is it following the WeWork debacle? Some analysts think the 60% equity might be negative once the pref-debt holders are factored in. Everyone loses.
- We’ve almost lost sight of what’s happening re Brexit as the Labour party fails to agree any policy, Boris gets embroiled in another scandal, and we wait for the Supreme Court to opine.
And then there was the United Nations Climate Actionconference y’day…..
I just bet lots of readers of a certain age are tsk tsking how a teenager would have the temerity to be rude and angry at the UN. Anyone blessed with a daughter will know that look. The scowl might not have been apt, and was hardly diplomatic. But, ask yourself how you would have reacted in that snake pit – listening to patronising leaders spout platitudes and empty promises. Just because Greta got angry, does it make her wrong? Is what she says any less acceptable because she demands action? It wasn’t a good look, but I remember my own daughter’s face contorted in similar fury. In hindsight, she was probably right to be angry – passion is part of life.
Compare and contrast Greta’s actions and honesty with the most powerful man on the Planet. Is it acceptable for the President of the United States to threaten to withhold promised military aid to a foreign government (under the cosh from Donald’s good chum Putin), and attempting to bully it into framing an American citizen for alleged crimes he has not been charged with and certainly not found guilty of? And then to brush it off in a series of tweets repeating vague allegations and offering no proof. For that is exactly what Donald Trump is doing re Joe Biden’s son – it’s a leaf out the very worst pages of history.
Back in the real world, something is deeply worrying about Europe. Y’day’s PMIs were pretty disappointing. Doom and Gloom everywhere. Yesterday’s German PMI was the lowest in years. France was not much better. No-one now predicts European growth – the agenda is how much further damage a slowing China or a recession will do. Although the ECB has announced further stimulus, eased rates and will resume bond buying, that’s a macro move that will achieve zero on the shop floor. The ECB’s monetary stimulus – aka pushing a heavy rock uphill with a wet length of string – will achieve nothing.
The facts are the European economy looks to have stalled! As I’ve said repeatedly it need a push. Manufacturing, and especially autos, is hurting. Of course, it’s nothing to do with Brexit – is it? (US Readers – rhetorical sarcasm alert.) That’s a wholly British problem isn’t it? But, it might just be in Europe’s interest to agree a clean constructive break in the hope Europe’s second largest buyer of German cars keeps on buying…..
Meanwhile, I have to mention the very best Idea I’ve seen in years on Brexit. It’s so simple: We should really ****-up Europe by Staying In! Revoke article 50 and demand Nigel gets a senior level role… Start being as diligent as France in obeying the laws and accuse everyone else of cheating… etc etc. It’s a brilliant plan, and I’m surprised Rees-Mogg has not proposed it.
Metro Bank is a rather exciting new UK Challenger Bank. But, it’s been in the news for all the wrong reasons, and its stock price has taken a hammering. It now faces the embarrassment of being unable to find buyers for a new bond deal – in a roaring fixed income market.
Yet, the new UK challenger banks are a fantastic idea. They have been encouraged by government to launch new and better banking services in the UK. Smaller and more nimble, and unconstrained by the institutional bureaucracy that makes the big banks so hopeless, it’s a tacit admission by the authorities the customer offerings of the Big Four UK retail banks – HSBC, Lloyds, RBOS and Barclays – are massively sub optimal. More to the point, the new banks can utilise new and efficient systems and Fintech, while the big banks are still trapped in legacy systems speaking archaic program lingos they can’t afford to replace.
Metro’s offer was simple – evolve with customers, serve them well, open accessible branches and work to find client solutions – rather than the mindless “computer says no” clients get from the large banks. But it came to grief earlier this year when it discovered it had been mistakenly under-allocating capital to its commercial property loans. The bank’s stock price took a hammering.
But it was an easily fixed problem – the bank was able to raise new equity to cover the shortfall (without breaching its regulatory capital levels). Months later – and despite social media rumours saying it would collapse – the bank still ranks top of UK customer satisfaction surveys, while the big banks come bottom.
Name me one of the big banks that hasn’t made bigger mistakes? Barclays playing fast and loose with the rules by lending investors the money to buy their stock to avoid collapse? RBOS for being complete fatherless children to their SME clients? HSBC for funding Mexican Cartels? Yet Metro remains under the cosh with continuing investigations of the bank and management for the accounting error.
As a result of the ongoing uncertainty on its management, the bank failed to find buyers for a £200mm Senior Non-Pref deal this week, and pulled the deal. It looks very bad. The deal would have improved the banks “MREL” (Minimum requirement for own funds and eligible liabilities”) ratio. At 7.5% for relatively low risk capital, it looked very expensive subordinated capital to where the big banks have been raising Tier 1 capital – and cost of capital is critical for the bank’s growth.
It looks even worse in terms of customer outcomes – Metro Bank’s future looks under threat. Sure the PRA has a duty to make sure the bank’s accounting is correct, and full credit to it for pointing out the mistake in underweighting its CRE exposures. But there comes a time when the bank now looks the victim of circumstances and unfair capital rules that support big inefficient established banks and works against the better more nimble challengers. The heads of the big banks must be delighted.. If the authorities let Metro die, it lets them continue their shoddy excuses for customer service.
All it would take would be a simple statement from government along the lines of this country needs better banking, and to confirm their support for challenger banks. They bailed out RBOS to prevent a systemic banking collapse in 2008. 11-years later what have got from owning RBOS? We are the proud owners of a bloated banking bureaucracy on our books at a loss.
If the government were to invest £250mm in Metro Bank senior non-prefs, then not only would they get a superb return, but create a better banking market! Worth a thot?
I’m afraid I won’t have time to comment on VisonFund this morning – I’m out travelling rest of this week, so Porridge will be occasional.
Out of time and back to the grind..
NB – The boat in the picture is Thalia. It was built in 1888 and is true to its original design, meaning it lacks anything like winches to pull in the sails. It was blowing 25 knots at the Hamble Classics Regatta. That’s me sitting right at the back trying to trim the main sail. It hurt! Still does. Great photo tho!