John Ward – Smoke Signals – 13 February 2014

JohnWDisturbing signs and worrying whispers about two big UK financial institutions.

Jesse Norman, Conservative MP for Hereford and South Herefordshire and a member of the Commons Treasury select committee, has been on Channel 4 pushing the usual RBS line about “yes these charges [of defrauding SMEs] are serious, but do they stand up?”. Even Mr Norman had to admit that the new charges “look bad, and yes, this is the third set of charges against the bank” – to be a little more accurate about it, the bank currently faces some 1700 law suits from allegedly defrauded SMEs. However, my interest in the RBS saga is not if or indeed how the crimes were committed, but why.

I’m obviously aware that senior bankers these days have the ethics of a viper, but just about every stunt pulled by Stephen Hester while he was CEO suggested desperation: we have had glitches, “mistakes”, and thinly disguised client property theft that were obviously going to be found out in the end. While he was doing this, Mr Hester was very much the Treasury’s favourite man: but then Osborne abruptly elbowed him out. We’ve never been given a credible reason why.

Now it seems RBS is going to be downgraded by Moody’s. Citing ‘concerns over the UK lender’s capital strength’, one can only assume that the abrupt profits warning in January involving ‘billions of Pounds in extra charges to cover the cost of past misconduct’ didn’t exactly endear them to the ratings agency. The truly hysterical part of all this, of course, is that neither the TSC nor the CEO of RBS seem able to gather evidence, but they do seem about to set aside “billions of Pounds” to address misconduct. These two assertions must represent about the best case of cognitive dissonance in financial history.

The fact is that RBS is 81% owned by us (well, not really us – these days, as you know, we’re merely creditors to be subordinated on a whim and a dare) and two Governments have now scoured the planet in search of a mug who might be unhinged enough to buy it. Nobody has bitten. It is, I suspect, entirely possible that RBS might involuntarily decide the outcome of the 2015 UK General Election. My view on RBS is increasingly that it is a case of when, not if.

Sadly, although in now way a basket case, also hoving into view on the potential exposure radar is the mutual bank Nationwide. I’ve heard so many tidbits, rumours and tuts about Big N over the last month, that as a customer sorry creditor myself, I’m now getting the wobbles. In some ways, the lender – it has an 82% share of the UK mortgage market – is a potential victim of its own dominance.

On the face of it, Nationwide is doing extremely well. Its most recent interim financial results (for the half year ended 30 September 2013) showed a 155% increase in underlying profit to £332 million, and a 25% increase in total underlying income to £1.39 billion. Total statutory profit was £270 million. So then: growing in size with comparatively healthy margins.

The problem for them (as by far the biggest UK housing lender) is that the UK housing market is ridiculously over-valued. And it is estimated that, in 2013/14 half year alone, Nationwide got over 30,000 first time buyers onto the property ladder: the very ones most likely to default in a housing bust. To be exact, those numbers were up 52% YOY – more than one in five of all first time buyer mortgages in the UK….and 16% of all cases advanced under the first phase of Osborne the Cunning’s Help to Buy scam sorry scheme.

I wouldn’t call that such a great idea, personally: nice of them to show willing – but it may come back to bite them.

Further – as is so often the case with lending – we are dealing with millions in income and profit, but billions in lending. Sorry to remind everyone about this, but there are a thousand millions in a billion. So although the lender’s assets are a hundred times more than its lending income, in the financial year 2012/13 Nationwide’s mortgage lending rose 17% to £21.5bn.

Nationwide has assets of around £193.3 billion…well over half of all the assets in the UK mutual lending sector. So as lending is only 11% of assets, everything’s fine, isn’t it? Er, not necessarily. We have to ask not what the assets total is, but also what the assets are…and what proportion of them are liquid.

In the September 2013 results, the lender’s core liquidity ratio was….11%. Now, remember that (a) a lot of debt is counted as an asset, (b) It’s loan to deposit ratio rose to 115.4% last year, and (c) Nationwide also faces substantial future levy payments.

Chief Executive Graham Beale writes, “To the extent that property prices have now stabilised, we expect to be less exposed to the requirement for additional provisions on impaired cases.” In short, bad debt is getting less likely.

I beg to differ. I think it’s getting more likely, I think we are going to get a bust either later this year or early next, and I think borrowers’ rates will rise early next year.

Very notably, Bank of England Governor Carney obviously agrees. I base that judgement on the fact that he has (1) devised a stress test to assess ability to survive a housing bust (2) given Nationwide a high profile in that test (3) scotched ideas of an early rate change and (4) made it clear in private that he thinks HtB is going to overheat an already over-valued market.

Mark Carney is a prudent man. He has looked at the Nationwide’s unique exposure to a bust, and he is worried.

Do we have a serial banker killer on our hands? That’s not a serious question, but the death toll keeps on rising. Harvard graduate Ryan Henry Crane, 37, used to work for JP Morgan. Another of its London-based employees committed suicide by jumping from the top floor of its Canary Wharf building two weeks ago. Crane, although young, was a high-flier: an Executive Director of JPM’s Global Program Trading desk, which has been central to the bank’s stunning record of infinitessimal trading boo-boos over time.

What most hacks don’t seem to have spotted is that Crane actually shuffled off the coil ten days ago. Yet no details were released at the time, and as yet what the bloke did after leaving the Pirate remains a mystery. Stay tuned.

Is China exporting its small-retail sector? It seems the UK isn’t the only place bending over backwards to let Chinese citizens immigrate. Since 2007, 400,000 Chinese have arrived in South Africa. The intriguing things here are first, almost all of them are from one province – Fujian – and second, they have set up (spread evenly throughout SA) some 12,000 shops.

Retired professor Colin McCarthy observes,  “All the evidence indicates that the project to set up such an extensive network of Chinese shops, all following the same pattern and targeting the same market, was well researched, well planned, well organised and well financed”.

In neighboring Namibia (where I saw the evidence of influx for myself four years ago) there were just 1,000 Chinese immigrants in 2005. Today there are upwards of 50,000. And again, they have established mainly small retail businesses – particularly in clothing and jewellery. In the industrial area of northern Windhoek, China City, a wholesale and retail centre; and Oshikango, on the border with Angola has seen hugely expanding Chinese retail: the town had 22 Chinese-owned shops 2004, 75 by 2006, and 213 by 2012.

In Athens, where the Chinese have invested heavily in Piraeus harbour, the range and volume of Chinese shops selling Chinese goods is also readily apparent.

The CPR lost 9.34 million citizens to emigration last year, and the numbers are increasing. But most of these are individuals in search of a better life: their biggest destinations are the US, Canada, Australia and New Zealand…and Beijing is worried about the consequent brain drain. The retail expansion abroad, say commentators in Asia, South Africa and Greece, looks coordinated and Government-planned.

Certainly something is afoot, because the US security services are monitoring the trend: 2009 U.S. embassy cables released by Wikileaks illustrated the degree of concern.

It’s an interesting model of imperialism. But small shopkeepers are very rarely keen supporters of communism: it could be that Beijing is happy to see the back of them. Either way, it’s one to watch I think.

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