Wednesday, 6 June 2012

Rain followed by thundery showers: Spanish woes; Britain's banks; and RBS.

This morning's local weather report has made me chuckle as it was a case of the day starting off with rain to be followed by showers which in some cases will be thundery.

Rain followed by showers! Its still tickling me now and its been a few hours since I heard it

Thinking about it, it could even be a metaphor for markets and the global economy at the moment as well.
But, I see that the FTSE is up this morning as it plays catch up with a couple of fickle days trading across the globe, after having been closed for the Diamond Jubilee celebrations. 
And I say fickle in reference to Wall st where weaker than expected growth (still growth though!) in non-farm payrolls data drove the markets down on Friday but slightly more recent data suggesting that the US service sector had edged up helped stabilise markets yesterday:

"The pace of growth in the U.S. services sector picked up in May as a gauge of new orders improved, according to an industry report. The Institute for Supply Management's services index edged up to 53.7 in May from 53.5 in April, a touch above economists' forecast for it to hold steady." ( Wall Street rebounds but mood still sour).

However, although the financial services sector seemed to benefit yesterday and this morning, I've seen 2 interesting reports today that don't seem to be filtering through yet (to the FTSE anyway).
Both are banking and bailout related as well.

The first piece is that, rightly or wrongly, Spain wants to break the rules!
The country's government seems to have openly admitted that it can no longer raise the Eu19 bn that it has proposed, to help recapitalise the Eu24 bn black hole in Bankia's balance sheet, and has made a further appeal to the EC for rescue funds ( Wednesday newspaper round-up: Spain, Barclays, Ireland).
The issue being that the interest rate on its sovereign debt raising is now at unsustainable levels.
And, I say break the rules because my very limited understanding of the EFSF is that, it is in place to lend to Governments not individual companies. 
But, the Spanish government doesn't want to take on this liability or a formal EU/IMF bailout which is a situation conditionally different to that which Greece, Ireland and Portugal have requested and accepted their bail-out funds.
Interesting to get the impression that unity and shared ideals is great when things are going well or we can't foresee it affecting us, but when it does, we want to bend the rules to suit us. 
I say interesting but its also disappointing to see the example being set, especially when its the individual citizens that are likely to take the most hurt not politicians.
It might not be a game, and its certainly not poker, but the stakes are getting higher.

With regards to the second extract, and continuing with the Financial Services sector, I made a comment in my May update (May 2012: Portfolio Update.) questioning whether, in this lengthening period after the credit crunch, financial services had fully embraced the opportunity to re-capitalise their balance sheets or instead, carried on regardless, and continued to operate in a questionable manner.
Well an article in today's Telegraph suggests that:

"Britain's banks are sitting on a £40bn black hole of undeclared losses that are preventing them from making vital loans to businesses and households. PIRC, the shareholder advisory group, has analysed the 2011 accounts of the UK's top five banks to calculate how much they expect to write off as bad debt in the coming years but have yet to take against profits. Royal Bank of Scotland (RBS) was in the worst condition, PIRC found, with £18bn of undeclared losses that would wipe out more than a third of its capital buffer and potentially force the 82% state-owned lender back to the taxpayer for another rescue. HSBC had £10bn in undeclared losses, Barclays £6.7bn, Standard Chartered £3.6bn and Lloyds Banking Group £3.6bn. PIRC presented its numbers to all the banks and none disputed them, The Telegraph writes" ( Wednesday newspaper round-up: Spain, Barclays, Ireland).

Bonuses all round then!

More than a little concerning when you expand this picture across Europe, particularly when you consider that Britain's banks have benefitted from: bail-outs for RBS and Lloyds; additional foreign investment in Barclays; and quantitative easing. 
It serves to illustrate a wider concern for European banks.

Just as I'm finishing up I see that RBS is undergoing some kind of pschological campaign to boost investor confidence by consolidating every 10 shares owned into 1 which now means that RBS is back up to £2 share (currently anyway).
I'll change you a tenner for 10 pound coins!

Is that the best that RBS's BoD can come up with to enhance shareholder value and how many meetings and presentations did it take to come up with that one.
Given that the extract above talks about a £18bn black hole, and that there is an administrative, and manpower cost to churning over the shares and share register, it suggests to me a lack of respect and understanding that they could conceive that this would create investor confidence without a fundamental improvement. 
Hey Barclays/Lloyds, our share price is higher than yours!

Fair enough if they had undergone a fundamental transformation and were now looking for ways to ensure that the company's true prospects were valued in the share price, then this might provide some subliminal message about price and value.
But then again this is the company that has been running all those smiley faced "customer charter" TV adverts intended to show it has turned over a new leaf yet still feels able to splash out an undisclosed figure of up to £7500 per head for olympic tickets (supported by a £7.5m hospitality pavilion) for investment banking executives and clients (Fury as RBS bosses prepare for lavish knees-up at Olympic Games.. using taxpayers' cash).

I think that they need to do a teensy weensy bit more yet to restore investor and public confidence.
Looks like the local weather report was correct after all - rain, followed by showers, some thundery. 

At least the sun's shining now!

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