Monday, March 05, 2012

RBS goes British Rail and hikes fares

TMM are in foul moods this morning. You see, it seems that the cottage industry that is the taxpayer owned "world-beating" UK banking industry have decided that they're not content with helping themselves to tens of billions of pounds of taxpayer money over the past few years. It seems that their profit margins aren't quite good enough. Brilliant, TMM thought, that means that they will reduce overheads, figure out what is going wrong and restructure their businesses to deal with increased competition and the so-called "New Normal", helping taxpayers get a decent return on their investment. But no, it seems. These publicly-owned banks appear to have taken on the classic public sector mentality of deciding the above is too difficult, and instead are opting for screwing the fixed client base. Very British Rail.

Yes, over the weekend, Reliant-Robin Bank of Scunthorpe RBS & Lloyds hiked their SVR (Standard Variable Rate) mortgage rates (soon to be followed by the rest of the cartel, having watched the recent carbon copy move by the Aussie bank cartel) by 25bps despite the Bank of England Base Rate having sat at 0.5% for 3years and multiple rounds of Quantitative Easing.

The usual reasons of "tightness in wholesale funding markets" and "increased regulation" have been trotted out by said banks. And certainly, to some extent this is true. But of the former, arguably the peak in the stresses emanating from Europe has passed with the gargantuan LTROs from the ECB. And as for the latter, TMM would observe that this has been an excuse for much of the past 25years. Regardless, the Basel III regulations are to be gradually introduced over the coming decade - they did not suddenly appear in the past few months. TMM are also highly sceptical they will be implemented in anything like their current form.

Anyway, TMM decided to take a closer look. None of this is new, and has been covered elsewhere, but is worth repeating. RBS have around £414bn of deposits, which probably pay around 0.2%, they have Short Term secured borrowings of about £300bn, which probably pay something like 0.8% (somewhere in between repo rates and Libor), unsecured borrowing of about £700bn which is probably something like 3.7% (Libor+CDS) and £70bn of equity which is probably about 10%. Which gives a blended rate of just over 2.4%. Against that, RBS's Net Interest Margin is about 1.45%, which, back of the envelope would produce about £22bn a year.

As TMM have noted previously, they find the behaviour of the Bob Diamonds of the world to be abhorrent. And without wishing to spark a religious debate about whether bailing out banks is a good or bad thing, TMM are generally of the view that if taxpayers are going to write a put on the banking system, it needs to be priced correctly. The value of this is not easy to estimate, but one way to arrive at a guesstimate of the implicit state subsidy might be to look at the difference between Subordinated and Senior CDS and multiply that by the unsecured borrowings. For RBS this looks something like £712b*(525bps-262bps) ~£18bn/year. Whether this is an overestimate or an underestimate, TMM do not know. But they do know that, absent the implicit government put on Senior bonds, RBS as an institution would not be able to exist. Because removing £18bn of that £22bn above doesn't leave much over to cover costs and NPLs...

Now, TMM are NOT bank analysts and the above is probably either wrong in at least a few ways at best, or at worst hopelessly naive. But they do think it at least dents the argument that mortgage rates have gone up purely because of increased funding costs or regulation.

It's just that these banks are not very good.

The chart below shows the historical estimated funding rate (red), the SVR 75% LTV rate (green), the difference between the funding rate and the SVR rate (incorrectly labeled 'SVR Margin' for ease of viewing, purple) and the overall Net Interest Margin for the bank (blue). The banks didn't cut their mortgage rates anything like what might be expected in 2008 in order to try and rebuild their margins lost in 2006/7. Then in response to a relatively small increase in funding costs they decided to try and hold on to these out-sized margins by hiking the SVR over the weekend despite the fact that wholesale funding costs have begun to move lower once again.

Now, regular readers will know that TMM are not Merv the Swerv's greatest fans. But they sure are looking forward to seeing his reaction to the banks sticking two fingers up at his latest gift of QE. TMM have also written to their banks demanding to know why their mortgage rate has gone up despite all of the above, particularly just a few weeks after large bonuses were paid out.

TMM would like to start a competition to rename the UK's public sector banks, and will start by offering:

Reliant-Robin Bank of Scunthorpe

Leyland Banking Group


VandalsStoleMyHandle said...

Q: Why do dogs lick their balls?

A: Because they can.

cpmppi said...


Bang on... "Because they can" was our preliminary title"


Anonymous said...

C says'
My main criticism of your analysis is it bears no real appreciation of the kind of market the banks face in terms of the laternatives that are on offer to them to adjust their business models to what really is a different kind of economic world to the one they have known for so many years.
At the heart of it they are profit making entities which have found fewer opportunities from which they can make profit.What is left for them is not at this particular time even a market in which they can forsake margin for chasing volume hence I am completely unsurprised to see them going this route. In support I would say that as usual they are using 'fudgy' rational to deflect criticism ,but that on;y puts' them in the same camp as many other corp entities in recent years.
The broad approach has been to make more from less and the banks are onboard with that.Anyway they have to pay me for my bondholdings so carryon chaps !!

Anonymous said...

I liked your reference to Aussie Banks. Ever since I came to these shores I noticed how benevolent the british banks were compared to the aussie variety. No minimum bank balance to avoid fees, no limited number of ATM withdrawls per month, no outright charge for using a competitors ATM instead of your bank. Aussie banks are masters of NII generation. Best is yet to come for UK savers.

Leftback said...

The usual three-part approach to bank reform:

1) Public/taxpayers screwed.
2) Monster bonii for the top brass.
3) No Problem, old chap!

Oliver said...

Consistently Underperforming Nationalised Thrift Services. said...

I think they are really guite heroic for gaining the first mover advantage in deflating the UK housing bubble.

Leftback said...

Perhaps RBS should get long oil.
Everyone else is...

Managed Money Positioned Asymmetrically

Steve said...

Two things:

--They can do it because of less competition

--They will do it because of the costs headed their way, notably the beloved Volcker Rule, among others

--They've lost a lot of their revenue sources now that so many of the financial games are over

They're ahead of the curve. The yanks are next.

Leftback said...

I love the smell of napalm in the morning.

Steve said...

Smells like...bullicide.

Saul Bollox said...

Quiet 'ere, innit?

Leftback said...

Have been waiting to see USD and JPY strengthen on the same day to confirm the turn, and here we are.

We don't see much support until:

SPX 1320 - 50 dma
SPX 1290-1300 zone - chart support
SPX 1260 - 200 dma

Kudos to those punters who predicted the ongoing cliff dive in AUD. That was a good call.

This week might be the week that the Decoupling Theory takes another knock as we discover that US employment was boosted artificially in Jan by warmer weather that brought forward retail spending and hiring in construction.

The action in the DAX today was ├╝berschrecklich, if that's a word. If not, I have just coined it.

CV said...

Well it was inevitable that a correction was coming. The main question all those poor souls being under-invested so far in 2012 will be asking themselves is of course whether to buy the dip.

The US and Chinese economy are slowing and this is only now starting to dawn on the market. How fast will the Fed launch QE3 if this continues.

I agree with LB, we need more pain. But Once spoos dips into the 1280 range I suspect they will be rolling out QE3. On our indicators global growth will bottom in April which means that in terms of coincident data releases it will be May/June.


Leftback said...

Fair comment there, Claus. We will have to witness some extremely underwhelming data and listen to the screams of newly minted reflationists and the moans of the latest batch of Skank of America "investors" before the floodgates are opened once again in the States.

BB dare not move while crude is still flirting with $100/bbl, so the dip buyers (and energy longs) better beware. No new orgy of central bank liquidity for a while yet. Hope the last guy who bought Apple at $548.21 last Thursday morning enjoys the new iPad.

(Do MM readers ever wonder, like LB, who does that? I mean, who is it who buys early in the morning, during a rolling top...?) It's like the people who start shorting the day after the index has been hammered down relentlessly all the way to the 200 dma.

It's a MOMO's world in the RORO market...

Steve said...

Donno LB but he's no guiltier than I am for being short AUD from 104.

At least now it's a less crappy trade...

Intrinsic said...


Who buys at the top? well we need a sucker to sell it to or we are the ones holding the bag when the brown hits the fan.

Amplitudeinthehouse said...

Pass me the Tokyo subway timetable, thank you.