Bank boom ends
I am not surprised there has been a sharp fall in the HBOS share price this morning. The squeeze on its margin in retail banking was very pronounced. and are now smaller than those of its corporate banking operation (which is astonishing for a bank whose core is the old Halifax building society).
When you add that to what Hector Sants, chief executive of the Financial Services Authority, said to me this morning about how the cost of money for banks has risen on a permanent basis, well it all adds up to a pretty gloomy outlook for banks’ profitability.
Predictably, shares in and (whose results are tomorrow) also fell pretty sharply.
For banks dependent on providing mortgages, loans and other banking services to millions of British consumers, there has not just been a downturn in the cycle – but, as Sants pointed out, the prospects for them have become altogether more dull on a permanent basis.
Sants himself is rather pleased about that. The end of the era of cheap debt means that fewer of us will be tempted to borrow too much.
But it probably means that the owners of banks, their shareholders, will receive lower returns. And it may well slow the growth of the economy for some years.
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why are the boe and the fsa talking the country into recession
Can't you give the Banks a rest or are you trying to instill more fear? The ³ÉÈË¿ìÊÖ does a good job of bringing down British companies - infact it seems to excell in this - e.g. MG Rover (through mis-reporting and Clarkson) and more recently Northern Rock (through fear and Robert Preston not letting go).
Give it a rest eh?
Good news - bank and insurance along with plumbers, electricians and car garages are rippers and something needs to be done.
RBS are due to report £10bn profit tomorrow? What is that if not a boom?
House builders are looking for increasing growth later this year, who is going to lend the money to them to buy the houses?
More doom and gloom from RP! You have been quite quiet since NR was nationalised, just taking time to find the next story to run with.
the lenders appear to be using a sledge hammer to crack this paticular nut, by coming down hard on new borrowers they risk chocking off the housing market at its source ie the first time buyer.
to john firmstone (post 1)
Talk does not cause recession. Years of reckless borrowing and chickens coming home to roost does.
To John Firmstone post 1
Much as I believe that the FSA are not fit for purpose. The banks themselves could have anticipated this. They could have eaten their cake over a lot longer period instead they scoffed the lot and and now there is a long queue for the bathroom.
The trouble is that the styupidity of the last few years cannot be undone. Not only are the financial markets and lending affected, but in my own case, my neighbour has built a huge and entirely out of place extension. It was financed with cheap money on the basis of property "profits" and got through as the local authority were deluged with such plans.
The credit problems will pass and this will all happen again in 15 years, but the eyesore next door will remain.
What we really need are some new banks. The ones we have are broken and have lost their way.
Peston, you are becoming just a pest. I'm not sure you even understand the fundamental economics of what is going on and it seems to me that your real talent is in dreaming up somewhat hysterical headlines. You seem to have ignored a simple fact from the results statement in that the dividend has actually been increased which means the shareholders are not receiving lower returns as so boldly stated above. Unless you know something that the rest of us don't about the latter part of this year(which I think is highly unlikely since you would have already put it across on the TV), I think you should moderate your remarks rather than continue with ill founded speculation
You can't talk a country into recession.
Spend tomorrows money today and tomorrow go hungry.
This seems the choice of generation X.
Tomorrow is apon us.
I am pleased about this piece of news as a first time buyer.
What this means I think is, interest rates will get higher. Meaning people are going to be in trouble remortgaging. They will need higher deposits to remortgage. Less transactions on the market and accelerated house price drop.
So in a year s time, my accumulated savings should help me put in a 20% deposit on the first house plus expect to see some bargains.
All this if I dont loose my job thanks to the economic downturn. Tricky situation for all I think.
HBOS this morning claimed a £70bn Treasury portfolio to be "liquid and conservative" but half of it they can't either value or sell... that's why this stock is going down.
It never ceases to amaze me that people think journalists are talking the country into recession and should thus stop reporting on Northern Rock and the like. Unless these same people are going to argue it was journalists who encouraged people to borrow more than they could afford (and I don't ever recall anyone encouraging that) then they should shut up and stop looking to blame someone for the problems the world's economies are now facing. The "let's look for someone else to blame for our own stupidity" approach seems alive and well in these people. I say well done Robert Preston and keep up the good work - the news might be bad but that's no reason not to hear it!
People said I was mad when I was shorting the markets in June/July.
This is all long over due and much worse than it is being made out to be.
The FED are not helping the situation either. It's quite obvious to me that governments and central banks are trying to ease the stock markets down slowly.
When we drop too much they say no recession, now we're going back up they are saying recession. The longer this drags out the worse it is going to be.
Don't shoot the messenger!!! It's not the BoE, FSA or Mr Preston who are the causes of the economic turmoil. It's the chickens that are coming home to roost.
The short termist - lend/trade at all costs and bag my end of year bonus - approach has led to all this. The fact that financial institutions have also succumbed to the dogma that real estate can never drop in value hasn't helped either.
This needs to be discussed and debated in the open as it affects the whole of society, particularly as it's the taxpayers (especially the 'doms') that are then left with the financial mess.
No, don't give it a rest Robert. Banks are core to business and when we're having a meltdown we need to have more your commentaries on banks every minute of every day.
Banks are core to business and therefore must be run under the tightest of regulation. That concept went out the window ten years ago and banks are only now beginning to pay the price - though I predict that concept will come back now.
HBOS more than any bank demonstrates that if you want profitability you have to have the tightest regulation at your core and use THAT as the means to lever higher profits and not the opposite of slashing regulation.
Rob's comments are quite valid, our media has a way of overinflating most issues, even those that are clearly to the detriment of our nation. With regards to the 'bank boom at an end' I feel this is simply untrue, these equities are heavily oversold partly due to shorting pressure from hedge funds.
I've seen several comments along the lines of "why are the boe and the fsa talking the country into recession", where were these comments when many commentators were talking up the economy based on unsustainable increases in debt.
* john firmstone wrote:*
"why are the boe and the fsa talking the country into recession"
Precisely because for far too long the Bankers, Beanies, Kirsties & Phils have talked and sleep walked this country into a bubble. Welcome to reality.
It is in this environment that warnings about the direction of the economy were drowned by the euphoria of these people partying. You could still choose to do the same. Unfortunately for this country the flock of sheep followed the Judas goats up a steep mountain of debt and are now looking down the cliff. The problem is goats are pretty good coming down cliffs, can't say the same about sheep. You get the point?
The FSA have now decided to express a view on the banks decision making processes, but it was the FSA and its move towards "self regulation " that in fact encouraged the banks to stretch the rules and ratios . the FSA seem to have managed to dodge the bullets throughout the credit crisis and have not been held accountable at all.
I disagree with Robert's closing remarks. I suspect the so called sub-prime crisis has been a heaven sent opportunity for some of the banks to clear their decks of non performing assets without attracting undue attention. I predict that in next year's round of bank results we will see a spectacular return to profits by some if not all. In the meantime the banks will have to learn how to work for their money again and the only loser will be the poor old customer who will face much higher borrowing costs despite lower base rates.
All the blindfolded lot that harp on about Pesto bringing down the banks are headed for a rude awakening - Pesto is one of the more conservative bloggers and to a certain extent refrains from actually telling it like it is - you wait and see!
#10: Charles, you owe RP an apology: "You seem to have ignored a simple fact from the results statement in that the dividend has actually been increased which means the shareholders are not receiving lower returns as so boldly stated above. Unless you know something that the rest of us don't"
The return to shareholders comes in TWO ways - the paid-out divi and the retained profit, which is reflected in the capital price of the share (since a share's value is the Present Value of all future returns). So, he knows more than you do!
HBOS this morning claimed a £70bn Treasury portfolio to be "liquid and conservative" but half of it they can't either value or sell... that's why this stock is going down.
RBS shares are down a massive 2.75p today. Their profits tomorrow will be another record. Just because NR and (to a lesser extent) some of the mortgage banks are not being run sensibly doesn't mean there's aproblem with RBS or indeed with the banking sector.
A bit of perspective: HBOS made a post-tax profit of £4.1bn in 2007, compared to £3.9bn in 2006. In other words, strength in other parts of the bank more than offset the fall in retail profits.
Anyone would think from reading this blog that HBOS was racking up huge losses, whereas in fact it is still very profitable. Barclays and Lloyds and very reassuring results last week, and hopefully tomorrow RBS will report more of the same. Why do delight in looking on the gloomy side, Mr Preston?
Nail - post 6. Oh how wrong you are. Sentiment is a very important force in markets, with numerous academic reports to confirm this. I wholly concur with the view that the bbc, along with numerous other new agencies use fear to sell papers.
Peston is becoming quite a legend around the City from what I can gather, with a number of colleagues and associates commenting how purely incorrect typically hostile his comments are.
Take this story for example. It is clear that Robert has either not read HBOS's results statement or has not understood it.
HBOS reported a decline in retail margins due to a desire to pursue market share. A thoroughly natural business strategy and one you will see your local corner shop to Tesco's performing.
Poor ole Robbo can't bleat about the 'junk' subprime on their balance sheet (cos there was very little of it) or Northern Rock, so he picks the only seemingly 'negative' news, retail margins.
Keep up the good work Robbo, you will soon reach 'joke' legendary status!
"Predictably, shares in Alliance & Leicester and Royal Bank of Scotland (whose results are tomorrow) also fell pretty sharply."
Robert, when you predicted RBS would fall sharply, did you also predict it would recover to be only down 0.8% by the end of the day.
I would certainly not call that a sharp drop, particularly given the recent increases in the RBS share price, and indeed those in the banking world in general since all this credit crunch talk began.
You seem to take a very short-termist view in all your banking blogs. For that matter, are you the ³ÉÈË¿ìÊÖ's business editor or a banking analyst?
There are a lot of other things going on in the world of business you know, your continual gloomy picture of banking is getting rather tedious.
Regards
A bored non-holder of banking shares.
Growth in our economy could grind to a halt,we no longer compete in manufacturing,the financial services industry must have lost credibility throughout the world.We are not talking our way into recession but we are being led into one by greedy bankers and short sighted political leaders,none of which seem to have the vision required.
bank boom ends....for now! banks are already eyeing other opportunities in equities and commodities. Sure the fixed income market stinks for now, but even that will be back. 6 to 12 months of pain, a bit of a slowdown, a few job cuts but don't worry...history has shown that the economic/business cycle is a certainty. bernanke will make sure that the US does NOT have a lost decade ala Japan. go long banks, usd and gbp. short oil and gold.
In the very short term banks profits are going to be down as a result of absorbing subprime losses, and in the short term run they will be down as a result of restricted lending. Already we have seen the withdrawal of 125% mortgages and more prudent credit card issusing. Banks now prefer at least a 5% to 10% deposit. Lenders seem to be reacting to the fact income multiples have reached historic highs for first time buyers which if allowed to go unchecked could add too much risk to a banks books. If anything this is good news, UK banks aren't chasing increased profits by relaxing lending criteria which is what happend in the US. In the medium to long term though growth here and abroad will pick up and our excellent UK banks will be in a position to benefit from those who wish to use the excellent services they provide.
Here we go again
What is now happening in the banking sector appears to be the same scenario that happened to the manufacturing sector a generation ago, when many business failed to adapt to market changes quickly enough. At that time many of our manufacturing companies were being managed by people who were not fully competent to run them and so the managers sought advice on what from management consultants who had little or no hands on experience of managing a business. These people often believed the way forward was to either burden the business with an increased management structure that made the company uncompetitive or to diversify into areas in which the company had no real expertise. In both cases that often spelt disaster for the company.
If we move forward to now we can see similar parallels with our investment banking industry. Our banks have become too big and unwieldly to manage properly and as a result they lack the necessary focus needed to meet the changing market conditions and that is down to the people who head up these organisations. They might all have gone to the right universities and posses good business degrees and be well connected but too many of them lack the fundemental experience needed to run these organisations proplerly. That is why there is a proliferation of management consultants (who have never managed a business in their life) roaming around the city advising the leading city bankers what to do.
There's nothing new is there!
It's preety Ironic really, the banks are currently in a court case to say they are justified and certainly not profiteering by charging £35 plus for a late payment etc. however at the same time RBS will announce record profits despite a write down of approx 3 billion in fixed income assets. surely on the back of HBOS, RBS, LlodsTSB and the rest announcing increased dividends to shareholders then it is quite clear that they arew raising a vast amount of money by ripping off their customers to pay for what can only be described as completely inept trading. On another not for those who think RBS profits of 10 billion are real please note Goldman Sachs who booked a record 11.6 billion in November and claimed htey had no writedowns and in fact were well placed to profit from the subprime market, this prompted record bonus' at Goldman's. however less than 3 months later an announcemnt that in the 1st quarter they may have to write down 11.1 billion in assets. Maybe I'm being cynical but surely Goldman's only booked their good trades so they could book their record bonus pool and have defrauded shareholders. I wonder if in 2 months RBS and friends will be booking more writedowns now thay have secured their bonus'.
Come on Peston, surely you can spin a negative story from RBS's results today. What's happening - you're slipping.
So come on Mr P, where's the doom and gloom piece from you on the RBS results?
Whats that? Their results are actually rather robust, they won't be going to shareholders for a rights issue and they've increased the dividend. Really? So you don't have much to write about in your blog? Too busy eating humble pie perhaps?
hmm, RBS profits substantially up. Does this mean the boom is back on????
Or was this article just gleeful speculation based on one single bank reporting a slight fall in profits.
The UK economy is in good health. The unemployment rate is low. I think the BOE was carried away and cut the interest rate. Unfortunately, this led to rise in inflation. I think the immediate priority must be to control rising prices of essential commodities. The BOE should(without any hesitation) INCREASE THE INTEREST RATE.