“The key is to disclose as much as possible and that is what we are pushing them to do all the time,” says Thomas Cropper, an analyst at Bernstein Research. “The more transparency the better. We need them to step up the level of information and provide it quickly.” That is the plea of Elizabeth Rudman, a UK banking analyst at Moody’s Investors Service.
The vacuum of information leaves analysts and their clients fearing that banks are putting off the evil day when they must release bad news. The rumour mill thrives in this data-free zone and leads firms such as Bernstein to use as a heading for its recent research paper, “Barclays and RBS: How bad can it be? Realistic downside scenario suggests value reductions are excessive”.
British banks’ third quarterly trading updates have given an indication of the state of exposure of British banks to the credit crunch. Barclays Bank, for example, has written off $1.3bn, and HSBC $930m. But analysts will not learn the full details of the damage done to balance sheets of most banks until February 2008, at the earliest, when banks produce their annual results.
Data is required first and foremost about banks’ exposure to the securitisation market. Many banks, and other financial intermediaries such as hedge funds and insurance companies, have been left holding securities that are now worthless.
The state of the collateralised debt obligations (CDOs) market attracts greatest concern. Ms Rudman says: “There is so much guesswork as to the write-downs and exposures. We need information about banks’ holdings of different forms of CDOs and their vintages. High-grade CDOs retain their value better than the mezzanine instruments, instruments dated before 2006 are also more likely to retain their value. Detailed information needs to be released as it becomes available.”
“The securitisation markets are defunct and I can’t give you a forecast on when they will return to normal levels,” says Peter Toeman, a banking analyst at HSBC, “but that will happen.” Mr Toeman says that “a lot of higher risk premiums have been attached to a lot of banking assets. The same holds for assets that have been securitised so it will be more costly to persuade people to hold those assets.”
The credit crunch has implications for the real economy, says Mr Toeman. “Companies will be constrained from being able to raise money. There will be a very big impact on banks. It means their profit numbers will go down as they try to rework their forecasts to allow for slower growth in mortgage volumes and probably margin attrition. We are looking for falls of between 16% and 3% from our previous estimates.”
Profits will be hit by a weaker mortgage sector, once a cashcow for the banking industry, because fund raising will become more expensive. Trevor Williams, a banking analyst at Lloyds TSB, says: “Less securitisation means there will be less appetite to lend because banks will have more on-balance sheet, rather than off-balance sheet. The market for securitisation of mortgage-backed assets is in extreme difficulty at the moment because of the credit crisis. More regulatory capital will be required to support mortgage lending. They will have to keep the margin wider than they would otherwise. Fewer people will take loans up because they will cost more. If there is slower economic growth and fewer people are able to pay the higher rates, then banks will offer less next year than they did this year.”
Concerns have widened out from the domestic mortgage market to the commercial mortgage-backed security (CMBS) sector, says Mr Cropper. “Commercial property prices have fallen and yields from commercial property are below the cost of financing.”
Leveraged loans is an area of anxiety for Ms Rudman. Banks had underwritten sponsors in the mergers and acquisitions markets believing that they could sell on the loans. But Ms Rudman says that no-one wants to pay earlier high prices and banks are either left holding paper or receiving much lower prices.
“Contingent commitments to asset-backed commercial paper programmes are very unclear at the moment,’ she says. “It’s a time of uncertainty. There are many areas where things could happen to the banks in a worst-case scenario, even though the underlying business is sound.”
Quick sale for Santander
Grupo Santander has sold Italian lender Antonveneta to Monte dei Paschi di Siena for €9bn. Santander took ownership of Antonveneta following ABN AMRO’s takeover in October by the Royal Bank of Scotland-led consortium, which included the Spanish bank and Dutch/Belgian lender Fortis. Santander has announced that it is considering acquisitions in the medium term but has ruled out any takeovers in the near future.
Following the second profit warning in less than a year, the state owner of Germany’s WestLB, North Rhine-Westphalia, has announced it does not intend to sell its 38% stake in the bank. The state government has tried to disinvest its participation in WestLB for over a year but the recent loss forecast of more than €100m has devalued the state’s stake and complicated the process of finding possible buyers.
German regional state bank HSH Nordbank has announced plans for a stock exchange listing in the second half of next year, while public sector bank Norddeutsche Landesbank has announced a €485m offer for mortgage lender Deutsche Hypothekenbank.
France’s Credit Mutuel has announced intentions to purchase 40% of Banca Popolare di Milano (BPM), according to La Repubblica. Credit Mutuel, which already owns 3% in BPM, has put forward a business plan for an integration with BPM involving an investment of up to €2bn.
Hungary’s largest bank, OTP Bank, has acquired the entire capital of Russian Donskoy Narodny Bank for $40.95m. The acquired bank is privately owned and based in the Rostov region, where it ranks as one of the leading players.
Landsbanki and Cenkos Securities have approached Close Brothers’s board of directors for a possible cash offer to buy the firm. The suggested price of 950p (€13.20) per ordinary share was rejected by Close Brothers. The deal would give Cenkos the securities, asset management and corporate finance businesses of Close Brothers while Landsbanki would take over its banking business.
Bank of New York Mellon has announced it will seek to manage more assets on behalf of Chinese investors as part of its effort to generate half of its revenues from outside the US. The bank is not the only one pushing into China now that the country has relaxed its rules and has allowed foreign asset managers to oversee investments.
Dutch banking group ING has bought a 30% stake in Thailand’s TMB Bank for €460m, winning over a rival offer by Frankfurt-based Deutsche Bank and DBS Group of Singapore. TMB, formerly Thai Military Bank, has a 10% share of the Thai banking market but is considered one of the weakest of the country’s big six private commercial banks.
In a move to speed up its restructuring plans, the Agricultural Bank of China has set up a separate risk management department to improve internal controls. The bank will also receive a capital injection from Central Huijin, now an arm of the newly established China Investment.
HSBC has announced it has stopped selling and trading mortgage-based securities in the US. The bank is also cutting 120 jobs in the investment banking unit, 100 of which will come from the closing of the US mortgage desk. HSBC will also stop investment bank coverage of the healthcare sector in the US.
Citi chiefs in firing line
A shareholder derivative lawsuit has been filed against Citi, its former chief executive, Charles Prince, and several top executives and directors over losses related to the bank’s subprime mortgage-backed securities portfolio.
Citi has concluded its IT systems renovation project across 67 countries. The project lasted seven years and eliminated one of the factors hindering the bank’s growth.
Industrial and Commercial Bank of China, the country’s biggest bank by assets, has opened a banking unit in Moscow with a registered capital of Rbs1bn ($41m). The expansion is in line with ICBC’s plans to expand its global assets and revenue. The bank is also applying to the local authorities in New York, Dubai, Doha and Sydney to open branches.
Another Chinese bank, China Merchant Branch, has won approval to open a branch in New York, which will provide wholesale deposit services, lending, trade finance and other banking activities.
China Minsheng Bank has bought a stake in UCBH, a small US bank. China Minshang Bank is not a predominantly government-owned institution and the deal can avoid various regulatory issues that other Chinese banks would have to face.
Kookmin Bank, South Korea’s largest lender, has agreed to buy a 93% stake in a local small securities firm Hannuri Investments & Securities for about Won250bn ($272m), as reported by newswire DowJones. Hannuri provides wholesale corporate and investment banking services and has no retail branches. The company has a 1.7% market share of the brokerage sector.
Wal-Mart de Mexico, the country’s largest retailer, has launched its banking unit Banco Wal-Mart. The company has announced plans to open 16 bank branches by the end of the year and expects to open 80 in 2008. Wal-Mart is the latest Mexican retailer to diversify into banking, after Grupo Elektra launched Banco Azteca in 2002.
Correction
Boubyan Bank of Kuwait, which was a new entry into the July 2007 Top 1000 at 731, was erroneously assigned a previous year ranking which meant it did not appear in the New Arrivals list as the fifth-highest new entry. We apologise for this omission.
