tony's blog

Monday, January 30, 2012

The next big thing

So what do we have to look forward to in 2012?   Mortgage lending is likely to be flat and unexciting and in my view, mortgage growth will not be high on the agenda for many CEOs’or finance directors of banks and building societies, regulators and central bankers. My prediction is that focus will continue on building up capital and liquidity reserves and being able to weather any storms that may yet be unleashed from the Eurozone in particular. Isn’t 2012 supposed to be the year the world comes to an end? The Bank of England will want to see that if nothing else, the British banking system survives.

To achieve this deleveraging will continue to be a key requirement. Sir Mervyn King has been vocal on this point saying that although banks leverage ratios have halved to 20:1 from the levels they were at before QE started, they are still too high. This is consistent with a recent report published by McKinsey Global which stated that Britain’s total public and private sector debt had risen to a rather massive 507% of GDP. Unlike Sweden in the early 1990s, McKinsey don’t consider that we have deleveraged anything like enough at present

There are three main ways a bank or building society can achieve this deleveraging: issue more equity capital, retain more profits as part of Tier I capital reserves or shrink loan books through deleveraging programmes. Other mechanisms such as freeing up capital through risk transfers will also have their place and I see that Barclays have already availed themselves of such a transaction earlier this month.

We will see an increase in banks actively encouraging borrowers to move their mortgage accounts away through one means or another. We will also see an increase in mortgage and other asset sales if I am correct. And I’m not the only one who sees things this way: Bob Young from Capital Home Loans has also identified the importance that deleveraging will have in 2012 and that it needs to be done intelligently. Like me he believes this has to be done with considerable thought and skill utilising a number of mechanisms, not just the simple re-broking of loans that we sometimes see.

Some banks are managing their deleveraging programmes themselves but to handle this effectively calls for a wide range of key skills including cross-selling techniques, JVs with other lenders and of course corporate and structured finance experience. This is not something that every lender will feel it has the ability to deliver so we can expect a growth in advisory and outsourcing to insightful individuals and firms.

It does seem to be a very pragmatic solution and we are going to see more and more of this type of activity going forward. However there is an art to this and the key is to get the balance right.

Tuesday, January 3, 2012

An orderly withdrawal

Well it’s that time of year isn’t it? We all dust ourselves down from the new year frivolities and start making predictions for the year ahead. Flavour of the month is of course the European crisis and the great debate as to what is going to happen to the eurozone.

There are of course the pessimists who see a disorderly break up as inevitable and disastrous consequences for the European economy and there are those that are more sanguine who see EU leaders resolving to repair the root of the mess. Last week, Mark Mobius a fund manager from Franklin Templeton predicted salvation by July. ‘The European crisis is not as deep and terrible as people think’ he said. ‘Nations…are in a process of negotiations and that takes time’.

His scenario depends on many changes happening in France’s elections, successful negotiation of the stability pact and progess in financing the rescue funds. All big asks, I think.

For what it’s worth, I'm not sure I see the euro as viable over the medium term, largely because the big debtor states have no chance of repaying what they owe. Greece is of course first in line for departure. It has debt at 144 per cent of GDP and its economy in a downward spiral of contraction and austerity. Redemption therefore seems improbable and it is becoming increasingly clear to me that Greece is not going to last much longer in the single currency.

So what would happen? Well, I think when we get to this inevitable scenario, it all depends on how orderly the departure is. Undoubtedly the situation needs to be handled carefully. Whilst the Greek economy would undoubtedly take a massive hit, Greece accounts for only 2 per cent of eurozone GDP, so optimistically its departure could be manageable if the markets were convinced that no other countries would follow. It would need international officials to believe that they can put a firewall around Greece; it needs the market to believe that this is an exception. The last thing we need is for it to get spooked.

The success of this scenario is very much in the detail.