A Gleam of Light Amongst A Sea Of Gloom

February 22nd, 2008

News from the City has been quite gloomy of late, but there are reasons to be cheerful, especially if you are a shareholder of Lloyds TSB Group. The biggest U.K. provider of personal loans has announced second-half profits increased 10 percent, helped by mortgage lending, asset sales and cost controls.

The bank also gained 4.8 percent in London trading after saying net income in the six months ended Dec. 31 rose to £1.75 billion, or 30.8 pence a share, from £1.59 billion, or 28 pence. The London-based bank also increased the dividend by 5 percent, it said in a statement.

‘Lloyds TSB has proved to be something of a safe harbour amid the global storm,’ said Richard Hunter, head of U.K. equities at Hargreaves Lansdown Stockbrokers. ‘These numbers have not disappointed.’

Lloyds TSB managed to increase pre-tax profit in its consumer bank by 20 percent even as the economy weakened. The bank increased mortgage lending and attracted more deposits, helping to control costs and offset the economies slowdown as consumers try to reduce a record £1.4 trillion of debt. Chief Executive Officer Eric Daniels said Lloyds TSB won’t have a ‘significant’ increase in bad debts in this year’s first half. The bank rose 20.75 pence to 457 pence in London, valuing Lloyds TSB at £26.2 billion. The shares are down 3 percent this year, outperforming the nine-member FTSE All-share Banks index, down 11 percent.

Lloyds TSB took a second-half writedown of £280 million on credit-related assets. That’s a fraction of the charges at larger banks such as Barclays, which wrote down £1.64 billion at its securities unit last year, and Royal Bank of Scotland, which said in December it will record £1.25 billion in net writedowns.

Lloyds TSB will now be able to consider acquisitions in the UK market, where smaller lenders including Bradford and Bingley and Alliance and Leicester have been weakened by writedowns and increased funding costs. Alliance & Leicester rose 6.4 percent to 510 pence in London on speculation of a bid from Lloyds TSB. The Leicester based bank is down 56 percent from a year ago because of funding concerns.

Lloyds TSB had considered a bid for Northern Rock, according to the Government and Northern Rock. However, Lloyds TSB discussed concerns that the government backing for Northern Rock may give it an unfair advantage in pricing its home loans. Lloyds TSB, with one of the largest branch networks in Britain, is less reliant on credit markets than other lenders. Whereas Lloyds TSB uses deposits for almost two-thirds of its funding, Alliance & Leicester and Bradford & Bingley raise about half their funds in capital markets, which have become more expensive than branch-based funds following the credit crunch.

Lloyds TSB’s costs relative to income in the second half fell to 49 percent from 50.8 percent, indicating greater efficiency. On the other hand, the bank shed 4,552 employees last year, or 7 percent of its 58,000 workforce. It will also cut as many as 2,000 jobs this year, Finance Director Helen Weir said at the press conference. This is, however, a small smudge on an excellent performance record.

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The saga continues and the mystery deepens

February 21st, 2008

After months of Government dithering or deliberation, depending on your persuasions, the decision has been made to nationalise Northern Rock. Or at least some of it, for a while. Some of the electorate, who have been funding the ailing company since last summer, could be forgiven for being slightly confused about what their money has bought.

Opposition parties have attacked the government specifically over its handling of the body that owns many of Northern Rock’s loans. But what is Granite, and does its ownership structure matter?

Granite is a special-purpose financing vehicle set up to allow the Northern Rock to sell off large parts of its mortgage book to bondholders. It was this financing model which got Northern Rock in trouble when the market for such mortgage-backed bonds dried up in August. Northern Rock financed 60% of its lending through activities like this on the wholesale money markets, rather than relying on money from depositors – a key reason for its rapid expansion.

According to Granite’s accounts, Granite is legal vehicle ultimately controlled by Northern Rock but registered as a trust in Jersey. The accounts say that, ‘although Northern Rock does not own directly or indirectly more than half of the voting power, the company is obliged to follow the policies and procedures prescribed by Northern Rock.’ Such legal entities are common among US and UK banks that want to finance additional mortgage lending off-balance sheet. By creating a separate legal entity, they avoid the obligation of having to raise extra capital to back their additional liabilities.

The government has made it clear that it does not want to take the liabilities of Granite into public ownership – and, in particular, says ‘it has not provided any guarantee arrangement to Granite bondholders.’ This seems a wise precaution in view of the credit crunch, which has called the viability of all mortgage-backed bonds into question. If the government were to guarantee mortgage bondholders around the world, this would amount to a far greater liability than merely guaranteeing that the depositors of Northern Rock will not lose their money. And it would also expose the government to claims for help from other UK banks whose earnings have been hit by bad debts from their mortgage-backed bonds.

The opposition has alleged that the best mortgages were put into Granite, in order to make it easier to sell their bonds on the open market. But this may not be true. Granite has been used to finance the recent rapid expansion of Northern Rock’s activities, and its loans tended to be bigger than those advanced to the average Northern Rock customer, with a higher risk in terms of loan-to-value. The average mortgage in Granite’s book was valued at £117,000 and the average size of the loan was 77% of the value of the property, compared with 60% for Northern Rock loans overall.

The new boss of Northern Rock, Ron Sandler, has made it clear that he wants to run down the size of the Northern Rock mortgage book. As a result, Northern Rock is not offering attractive rates on new mortgages, or to those customers who are coming off its fixed-rate deals. Therefore, its use of Granite as a financing vehicle is likely to shrink and perhaps disappear. If credit markets do recover, however, and if Northern Rock is returned to the private sector, it might consider reviving the use of Granite to finish future expansion.

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‘Low Usage’ Charges For Barclaycard Holders

February 6th, 2008

After the problems of Egg card users recently, Barclaycard has joined them in proving to be more awkward than their advertising blitzes let on. They are considering introducing a fee for customers who do not use their cards enough. If introduced, the fee could be imposed on ‘low usage’ customers, people who use their cards infrequently or not at all and could be as high as £20 a year.

Barclaycard is set to contact up to one million customers in order to try to persuade them to use their cards more and thereby avoid the fee. Other card firms will probably follow Barclaycard’s example, analysts said.

Barclaycard have said that fees would only be introduced as a ‘last resort’. ‘We will do everything we can to improve the deal we give people, encourage them to use our card, not someone else’s and avoid fees,’ a Barclaycard spokesman said.

‘As a last resort, we are considering a fee for a minority of customers that simply do not use their card,’ he added. Barclaycard would not say what customer behaviour would prompt them to define them as ‘low usage’.

Any introduction of a ‘low usage’ fee by Barclaycard would be a watershed for the industry. Barclaycard is by far the UK’s biggest card provider, with 9.8 million cardholders and about 15% of the total credit card market.

The move is part of a growing trend of credit card providers imposing annual fees and charging for switching debt from another card. In February, Lloyds TSB started to levy a £35 charge on 50,000 ‘low usage’ card accounts. At the time, like Barclaycard now, Lloyds TSB would not give a definition of what ‘low usage’ actually meant.

Nick White, director of financial services at uSwitch has been quoted saying, ‘given Barclaycard holds a market share of around 15%, it is likely we will see this trend spread across the entire industry. This is probably a good time for consumers to ensure they close down any accounts they no longer use,’ he added.

There are two interpretations of this kind of behaviour by lending providers. One is that the troubling times in the markets are causing them to tighten their belts in displays of responsible behaviour that will see them through the economic downturn. The other is that the companies are using market turbulence as a smoke screen to increase the cost of borrowing as a way of shoring up profits in a cynical display of opportunism.

I shall leave it up to you, dear reader, to decide which of these phenomena we are witnessing.

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