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Antony901

The figures are for Lloyds downside case, it is not what they are expecting to happen.

At the UBS European conference on 8th November 2022, William Chalmers said that in their downside case for the economy (GDP falls by 2.3%, unemployment reaches 7.5% and house price index falls 30%, peak to trough) the credit losses would be about £5.5bn. Lloyds already have just over £5bn of provisions against losses on a high quality book. The average mortgage LTV is 40.3%.

Walkersworld

Hopefully as long as they are posting on here they are not doing any damage in the real world.

I’ve just been looking into historic interest rates and bank profitability.

During the year 2000 (the earliest year I could find figures for Lloyds Bank PLC) UK base rates were between 5.75% and 6%. Lloyds made a profit of £3886m, had an EPS of 49.6p and paid dividends of 30.6p per share.

In the same year Barclays made a profit attributable to shareholders of £2473m, had an EPS of 163.3 and paid 58p per share dividend. This was from total assets of approx. £316bn

During 1990 base rates were between 14.88% and 13.88% and Barclays made a profit attributable to shareholders of £589m, had an EPS of 24.7p and paid dividends of 21.2p per share. This was from total assets of approx. £135bn

It would appear that high interest rates are not the “doom and gloom” for banks which some people think.

The question is at what point do interest rate rises start to hurt the banks?

During the Natwest Q1 2022 IMS Q&A a question was asked about at what point do interest rate rises become a negative for the group. Alison Rose, Natwest CFO, answered “very much higher than any of the forecast on interest rates“

The day earlier, ING group had issued a paper stating that the market consensus for the UK base rate was that it would rise to “roughly 2.5% over the next year”. It is likely that some of the forecasts were for more than that.

I don’t think that the situation for Lloyds will be significantly different from Natwest especially as William Chalmers made the point that Lloyds has a customer base in the “better off part of the demographic” during an interview at the UBS European conference on 8th November 2022.

At 3.5% I don’t think that we are “very much higher” than the 2.5% consensus figure, never mind any of the outlier figures.

Another point to consider is that even if the base rate is increased to a level where there could be a detriment to a bank they only have to pass it on to customers where there is a contractual obligation to do so.

No one will know whether or not the regulations aimed at ending the “Too big to fail” issue are sufficient unless a big bank fails! Note that it is the PRA, not the FCA, who are responsible for this and the rules are not there to prevent all bank failures only ones which have a systemic impact on the economy.

However the major UK banks are undoubtedly in a much stronger position than they were at the start of the financial crisis. It is not just that they have more capital than back then, it is also of a much higher quality. One of the problems discovered during the crisis was that many of the financial instruments which should have been loss absorbing capital were not actually loss absorbing! This lead to the implementation of TLAC (Total Loss Absorbing Capital). To count as TLAC, instruments have to be truly loss absorbing and at the half year Lloyds had just under £68bn of TLAC.

The 2021 stress test of the major banks was far more severe than the financial crisis. At its worst all of the banks had more capital than they had before the financial crisis and that is without any of the financial instruments converting into capital.

William Chalmers, Lloyds CFO, gave an interview at the UBS European Conference on 8th November 2022. On the pension deficit he said that they had made great progress from the £7.3bn outstanding at the end of 2019. While they are still working on the current numbers they should have a better idea of the figure by the time the board are considering capital distributions at the year end. His expectation at the time of the interview was that the deficit would be in the range £2bn - £2.5bn but stressed that the figures were still being worked on.

Nothing has been decided yet.

Yesterday the PRA launched a Consultation Process (CP) on the subject of Basel 3.1 implementation and interested companies, organizations and individuals have until 31st March 2023 to respond with their views. The proposed implementation date for the new regulations is Wednesday 1st January 2025.

https://www.bankofengland.co.uk/prudential-regulation/publication/2022/november/implementation-of-the-basel-3-1-standards

Seany123

I totally agree it is better to be safe than sorry, especially for banks which are inherently unstable.

Another area in which I hope that we no longer have to follow EU regulations is in financial reporting standards. Banks have to use mark to market valuations (i.e. the price they could reasonably expect to receive for an asset, in the open market, on the valuation date) for many of their assets. While this seems a good idea from an accounting point of view when there is a liquid market for the assets, it can be disastrous when there is little or no market for those assets.

The financial crisis showed that this can lead to a downward spiral of decreasing values, putting huge pressure on financial institutions.

One of the reasons that the US banks recovered from the financial crisis much faster than UK or European banks is that, in 2009, Congress pressured the US Financial Accounting Standards Board to suspend mark to market validations and allow firms to use cash flow models instead. This greatly reduced the amount of the reported losses, reduced the amount of capital the banks needed to raise and speeded their recovery.

The ability to suspend mark to market valuations might be a valuable tool in the next financial crisis.

The PRA have already made one change from the ECB capital requirements for banks they regulate. The ECB allows banks to count software intangibles as capital. From 1st January 2022 the PRA, quite rightly, disallowed this. While software intangibles have an inherent value to the bank using them, they have no intrinsic value outside that organization. Barclays software is useless to Lloyds or Natwest and vice versa.

So the very first departure from ECB regulations means that PRA regulated banks have to hold more other capital than would be the case under ECB rules!

This morning Noel Quinn gave an interview at the Redburn CEO conference and made many interesting points. A link to the recording is given below.

On the sale of the Canada business he said the goal was to have it completed by the end of next year. On the use of the capital he said that it is likely that they would retain some for growth but return a good chunk to shareholders by way of special dividend and/or additional buybacks over and above the buybacks from organic growth.

Ping An’s proposed breakup of the group would result in a material destruction of value. Noel has had no conversations with other shareholders who have expressed support for a breakup which would require regulatory approval in over 30 countries and 75% shareholder approval. However he acknowledged that Ping An made some very valid points e.g. in the last 10 years cost efficiency has been too high and ROTE too low but these are being addressed.

https://wsw.com/webcast/redburn6/hsbc/2140160

MB

As lti says it is the regulators who set the caps.

Regulators in both the UK and USA set performance targets for NG and they only make large profits by exceeding their targets.

Indeed Brixton timing is critical except for very long term investors.

On the other hand, since the 1 for 10 share consolidation which took effect on 6th June 2012, NWG/RBS are up 19% but Lloyds are up 67%.

Natwest didn’t do a buyback because it could have taken HMGs shareholding above 50% again!

Currybelly

The whole point of delegating the responsibility for the buybacks is that MS have no insider knowledge of Lloyds so any time limit would be immaterial.

Remember that MS are not getting paid for the buybacks and make their money by trading in the knowledge of the buybacks they intend to make.

If the order book doesn’t give much opportunity for a profit then they will probably delay until there are better opportunities.

Lloyds have a significant advantage over other corporate landlords i.e. they have full access to millions of current accounts. Not only does this give them reasonable confidence about the financial position of prospective tenants but it can also help distinguish between someone who frequents florists and garden centres and someone who frequents pubs and the bookies!

Yesterdays buybacks took the overall spend to just over £149m of the £150m total so all else being equal I'd expect today to be the last day of the buybacks.

Thedetector
“Anyone using cash now to buy Aviva shares will lose out due to Aviva sp recent rises. Also have less shares for divi payout”

On the other hand if someone used the returned capital to buy AV shares when it was received on 19th May, as I did, they would have more shares than they did prior to the consolidation and own a greater proportion of the company due to the latter.