British Banking/Housing

[rffrydr]

From the broker:

Looking at the UK Housing Market
With the problems brewing in the UK banking system, some are questioning the stability of the British financial structure and furthermore the possibility of on going rate hikes. Going forward, the situation in the housing market will remain instrumental in determining future monetary policy.



UK home prices remain at their all time highs. According to the BBC, the average cost of a home is Stg.210,578, up 9.25% from last year. Furthermore, the Rightmove Asking Price index hit all time highs in August. Though these gains have been consistent, they have been decelerating. The Y/Y growth rate in the Nationwide House Prices index has fallen off its 2003 highs. The graph below exhibits the trend since 1992.

Nationwide House Prices: Monthly 1992-2007



While the index did pick up some steam at the end of 2006, there has been some recent consolidation around 9.5%. The pick-up in housing prices was a function of the growing business in innovative mortgage products. According to a Halifax press release distributed in 2001, “UK borrowers benefit from having a wide choice of mortgage products, including variable rate loans, discounted, fixed, tracker, capped, and 'cap and collar' mortgages. In contrast, over two thirds of mortgages in Europe are fixed rate loans.” It is estimated that from 2002-2005 over ¼ of the loans made were adjustable. Lower loan standards and a diverse array of mortgage products encouraged aggressive lending. Loans for house purchases increased to Stg. 9.192B in July of 2007 from Stg. 3.431B in January of 2000. The data on mortgage approvals also expresses how the changes in lending standards encouraged the boom in the real estate sector. Approvals surged from 1.7B in mid 2001 to 6B by December of 2006. The changing housing climate in the UK however has since depressed approvals to under $4B.
UK borrowers will soon face the consequences of these loose standards. By the end of the year, 800K mortgage will be subject to re-set to significantly higher rates. The fixed mortgage average has risen from 3.99% in 2003 to 5.71 by July of 2007. Going forward, the market is left to grapple with the UK’s ability to digest these higher rates. The higher mortgage rates and resets will create major financial obstacles in the UK. One of the main indications of the continued deteriorating housing market is the large value of home equity withdrawals. The chart below shows the relationship between the per quarter value of home equity withdrawals.





According to this chart home equity withdrawals have stayed robust. Though there was a precipitous decline in the metric from 2004-2005, the most recent spike could likely be due to the rebound in home prices. The increasing value of home equities withdrawals suggests that the consumer is becoming overleveraged. Considering the upward trend interest rates, credit for the individual may face unmanageable levels. The growth in income in relationship to HEW argues for a contraction in the UK economy. According to the Bank of England data used in the above graphic, yearly income growth is approaching negative levels. Notice on the graph that in the later portion of the data set declines in income growth correlate with expansions in home equity withdrawals. This in mind, it is arguable that falling income levels forced consumers to borrow on their homes to fund purchases. Looking back to home prices, low income growth coupled with high mortgage rates suggests and affordability problem in addition to an over-leveraged housing market.
These statements in mind, it is unlikely that the BOE will hike at their next meeting. Though money supply growth and inflation do argue for the continuation of the tightening cycle, the BOE will recognize the deflationary pressures and economic stresses extending from the housing market.[/code]
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

FSA liquidity standards:

http://www.fsa.gov.uk/pages/Library/Policy/Policy/2009/09_16.shtml

Wherein we find that incipient notion from the market itself that it is its own worst enemy:

[HenryTo]

UK housing prices rose for a second straight month, but by less than expected:

http://www.bloomberg.com/apps/news?pid=20601068&sid=aMsgy3Wn6vJ0

[rffrydr]

HSBC's "headline" 1.99% mortage with 40% down:

http://www.cnbc.com/id/15840232?video=1242039208&play=1
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

The "v" in london property:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aKkxmq34nT3E
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

The RBS shadow over Lloyds attempt to "seize the day" with yet another rights offering....but this time to get out of the govt's hair. A bridge too far?

http://tinyurl.com/mcsx5q
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

The Bank of England's Royal Bank of Scotland shuffle: no good times for two years.

http://files.shareholder.com/downloads/RBS/638965803x0x311888/6ee47880-aa6d-4b61-aea5-26a4c3240a6e/070809_1.pdf


From UBS:

RBS H1 underlying loss of £3.4bn versus UBS expectation of £2.5bn
Before the gain of £3.8bn on repurchased debt, RBS generated a loss before tax of
some £3.4bn. The group has reorganised itself into core and non-core divisions
with the former generating a profit of £6.2bn with the latter realising a loss of
£9.7bn. GBM was the main driver of both, generating £4.9bn of PBT within the
core division but also negative revenues of £4.2bn and a significant share of total
impairment charges of £5.3bn in non-core.
Disclosure excellent and clear targets too
RBS has provided comprehensive disclosure on core and non-core divisions both
in terms of income and key exposures. There is significant overlap between the
non-core division and the APS assets with the company indicating that 40% of
non-core assets and 56% of non-core risk assets will be covered by the APS.
Targets have been provided back towards profitability and normalised earnings
which are framed in terms of 2013 delivery.
BE:
Margins and credit challenges
Margins declined to 1.65% in Q2 from 1.78% in Q1 and 2.07% for 2008. We
expect the rate of attrition to decline from here. Overall impairment charges were
£7.5bn of which c.70% relate to charges in respect of assets in the APS.
Valuation
We will review our estimates and price target following the analyst meeting later
today but would not be surprised to see the stock to retrench after its recent run.
We see trough tangible book value at 43p by end 2011. Our 40p price target is this
trough value discounted back a year.


Other than RIO, which did not get done, this may have been "Last Great Deal"

[rffrydr]

Thinking the unthinkable, LLoyds standing on its own feet:

http://ftalphaville.ft.com/blog/2009/08/06/65671/lloyds-out-of-the-frying-pan-and-out-of-the-aps/
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

"What if" housing has bottomed translated into Lloyds, courtesy, casanove (from alphaville):

Our estimates are based on falling house prices this year and next. Yet halfway through the year, house price indices are slightly higher. If the low point in house prices has passed it would reduce our estimates for risk assets and, more importantly, for mortgage loan impairment. Cumulatively over three years to 2011E, the lower loss given default would add £3bn to pre tax profits and some 7p to book value by December 2011E. Arguably conditions that are consistent with stable house prices would result in a lower default rate across retail loan books giving a further benefit to earnings, capital and book value.
Our view remains that house prices will decline but near term news flow may support a more optimistic outlook, of which, on our estimates, Lloyds is the major beneficiary in the sector. If the share price rises we would regard it as an opportunity to sell the shares.
NH:
Furthermore, a scenario in which house prices stabilise would suggest a more benign economic picture; for example unemployment might not rise through 2010E as we assume. Therefore under the scenario of stable house prices, the likelihood is that the probability of default would be lower also across the loan books, particularly retail, than we have in our estimates. We have a further £10bn of impairment arising over the three years to 2011E from retail unsecured loans.
NH:
We leave our estimates unchanged. Mortgage supply will remain constrained as the banking system reduces its reliance on wholesale funding, while the prospect of a rising tax take to service government borrowing adds further pressure to the outlook for arrears from a consumer sector with record levels of debt.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Goldman on British Banks:

Structural changes positive for LT returns
The UK banking sector is going through
unprecedented change. The market appears to
view these changes as unambiguously negative
given that the UK banks currently trade at less
than 1x tangible book versus historical averages
of above 3x. Our view is more constructive: we
see a strong relationship between market share
concentration and long-term returns, and expect
some of the reduced ROE following de-leveraging
to be offset over time through higher ROA.
NH:
Credit costs key driver of ROE; risk
transformation through GAPS
The key driver of valuation is ROE, and the key
cyclical driver of ROE is cost of credit. We have
taken a closer look at the credit risk remaining on
the banks’ balance sheets after taking the
Government’s Asset Protection Scheme (GAPS)
into account. We conclude that Lloyds is likely to
have below-sector-average credit losses by 2011,
and that normalized medium-term losses will be
below 0.5% of loans, suggesting an ROE of 20%+
after 2011.
NH:
Asset/liability repricing; pain now, gain later
We have attempted to model the repricing of
assets and liabilities for the three domestic UK
banks. We expect Lloyds’ and RBS’s net interest
income to decline by an average 12% in 2009 and
4%-6% in 2010, and to turn positive in 2011.
NH:
Lloyds onto Conviction Buy (from Neutral)
Lloyds is trading at 0.8x our estimated trough
reported tangible book value of 87p, vs. a 2011E
ROTE of 16%, making it the least expensive large
cap bank in Europe. This is despite our view that:
(1) it has the highest credit buffers in relation to
vulnerable assets in Europe thanks to GAPS; (2) it
will report above-average ROTE by 2011; and (3)
its market share – the highest of any bank in the
G7 – should allow its returns to recover to sectorleading
levels over the long term. We upgrade
Lloyds to Buy and add it to our Conviction List
and UK Relative Value List.

Reinstating on Barclays as Neutral
We have removed the Not Rated designation from
Barclays and have a Neutral rating on the shares.

Implications
In our view, Barclays is well positioned to navigate through the headwinds that UK banks are currently facing. We regard Barclays’ capital levels as sufficient and, importantly, we expect the bank to remain profitable throughout this economic downturn. We also believe that its efforts to remain independent of government ownership give it increased freedom to act fully commercially.
NH:
Looking ahead, we expect the integration of the Lehman Brothers US operations and the related ambitious target of building Barclays Capital into a world-leading investment bank to be the key focus for Barclays. We estimate that this will contribute 43% of group gross operating profits from 2009 through to 2011. At the recent Barclays Capital investor day, management identified £5 bn of potential incremental revenue streams that could be achieved over the coming years through Lehman Brothers’ US operations alone.
NH:
While we are encouraged by the early signs of a successful integration, we remain concerned about near-term earnings dilution from the sale of Barclays Global Investors, as we expect this to reduce underlying ROE and
long-term growth. In addition, we believe Barclays is likely to return to normalized returns at a later stage in the cycle than its UK peers, as it has opted out of participating in the Government’s Asset Protection Scheme.
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

UK financial firms projected to cut another 13,000 jobs in the 3rd quarter:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aBygw2Bz1wXY

[rffrydr]

Luxury home prices in London rose in Q2 for the first time since September 2007. Prices were up 4.3% q/q, but down 11.5% y/y
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

LLoyds selloff on placement not quite complete. (Yet another) Chance to buy one of the premiere banking institutions (and its indirect link to BOE) at 4X earnings. I think the idea that earnings streams will guide as insolvency issues quickly fade is right. I like selling puts to buy in.

Here's the DB positive outlook, again courtesy alphaville:

[rffrydr]

The Credit Suisse Outlook gives little benefit to the economy:

[HenryTo]

Housing in the UK starts to stabilize:

http://www.nytimes.com/reuters/2009/05/11/business/business-uk-britain-rics.html?_r=1

[rffrydr]

All the rest seems so civilized:

http://finance.yahoo.com/echarts?s=BARC.L#chart1:symbol=barc.l;range=6m;compare=mt;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
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Today is the Tomorrow you worried about Yesterday!