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!

[HenryTo]

The UK government effectively backstops the entire asset base of RBS:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a96ZWAbBHvGc&refer=home

[rffrydr]

Halifax index through a monkey-wrench into matters with an UPTICK in reported prices last night.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

RBS investment converted to common shares in effort to give life to the Zombie:

http://ftalphaville.ft.com/blog/2009/01/19/51308/hmt-on-rbs/
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

HBOS earnings break the '92 model:

[HenryTo]

Royal Bank of Scotland is officially taken over by the British government:
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Friday November 28, 12:51 pm ET

By Emily Flynn Vencat, AP Business Writer
Royal Bank of Scotland says British government will buy majority stake in bank

LONDON (AP) -- The British government will take over Royal Bank of Scotland Group PLC with a majority stake of almost 60 percent after the shareholders of the nation's second-largest bank shunned an emergency share issue.

The 20 billion pound ($31 billion) rescue takeover, the result of a plan announced last month, means that dividends on common shares will be scrapped and top executives' bonuses will be canceled. Chief Executive Fred Goodwin has resigned and Chairman Tom McKillop, who last week personally apologized to shareholders for the 85 percent fall in the bank's share value, has said he will retire next year.

RBS's 1.8 trillion pounds in assets are topped among U.K. banks only by those of HSBC. Its operations around the world include Citizens Financial Group, a commercial bank holding company headquartered in Providence, R.I., and Greenwich Capital Markets, based in Greenwich, Conn.

Fears about the solvency of RBS intensified this year as the global credit crisis contributed to it writing off 5.9 billion pounds ($9.2 billion) in bad loans. A third of that was due to last year's ill-timed euro14 billion acquisition of part of Dutch bank ABN Amro.

The government's shares will be held by a company called UK Financial Investments LTD. Its charge is to maximize value for taxpayers and prevent politicians from making business decisions about the bank.

"The investment will be managed at an arm's length from government," the Treasury spokesman said.

The bank, which has indicated it could post its first ever annual loss this year, was forced to resort last month to the British government's bailout plan, which offered as much as 37 billion pounds to prop up RBS and two other U.K.-based banks, Lloyds TSB Group PLC and HBOS PLC. In all three cases, the government guaranteed to buy any shares not purchased by investors.

At the government's request, RBS announced a share issue a month ago at 65.5 pence a share. But because its share price has fallen by almost a quarter since then, investors knew the government, in its role as guarantor of the issue, would end up having to shoulder the full amount when the deadline expired Friday. The result is an immediate $5 billion pound paper loss for taxpayers.

Only 0.2 percent of the shares were taken up by investors, leaving the state with the balance and boosting its ownership stake to 57.9 percent. Three-quarters of Friday's 20 billion-pound government investment was in ordinary shares and the remainder was preference shares.

Shares in RBS fell 2.4 percent to 53.7 pence on the London Stock Exchange Friday as investors braced for dividend payments to be cut.

As long as the government owns preferential shares, its restrictions on dividends and bonuses will be enforced. The bank had already scrapped a cash dividend for the first half of the fiscal year 2008, paying instead a dividend in shares.

A Treasury spokesman, who declined to be named because of government policy, called the government's imminent purchase of the stake in RBS "the next step" in "a process that supports financial stability, protects ordinary savers, depositors, businesses and borrowers; while safeguarding the interests of the taxpayer."

The drastic fundraising plan comes on top of a 12 billion pounds rights issue by RBS earlier this year -- at the time the biggest ever rights issue in Europe.

RBS shares were above 380 pence last December, and above 200 pence as recently as Sept. 26.

[rffrydr]

The magic that is a securitized balance sheet, unveiled:

http://ftalphaville.ft.com/blog/2008/11/04/17780/the-royally-rendered-bank-of-scotland/

What does it say about "our" banks? Accounting sleight of hand.....is that a bad thing? Really? Ironically, it might be just the direct approach we need.

Still at a buck for the ADR the risk/reward makes for a nice lottery ticket.

[HenryTo]

Royal Bank of Scotland to obtain a government equity injection of about $17 billion as early as this Monday:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a1Ed1YTmYl9Y&refer=home

[HenryTo]

FT Editorial on the British bailout plan:

http://us.ft.com/ftgateway/superpage.ft?news_id=fto100820081437535082&page=1

[rffrydr]

Excerpt from Alphaville blog just about covers it:

[HenryTo]

GaveKal's Anatole Kaletsky on the UK government's rescue package:

http://gavekal.com/forum3/default.aspx?f=2&m=3558

[HenryTo]

UK government unveils £500 billion package for its banks. The Bank of England will need to follow up with at least a 50 bps cut tomorrow:

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3156711/Bank-bailout-Alistair-Darling-unveils-500billion-rescue-package.html

[HenryTo]

Mervyn King's refusal to cut interest rates in the face of a crashing UK housing market (where mortgage rates are tied to short-term benchmark) is definitely partially responsible for this:
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UK's Darling to announce bank support plan Wed
Tue Oct 7, 2008 2:34pm EDT

LONDON, Oct 7 (Reuters) - Britain's finance minister, Alistair Darling, said on Tuesday he would make a statement on a plan to support the country's ailing banking system before financial markets open on Wednesday.

After late-evening talks with Prime Minister Gordon Brown, the Bank of England Governor Mervyn King and the chairman of the Financial Services Authority, Darling provided no details on the plan, saying only that it was designed to be "long term".

"The Bank of England has been putting substantial sums into the markets today and it is ready to do more when that is needed," he said. "We have been working closely with the governor of the Bank of England, the FSA and the financial insitutions to put the banks on a longer-term sound footing.

"I intend to make a statement before the markets open tomorrow morning and I will make a statement to the house of commons later in the day," he said.

[HenryTo]

Look for the Bank of England to dramatically slash interest rates heading into Christmas time.
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Darling says downturn deeper than feared
Sat Aug 30, 2008 4:30pm BST

By Christina Fincher

LONDON (Reuters) - The economic downturn is likely to be deeper and last longer than originally feared and it might turn out to be the worst for 60 years, Chancellor Alistair Darling said on Saturday.

The frank comments in a newspaper interview suggested concern at the top of the government that the economic slide will make it difficult for Prime Minister Gordon Brown to recover ground and fend off a resurgent opposition Conservative Party.

Labour has seen its opinion poll ratings plummet in the last six months and it is now languishing 21 points behind the Conservatives.

A national election must be held by mid-2010 at the latest.

Darling told the Guardian newspaper that the government had failed to get its message across and would battle to persuade a sceptical electorate it deserved another term in power.

The Guardian quoted Darling as saying economic times for the country were "arguably the worst they've been in 60 years".

"I think it's going to be more profound and long-lasting than people thought," he said.

His comments came just days before a planned package of measures designed to buffer the economy and help the government regain the political initiative.

"We've got our work cut out. This coming 12 months will be the most difficult 12 months the Labour Party has had in a generation, quite frankly," Darling said.

"We've got to rediscover the zeal which won three elections, and that is a huge problem for us at the moment. People are xxx off (angry) with us."

ASTONISHING

The BBC called the interview an "astonishing intervention" and reaction from opposition politicians was swift.

Conservative economy spokesman George Osborne chided Darling for "letting the cat out of the bag" about the real state of the economy while Liberal Democrat spokesman Vince Cable called Darling's comments a "scarcely concealed attack" on Brown himself.

The bleakness of Darling's assessment of the economy marks a departure from his previous line that Britain's flexible labour market left the country well placed to withstand the global credit crisis.

Justifying his sharp tone, Darling said honesty was the best way of dealing with the credit crisis.

"We've got a credit crunch, the like of which we have not seen in generations," he told the BBC. "That's why it's necessary for us to support the economy and help people get through these difficult times."

Some commentators suggested Darling was massaging the public ahead of a wide-ranging economic package next week.

The package will include help for those struggling with plunging property values and soaring fuel bills.

Brown is expected to kick-start his political fightback on Tuesday with a scheme to enable first-time homebuyers borrow money for a deposit from local councils.

Later in the week he will announce a fund, based on contributions from energy providers, to help families make their homes more energy efficient. Some ministers have argued the government should go even further and impose a windfall tax on energy companies but this looks unlikely at this stage.

MOUNTING GLOOM

The speed and scale of Britain's economic downturn has become increasingly apparent. Official figures last week showed the economy failed to grow in the second quarter for the first time since the early 1990s.

The pound has suffered its worst month against the dollar since sterling's ejection from Europe's Exchange Rate Mechanism in 1992 and a growing number of analysts believe the economy may have already tipped into recession.

House prices have crumbled by more than 10 percent over the past year and the number of mortgages approved for home purchase has hit a record low, suggesting no hope of recovery anytime soon.

Bank of England policymaker David Blanchflower told Reuters earlier this week that two million Britons could be out of work by Christmas and interest rate cuts were urgently needed to stop the economy heading into a prolonged slump.

[HenryTo]

Banks and private equity firms looking to acquire and break up HBOS:

http://www.bloomberg.com/apps/news?pid=20601087&sid=az47FR1ENk6s&refer=home

[HenryTo]

Sharp rise in UK mortgage delinquencies:

http://www.ft.com/cms/s/0/9a3c01d6-2b60-11dd-a7fc-000077b07658.html