Joe Hart saved nothing

Mint – Blain’s Morning Porridge

Hammer of the gods, will drive our ships to new lands, to fight the hordes, and sing and cry.. Valhalla I am coming.. 

“Iceland is supposed to be cheap, but Joe Hart saved nothing…”

I’m told there are more 20-40 year old males working in Canary Wharf than live in Iceland..says it all I suppose..I guess you just have to want it more…

Britain is turning the immediate tearful resignation into some kind of virtuous art form. About time we take mind of Voltaire’s comment: “The English like to shoot an Admiral from time to time, pour encourager les autres..” Put em all up against a wall… I have a little list, they never will be missed. 

Meanwhile…European banks? Ouch.

The leading French, German, Spanish and Italian names are down an average 18.5% since the day before the End of the World last week. UK banks are even worse – Barclays, RBOS and Lloyds are down around 30%, while new “challenger” banks like Aldermore are down 45%. Rumours say some names are “vulnerable..”.

The obvious fears are margin compression, the threat of slowdown, capital cushions, the expectation of lower rates for longer..and in the case of the UK banks.. uncertainty. These are all very rational fears.

However, dig deeper into the liquidity, risks, NPLs, and capitalisation of the UK banks, and there shouldn’t be much to worry about.. Except that…this being England… you have to worry about everything these days.

The question is.. do UK banking names become a screaming buy? The big unclear issue for the UK banks is this question of “passporting” into Europe. I am the convinced the passport issue was a Junckeresque bogey contrived to scare the UK into voting to stay. Sadly, unwise Eurocrats now seem determined to make it stick. Europe’s elected politicians should take note.

If UK banks are excluded from Europe by the fiat of unelected kleptocrats in Brussels, let’s cut the crap and just go straight to War without passing Go or collecting £200. It would be the clearest demonstration yet that Brussels are a bunch of spoilt vindictive runts parasitically sucking off Merkel’s teat. What sense would there be excluding Europe’s best run, best capitalised and best regulated banks? It would not benefit a single European in any respect (except removing unwelcome competition) – and would simply lower standards across the continent. But, it would score some revenge points for Juncker. 

Even if the UK exits Europe, (and I increasingly believe that’s a very big IF), Merkel and the rest of Europe’s elected leaders should immediately whap all discussion of passporting into the long grass. Democratic Pragmatism should be the order of the day.

If not, explain to a rational world where European banks will be preferred to UK banks? A pragmatic solution where European and UK banks remain welcome in each other’s market is a growth multiplier. Are US banks banned from Yoorp? Or, should European banks be banned from the US? Now there’s a thought.

Meanwhile, the bank rot is spreading. You can tell the market is getting worried about banks when folk start asking the kind of questions they should already know the answers to.

As European bank stocks tumble, should holders panic about CoCo (contingent convertible) bonds? If prices were votes, then banks are even loss popular today than they were following Lehman.

For years I’ve said holders should be in a constant state of discomfort regarding any and all CoCo bonds.. but, tumbling stock prices aren’t going to trigger CoCos on their own. Although the price of CoCos will likely tumble in line with stocks – it’s the quantum and quality of capital that counts.

Prices are struggling because the lower equity prices infer banks aren’t doing so well and are thus more likely to breach the capital levels that could trigger a CoCo default. And, of course, declining confidence in banks makes raising new capital so much more difficult.

But, to actually trigger a CoCo “surprise” requires one of two things to happen. Either the bank experiences a massive capital hit from real tangible losses (which are subtly different to rising non-performing loans), or the regulator exercises its judgment to trigger the CoCo – creating new capital by converting CoCo debt holders into capital via retained profit and loss. (Effectively…) 

In the long term, rising NPLs will create the same result – eventually. But, the key is you can see that crisis coming as capital is swamped by losses. And regulators can address it – as they have in Italy. Italian banks require a massive capital injection – but even a €40bn capital drop doesn’t look likely to resolve the rot.

My colleague Martin Malone sees Italian non-performing assets around €350bn – 25% of gross domestic product. Ouch. Net bank NPLs are €100m. Italy’s partial solution is to fund the banks by issuing more government bonds to fund its proposed €40bn re-cap...which I suspect is ultimately funded by the European Central Bank's purchase programme buying these bonds. Schweet. Italian banking saved. Europe busted.

On the other hand… you have to be thinking some CoCos might be getting to the stage when they are worth buying.. happy to run through them with you..

Bill Blain

Mint Partners

44 207 786 3877

07770 881033