The UK's Q4 2023 banking crisis.

[sancho panza]

NatWest first up on here of the big banks.

With it beign a stock market lsiting we cna work out it's Dowd Buckner leverage ratio

MC/TA=26.1/720.1=3.62%

Dowd Buckner leverage ratio=TA/MC=27.6/1

First we'll have a look through the slides for the presentation where they'll hopefully have done the work for us whcih is 50 sides long .2nd link is the full 250 pager where we'll have a look for some nuance.

https://investors.natwestgroup.com/~/media/Files/R/RBS-IR-V2/results-center/17022023/nwg-slides.pdf

https://investors.natwestgroup.com/~/media/Files/R/RBS-IR-V2/annual-reports/ar-2022/full-annual-report-2022.pdf

My comments(MC)-page 4 Interesting that it' paying our divis when the UK taxpayer still owns something like 41%

MC-Page 6:I find using phrases like 'all weather balance sheet' a bit OTT given they're still sucking on the taxpayer teat and have had 15 years of Zirp and QE.It doesnt sit very well when they're claiming a 5.4% leverage ratio but still haven't bought out Joe Taxpayer.

 

 

MC-Pages 10-12 Broad base of business but bulk of RWA's are in it's commerical sector,so any downturn in retail could hit them hard if commercail worsens(worth noting commerical includes CRE,we'll find out the size of it later

MC-Page 16 worth noting the changes from 2019-22 in RWA's composition.Retail rising

 

 

MC-Page 19-CHunky rise in net interest income leading to a strong bottom line versus last year.

MC-Page 20-the loan book as is.Interesting to note near 10% uplfit in mortgages Q4 21 vs Q4 22 which looks like market peak

MC-Page 21-check out the sheer scale of the non interest bearing balances..................almost surreal given 10% CPI.One of the reasons must be that big commercial companies would rather not take the risk with a smaller bank.

MC-Page 28.Some loan book data summarised.LTV 53% on mortgages,though 66% on 5y with 22% of fixes expiring before YE 2023,hints of big ECL provisions in credit card book,on plus side as well,huge chunk of CRE lending to hosuing associations but warnings of forebearance in retial and leisure

 

 

 

 

 

...got to do school run,back later for a look attheir stage 1/2/3 data

[Democorruptcy]

2 hours ago, sancho panza said:

NatWest first up on here of the big banks.

With it beign a stock market lsiting we cna work out it's Dowd Buckner leverage ratio

MC/TA=26.1/720.1=3.62%

Dowd Buckner leverage ratio=TA/MC=27.6/1

Earlier this month the "successful" (so successful it didn't end on time and keeps being extended) scheme to return it to private ownership was extended another 2 years.

Quote

 

Government extends successful NatWest Group trading plan for a further two years to support the intention to exit its shareholding by 2025-26.

https://www.gov.uk/government/news/natwest-on-track-to-return-to-private-ownership-as-successful-trading-plan-extended

 

NatWest are the biggest winners from taxpayer's paying the base rate on bank deposits at the BoE.

 

 

 

[sancho panza]

Nat West annual report slideshow cont.

 

MC-Page 31 Changes to CET1 and RWA for the year

 

MC-Page 38.An intersting summation of RBS's journey into becoming NatWest.Of note the sheer scale of the bad loans in 08,cost income ratio.What really leaps out at me is that in 2008-12 the CET1 ratio was 10.3% on an asset book of £1.3bn.......so effectiveyl RBS has offloaded a lot of thsoe loans.If all they've done is shfit them to the likes of the Cov,it won't have achieved much

MC-Page 40Again we get anotehr hint towards the poverty of the modeling with their modelling inputs and there being real issues with all 4 eg GDP(imputed rents are 1)% and effectively an accounting fiction),UB figures-excludes huge chunks of people looking for jobs but not signing on/people on in work bennies etc),HP/CRE Index, and CPI.

 

 

MC-Page 44-Here are the charts that drive profit growth and on that front things are looking rosy as spreads widen.AS long as loans get repaid,banks do well with the wider the spread in nominal terms

So in Q4 21 net interest margin for the group was 1.66-0.26=1.4%

Q4 22 NIM=2.98-0.87=2.11%

All of a suddent that huge chunk of non interest paying deposits makes them decent moeny

 

MC-Page 53-As ever the interesting data comes near the end.Of note

1) mortgage book has gone from £147bn 2019  to £187bn in YE 2022.Worth noting that's nearly the market cap of the bank.

2) Whilst overall stage 2 rates are lower than 2020 but strangely worse in per centage terms at the lower LTV levels <50% where over 10% of those loans are classed as deteriorating.

3) the CRE loan book has very low Stage 2 rates.

Tonight all being well,I'll get time to look and see if there's any more detailed data ni the full 250 pager

[sancho panza]

2 minutes ago, Democorruptcy said:

Earlier this month the "successful" (so successful it didn't end on time and keeps being extended) scheme to return it to private ownership was extended another 2 years.

NatWest are the biggest winners from taxpayer's paying the base rate on bank deposits at the BoE.

 

 

 

Yeah it's interesting when you look back at the last 15 years of Zirp and QE.NatWest aka RBS has paid out a hell of a lot in divis and yet the tax payer still hasn't got his equity back.

Currently they're down at 41% but it's hard to see where they'll get a buyer for the rest given whats going on.

All in all these results look a lot more solid than the likes of the Coventry but that's hardly a test is it?

We're also forgetting the stimulus that's been applied to teh UK economy over thsoe 15 years in terms of fiscal deficits funding public sector jobs and bennies pay outs.

If we took away that subsidy,these loan books would collapse quite quickly imho.AS I said above,Natwest mortgage growth between 2019-2022 was equivalent to their current market cap.So they've bascially elvered into the top of the market.It's hard to see where they go from here if it sin't down a fair bit.

I'm with Terry Smith.I wouldn't touch these.And if thats the case then what's left for the hosuing market with credit creation in the banking sector underpinning it.

There's a real sh1tshow coming imho but I don't think Natwest and the big playerswill be ground zero this time.

[jamtomorrow]

13 hours ago, sancho panza said:

All in all these results look a lot more solid than the likes of the Coventry but that's hardly a test is it?

Dramatic difference in stage 2 loans compared to the Coventries and Skiptons of this world. What's driving that? More demanding underwriting? Less (much less) BTL in the mix? Rule-bending in what constitutes stage 2?

Edited April 28, 2023 by jamtomorrow

[Virgil Caine]

First Republic rapidly approaching extinction point. Another Californian bank which seem to have shovelled out long term loans to wealthy borrowers at near zero interest rates and deferred repayment of principal and then failed to hedge the risk. Got to ask what is the point of bank regulation when this sort of behaviour is allowed.

https://www.ft.com/content/877288e0-8f4e-4284-a04b-bfe36ee1de7b

I found this analysis by a commentator on an earlier FT article revealing 

As to the facts (the ones the FT should

 

1) Does First Republic have a long history of interest rate hedging? After all, their model has always been to attract short-term depos to fund long-term mortgages (generally with fixed rates for 10 years) and the purchase of munis. This exposes the bank to massive Int rate and funding risk as a matter of course. If they were aware of this risk and were only “momentarily distracted”, then surely there would be a history of massive interest rates hedges in their prior year 10-Ks that they simply “forgot” to put on in recent years? Or was First Republic always rolling the dice on that risk, for a decade or decades under old management? Take a guess!

 

2) First Rep’s model is to make mortgage loans below market (my CA real estate agent said they were 75bp below the competition over the last couple of years, confirmed by a guy I know who left another CA bank to work at First Rep doing mortgage origination).

 

If you are going to lend at below market rates then usually the reason is to generate product revenues (wealth management, tax planning, payments, derivatives etc). How do First Republic’s product revenues compare to its net interest rate revenues? After the expenses of paying for those wealth management branches and people, they are negligible. The bank is essentially a big carry trade, that is now underwater on a run rate basis (paying Fed rates for funding). And the munis they own are not useful as they won’t be paying taxes.  

 

The reality is that any bank can buy securities or sell CDS and make similar returns to a loan, without the need for massive branches or bankers or salespeople . Just a couple of people sitting in a cubicle or working from home building/managing a credit portfolio. Fund them with deposits and it is all gravy (as long as int rate risk is hedged and credit risk is diversified and reasonable).  

 

The only reason for a bank to employ people to make actual loans is to earn fee income - arrangement fees for credit agreements, payments revenues, hedging revenues, bond issuance, IPOs, etc.  

 

If your fee revenues are not massive (first republics were not), and you are counting loan interest as revenue (whereas most big banks look at that as a money loser after CDS hedging costs), you as a bank are essentially just a huge expense suck and employment/enrichment scheme waiting for the interest rate market or credit risk to take you out, and hoping that the artificially low deposit rates you pay due to FDIC insurance and depositor’s ignorance will help cushion the blow while paying lots of people in the meantime.

 

Basically they have been making 30 year loans at 3.9% to borrowers and are having to borrow from the Fed etc at 4.75% to fund the lending. What a joy it is to live in a world of such financial geniuses.

 

 

Edited April 28, 2023 by Virgil Caine

[sancho panza]

6 hours ago, jamtomorrow said:

Dramatic difference in stage 2 loans compared to the Coventries and Skiptons of this world. What's driving that? More demanding underwriting? Less (much less) BTL in the mix? Rule-bending in what constitutes stage 2?

I think the PRA has clamped down on the likes of the cov/skipton.The sharp rise in booking stage 2 could mean a few things looking at them in isolation

1 there's been a huge rise in deterirorating loans

2 they were booking laons as performing when they weren't

3 there's been a regualtory change and theyve been forced onto the standardized approach(using BoE/BIS default data) from the IRB(using their own default data).

4 edit to add:COuld aslo be Nat West are using IRB so there could be some skew due to that.I was surprised by how low tehir CRE loans were in terms of stage 2,so you might have hit on something there in bold bit no.2

iirc cov and other BS's under £50bn were forced onto the SA approach hence the changes to RWA.although I suspect it's akxutre of teh 3 ie,Cov got forced to use SA whcih by sheer coincidence forced it to raise amount of loans in stage 2,at the same time psot Kwame kaze a load of loans clearly deterirorated

 

when comapring thsoe littleis to the bigger lsited instituions insittuions the bit in bold really stikes me as the overriding reason witha  few otehrs chucked in

1) looking the the regional bias in ledning of the BS's,there's a clear skew to the South east and London.QUite what regional BS's are doing getting involved in that region given they've been lending at 10 times local salaries,I'll never know.It'll be really interesting to see if there's any overt regional skew in Natwests loan book

2) also smaller BS's are much more heavily skewed to BTL lending.Iirc it was near 40% of Covs book.Again the average basment dweller would be asking himself what the hell the cov were thinking.

3) they've all levered into the bubble peak(msot likely 2021/22 depending on region) but once I learn how to do excel Ill knock up some charts and we can on a %age basis who's levered up the msot.I suspect it won't be the big banks

4) the management of the BS's doesn't have to answer to shareholders.I'm not sure who they answer to- I presume tis the members.But BS members are hradly the msot likely to hold a board to task for levereing up the loan book.

 

 

I havent had time to dig through the full data set for Natwest to see what it offers in terms of BTL/OO/CRE/regional divergence,as got kids while Mrs P away but teh fraemwork from yesterday looks in stark contrast to Cov et al where they clearly got caught off gurad.

 

I think as @Democorruptcy highlighted yesterday,Natwest govt share sale has been psotponed by two years,which tells us a lot about the near future.

Edited April 28, 2023 by sancho panza

[sancho panza]

3 hours ago, Virgil Caine said:

First Republic rapidly approaching extinction point. Another Californian bank which seem to have shovelled out long term loans to wealthy borrowers at near zero interest rates and deferred repayment of principal and then failed to hedge the risk. Got to ask what is the point of bank regulation when this sort of behaviour is allowed.

https://www.ft.com/content/877288e0-8f4e-4284-a04b-bfe36ee1de7b

I found this analysis by a commentator on an earlier FT article revealing 

As to the facts (the ones the FT should

 

1) Does First Republic have a long history of interest rate hedging? After all, their model has always been to attract short-term depos to fund long-term mortgages (generally with fixed rates for 10 years) and the purchase of munis. This exposes the bank to massive Int rate and funding risk as a matter of course. If they were aware of this risk and were only “momentarily distracted”, then surely there would be a history of massive interest rates hedges in their prior year 10-Ks that they simply “forgot” to put on in recent years? Or was First Republic always rolling the dice on that risk, for a decade or decades under old management? Take a guess!

 

2) First Rep’s model is to make mortgage loans below market (my CA real estate agent said they were 75bp below the competition over the last couple of years, confirmed by a guy I know who left another CA bank to work at First Rep doing mortgage origination).

 

If you are going to lend at below market rates then usually the reason is to generate product revenues (wealth management, tax planning, payments, derivatives etc). How do First Republic’s product revenues compare to its net interest rate revenues? After the expenses of paying for those wealth management branches and people, they are negligible. The bank is essentially a big carry trade, that is now underwater on a run rate basis (paying Fed rates for funding). And the munis they own are not useful as they won’t be paying taxes.  

 

The reality is that any bank can buy securities or sell CDS and make similar returns to a loan, without the need for massive branches or bankers or salespeople . Just a couple of people sitting in a cubicle or working from home building/managing a credit portfolio. Fund them with deposits and it is all gravy (as long as int rate risk is hedged and credit risk is diversified and reasonable).  

 

The only reason for a bank to employ people to make actual loans is to earn fee income - arrangement fees for credit agreements, payments revenues, hedging revenues, bond issuance, IPOs, etc.  

 

If your fee revenues are not massive (first republics were not), and you are counting loan interest as revenue (whereas most big banks look at that as a money loser after CDS hedging costs), you as a bank are essentially just a huge expense suck and employment/enrichment scheme waiting for the interest rate market or credit risk to take you out, and hoping that the artificially low deposit rates you pay due to FDIC insurance and depositor’s ignorance will help cushion the blow while paying lots of people in the meantime.

 

Basically they have been making 30 year loans at 3.9% to borrowers and are having to borrow from the Fed etc at 4.75% to fund the lending. What a joy it is to live in a world of such financial geniuses.

 

 

That's a great psot right there Virgil.It's like lehman never happened.I've psoted a Mr Mortgage vid from early 08 for psoterity's sake at the bottom

couple fo the really pretinent points that I'd like to comment on if I may

1' After all, their model has always been to attract short-term depos to fund long-term mortgages (generally with fixed rates for 10 years) and the purchase of munis. This exposes the bank to massive Int rate and funding risk as a matter of course.'

This is Northern rock/Lehman in many respects.Yes some naunces are different but it's borrow short/lend long.Given that's the case,you have to wonder what the regulators have been doing.It's not hard to spot if you have the time or moeny.Dare I even suggest it,but it's a bit like UK BS's,however did they get their laon books past the PRA? And if the recent changes are due to the PRA then why didn't the PRA ring the alrm bell earlier.Time will tell.

2 'First Rep’s model is to make mortgage loans below market (my CA real estate agent said they were 75bp below the competition over the last couple of years, confirmed by a guy I know who left another CA bank to work at First Rep doing mortgage origination).'

This is really shocking to me given recent history if it's true.People at the coal face would have known for some time.

3'f your fee revenues are not massive (first republics were not), and you are counting loan interest as revenue (whereas most big banks look at that as a money loser after CDS hedging costs), you as a bank are essentially just a huge expense suck and employment/enrichment scheme waiting for the interest rate market or credit risk to take you out,'

This last bit in bold really resonates when you look at the pay of the BS boards.ANd I mean really resonates.

 

 

[sancho panza]

On 25/04/2023 at 15:11, sancho panza said:

Looks like Nat West will be immune to the coming crisis.

people in glass hosues etc

https://uk.finance.yahoo.com/news/natwest-blames-svb-credit-suisse-103010528.html

NatWest Group has said “poor risk management” and “long-standing” challenges were to blame for the failures of Silicon Valley Bank (SVB) and Credit Suisse which sparked concerns over the strength of the global banking industry.

The British bank is strong and resilient in contrast, chairman Howard Davies told shareholders at its annual general meeting (AGM) in Edinburgh.

Mr Davies said the nation has seen the impact that economic uncertainty and rising interest rates can have on the banking sector, following the collapse of SVB and other US lenders, and the rescue takeover of Credit Suisse by rival UBS.

 

“Ultimately, poor risk management and long-standing, idiosyncratic challenges were largely to blame for those failures,” he told the audience.

“NatWest Group, by contrast, has built a robust and resilient balance sheet with strong capital and liquidity, a largely secured retail loan book and well-diversified commercial lending.”

The banking giant acknowledged the impact of cost-of-living pressures on households and its customers.

Mr Davies added: “While there are some grounds for cautious optimism, with employment remaining high, the economic environment will remain challenging for some time to come, with expected further tightening of consumer spending and real incomes, which will put pressure on household budgets.

“The UK may or may not experience a technical recession in 2023 – economic forecasters differ on that point – but the economy is unlikely to grow significantly.”

It's another 'you couldnt make it up' moment.Hopefully this will be the limit of it.

https://uk.finance.yahoo.com/news/ftse-and-european-markets-higher-amid-run-of-positive-us-tech-profits-080733311.html

The UK's blue chip index was in the red as NatWest (NWG.L) tumbled 4.24%.

NatWest reported higher-than-expected profits of £1.3bn ($1.6bn) in the first three months of this year, and said it would be able to navigate a tough economic environment.

Nevertheless, the bank’s share price dropped as it put aside £70m to cover an increasing number of defaults and the amount of deposits it held fell by £11bn.

Other banking stocks fell with Lloyds (LLOY.L) slipping 2.07% and Barclays (BARC.L) down 1.93%.

[sancho panza]

https://propertyindustryeye.com/uk-commercial-property-investment-declines-across-all-sectors/

The amount of money invested in UK commercial property has fallen across all sectors, new research has found.

Sirius Property Finance analysed UK commercial property investment over the past six months, and compared it directly to investment over the six preceding months. 

The research found that in terms of money invested, the biggest decline has been seen in the industrial sector, falling by 55%. In the last six months, £2.9bn has been invested, down from £6.9bn in the six months before that. 

Office space investment has declined by 55% in the past six months, driven by a 63% drop in investment outside of central London. Despite this, office space is still receiving the highest amount of total investment at £3.8bn.  

Meanwhile, retail & leisure has declined by 45%, with a 75% drop in shopping centre investment, followed closely by a 74% fall in leisure investment. 

In terms of the number of transactions, offices have seen the sharpest decline, falling by 44%, driven by a 64% drop in central London.

[spunko]

https://www.thisismoney.co.uk/money/markets/article-12026279/First-Republic-brink-hope-fades.html

Oh look its another back failure being reported after the markets have closed for the weekend. 

[sancho panza]

54 minutes ago, spunko said:

https://www.thisismoney.co.uk/money/markets/article-12026279/First-Republic-brink-hope-fades.html

Oh look its another back failure being reported after the markets have closed for the weekend. 

This is becoming what the Bankers would call a crisis,you know,like a real one where they lose moeny alongsdie Joe Sixpack

 

'First Republic's shares were repeatedly suspended yesterday during volatile trading and at one point were down more than 50 per cent. They are down by 97 per cent for the year to date.

It previously received a stay of execution when a consortium of big Wall Street banks agreed to inject £24billion in deposits to prevent a damaging collapse that threatened to create shock waves for the rest of the sector.'

 

It says a lot about them that Wall St took a look and thought....'nah!'.Things msut be really bad.

If Alex Groundwater is right and they were spooning IO big time into San Fran realestate at the bubble peak,then that might explain why they've let it go.

Losses there are going to be be huge.This failure has the look and feel of  the 'Bear Stearns' moment

[wherebee]

3 hours ago, spunko said:

https://www.thisismoney.co.uk/money/markets/article-12026279/First-Republic-brink-hope-fades.html

Oh look its another back failure being reported after the markets have closed for the weekend. 

US markets still open at time the news broke, surely?  I was seeing it reported before I went to sleep late last night (which is the NY open)

[Virgil Caine]

13 hours ago, sancho panza said:

This is becoming what the Bankers would call a crisis,you know,like a real one where they lose moeny alongsdie Joe Sixpack

 

'First Republic's shares were repeatedly suspended yesterday during volatile trading and at one point were down more than 50 per cent. They are down by 97 per cent for the year to date.

It previously received a stay of execution when a consortium of big Wall Street banks agreed to inject £24billion in deposits to prevent a damaging collapse that threatened to create shock waves for the rest of the sector.'

 

It says a lot about them that Wall St took a look and thought....'nah!'.Things msut be really bad.

If Alex Groundwater is right and they were spooning IO big time into San Fran realestate at the bubble peak,then that might explain why they've let it go.

Losses there are going to be be huge.This failure has the look and feel of  the 'Bear Stearns' moment

I suppose the big difference between Housing Bubble 1 and Housing Bubble 2 is that the lending which drove the former was often at the bottom of the market. This time the loans appear to have been doled out to borrowers who are at least ostensibly high net worth. Presumably most of the loans are performing it is that they just don’t produce enough earnings to offset the run on deposits and the falling share valuation. Worse falling real estate asset prices  appear to have the potential to put the lending underwater.

[sancho panza]

9 hours ago, Virgil Caine said:

I suppose the big difference between Housing Bubble 1 and Housing Bubble 2 is that the lending which drove the former was often at the bottom of the market. This time the loans appear to have been doled out to borrowers who are at least ostensibly high net worth. Presumably most of the loans are performing it is that they just don’t produce enough earnings to offset the run on deposits and the falling share valuation. Worse falling real estate asset prices  appear to have the potential to put the lending underwater.

I think that's one differing factor.I'd aslo argue the scale of thsi one is all transcending.It's in every level of the market in terms of income deciles, with probably more leverage in certain regions eg Sotuh East and certain sectors eg BTL.

As you say virgil,in 08,the bottom dropped out of the market.This time it seems the largest threat to the market is the larger mortgages and those with mulitple properties mrotgages.

I think what's particuarlyl enlighening is the manner of First Republics fall.It wasn't necessarily it's loans souring( I think they will) but rather the shrewd moeny doing a runner before they did so.

Looking at the mrotgage books of the likes of the Cov,the more I dwell on theri laon book the more I think the skew to the SOuth East is the tell.40% or whatever.Stands out like a sore thumb.

ANd hence I think that's where teh UK mortgage books will unwind first and foremeost.Without the huge stimulus to the UK economy from Zirp/QE/fiscal deficits,London will likely drop a bit but it won't take much I suspect to put a meat cleaver through some finely tuned balance sheets.

 

Same in the US,where have the biggest bubbles been?California? AS an example of the rpoblems they face,Musk has been running twitter with 50% less staff.The state is gradually depopulating for a variety of reasons.The laons issued there are non recourse(I think we've discussed this already somewhere.So First Republic lending big sums IO into the State at 50 BP below the competition was underpinned by nothing other than a promise to pay.There's three biggeis in there in terms of Bubble 2 and that Cali,Texas and Washington.

Tiem will tell but banks with regional bias in their loan books to these states will be the msot excpsoed to runs I suspcet.

https://studybuff.com/which-states-are-non-recourse-states/

There are currently 12 non-recourse states: Alaska, Arizona, California, Connecticut, Hawaii Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, and Washington.

[sancho panza]

 

A bank that crashed from the top it would appear.

https://uk.finance.yahoo.com/news/first-republic-auction-underway-deal-180134011.html

Reuters) -U.S. regulators are trying to clinch a sale of First Republic Bank over the weekend, with roughly half a dozen banks bidding, sources said on Saturday, in what is likely to be the third major U.S. bank to fail in two months.

Citizens Financial Group Inc, PNC Financial Services Group and JPMorgan Chase & Co are among bidders vying for First Republic in an auction process being run by the Federal Deposit Insurance Corp, according to sources familiar with the matter. US Bancorp was also among banks the FDIC had asked to submit a bid, according to Bloomberg.

STUNNING FALL

First Republic was founded in 1985 by James "Jim" Herbert, son of a community banker in Ohio. Merrill Lynch acquired the bank in 2007, but it was listed in the stock market again in 2010 after being sold by Merrill's new owner, Bank of America Corp, following the 2008 financial crisis.

For years, First Republic lured high-net-worth customers with preferential rates on mortgages and loans. This strategy made it more vulnerable than regional lenders with less-affluent customers. The bank had a high level of uninsured deposits, amounting to 68% of assets

The San Francisco-based lender saw more than $100 billion in deposits fleeing in the first quarter, leaving it scrambling to raise money.

Despite an initial $30 billion lifeline from 11 Wall Street banks in March, the efforts proved futile, in part because buyers balked at the prospect of having to realize large losses on its loan book.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•  

FRC

-43.30%

 

•  

   
•  

 

[spygirl]

On 27/04/2023 at 17:35, Democorruptcy said:

Earlier this month the "successful" (so successful it didn't end on time and keeps being extended) scheme to return it to private ownership was extended another 2 years.

NatWest are the biggest winners from taxpayer's paying the base rate on bank deposits at the BoE.

 

 

 

Natwest employees, the ones that are left, are.

NW equity holders Nah.

 

[spygirl]

On 27/04/2023 at 17:36, sancho panza said:

Nat West annual report slideshow cont.

 

MC-Page 31 Changes to CET1 and RWA for the year

 

MC-Page 38.An intersting summation of RBS's journey into becoming NatWest.Of note the sheer scale of the bad loans in 08,cost income ratio.What really leaps out at me is that in 2008-12 the CET1 ratio was 10.3% on an asset book of £1.3bn.......so effectiveyl RBS has offloaded a lot of thsoe loans.If all they've done is shfit them to the likes of the Cov,it won't have achieved much

MC-Page 40Again we get anotehr hint towards the poverty of the modeling with their modelling inputs and there being real issues with all 4 eg GDP(imputed rents are 1)% and effectively an accounting fiction),UB figures-excludes huge chunks of people looking for jobs but not signing on/people on in work bennies etc),HP/CRE Index, and CPI.

 

 

MC-Page 44-Here are the charts that drive profit growth and on that front things are looking rosy as spreads widen.AS long as loans get repaid,banks do well with the wider the spread in nominal terms

So in Q4 21 net interest margin for the group was 1.66-0.26=1.4%

Q4 22 NIM=2.98-0.87=2.11%

All of a suddent that huge chunk of non interest paying deposits makes them decent moeny

 

MC-Page 53-As ever the interesting data comes near the end.Of note

1) mortgage book has gone from £147bn 2019  to £187bn in YE 2022.Worth noting that's nearly the market cap of the bank.

2) Whilst overall stage 2 rates are lower than 2020 but strangely worse in per centage terms at the lower LTV levels <50% where over 10% of those loans are classed as deteriorating.

3) the CRE loan book has very low Stage 2 rates.

Tonight all being well,I'll get time to look and see if there's any more detailed data ni the full 250 pager

To misquote Mike Tyson - Everyones got a (solvent) model  ... until they get punched in the equity.

The problem with banks models n accounts is the leverage.

Once the loans start to go bad - poof!

A floating turd only takes up a v small part of a swimming pool ... but noone will jump in.

This is connect to the First Republic fuckup this weekend.

On first, second n third scan - all banks look similar. They loan to this n that sector, hold x% of capital, equal employee, trans support group etc.

However it's the stuff that's no modelled, the wrinkles, the turning a bling eye etc that sink banks.

If banks were all the same youd not have mortgage brokers.

Most people only take out 1 to 3 mortgages from a bank in their lifetime.

A broker ought to be doing that in an hour.

Brokers know which banks have that but extra risk tolerance, ones that turn a blind eye yo credit wrinkle, or have been so uncompetive that theyll bend over to meet this quarters results.

 

 

 

[spygirl]

Charlie Munger: US banks are ‘full of’ bad commercial property loans

Berkshire Hathaway vice-chair foresees pain in FT interview — but it will not be as severe as 2008

https://www.ft.com/content/da9f8230-2eb1-49c5-b63a-f1507936d01b

Charlie Munger has warned of a brewing storm in the US commercial property market, with American banks “full of” what he said were “bad loans” as property prices fall.

The comments from the 99-year-old investor and sidekick to billionaire Warren Buffett come as turmoil ripples through the country’s financial system, which is reckoning with a potential commercial property crash following a handful of bank failures. “It’s not nearly as bad as it was in 2008,” the Berkshire Hathaway vice-chair told the Financial Times in an interview.

“But trouble happens to banking just like trouble happens everywhere else. In the good times you get into bad habits . . . When bad times come they lose too much.”

 

Berkshire has a long history of supporting US banks through periods of financial instability. The sprawling industrials-to-insurance behemoth invested $5bn in Goldman Sachs during the 2007-08 financial crisis and a similar sum in Bank of America in 2011.

But the company has so far stayed on the sidelines of the current bout of turmoil, during which Silicon Valley Bank and Signature Bank collapsed. “Berkshire has made some bank investments that worked out very well for us,” said Munger. “We’ve had some disappointment in banks, too. It’s not that damned easy to run a bank intelligently, there are a lot of temptations to do the wrong thing.”

I remember BH investment in GS.

I'd prefer the term - balls in vice.

Heres GS spin -

https://www.goldmansachs.com/our-firm/history/moments/2008-buffett-investment.html

Warren thinks we are bestest bank. Evah!I'm surprised they put the detail in

On September 23, 2008 – two days after Goldman Sachs became a bank holding company – the firm announced a private offering to Berkshire Hathaway whereby Berkshire Hathaway would purchase US$5 billion in special preferred shares that would pay a 10 percent annual dividend. The firm had the option of buying back the shares for US$5 billion plus a one-time dividend of US$500 million. Buffett stipulated that Goldman Sachs’ top executives pledge not to sell their own shares before Buffett sold his. Berkshire Hathaway would also acquire warrants to buy an additional US$5 billion of common stock at US$115 per share.

10% dividend. Every year. Til they dumped the stock.

 

 

 

 

[spygirl]

On 29/04/2023 at 13:24, Virgil Caine said:

I suppose the big difference between Housing Bubble 1 and Housing Bubble 2 is that the lending which drove the former was often at the bottom of the market. This time the loans appear to have been doled out to borrowers who are at least ostensibly high net worth. Presumably most of the loans are performing it is that they just don’t produce enough earnings to offset the run on deposits and the falling share valuation. Worse falling real estate asset prices  appear to have the potential to put the lending underwater.

Its CRE.

Lending to porless individuals is easy.

In the UK MMR does the lifting for you - computer says Fuck off.

CRE is a world away. Banks are lending to large peers whive lawyered up and out shark tte banks.

After 2008 -10 banks were - and still are - struggling to sell loans.

A bank exists to sell debts.

No sales, no banks, no job...

Remember this?

Opinion  On Wall Street Why ‘covenant lite’ loans are not the menace they seem Risky debt market is dominated by contracts that have investor protections ripped out MARK VANDEVELDEAdd to myFT

https://www.ft.com/content/7f80d354-311b-11e9-8744-e7016697f225

2019

The $1.3tn leveraged loan market has lately developed its own peculiar quirk, which may reveal something about its participants’ material insecurities. Fully 80 per cent of the money that changed hands there last year was extended under what are known as “covenant lite” loans, a polite term for lending contracts that have had most of the investor protections ripped out.

The safeguards in question are legal clauses that once enabled investors to grab the wheel if a company missed its financial forecasts or made other wrong turns. In the credit market frenzy that preceded the financial crisis, private equity firms were briefly able to negotiate exceptions, winning notorious “mulligan” clauses that allowed the company to drop the ball once without consequence. Such permissive deals vanished for a few years when credit markets seized up. But during a decade of expansive monetary policy and loose lending, they have returned to become the norm.

QE n Zirp were stuffing economy full of cheap money. Got yo get rid of it some how....

Well, it's not a good yield for us but .. moneys cheap.. fingers crossed.

As long as a global pandemic tgat destroys office n retail demand doesn't turn up and FED doesn't raise rates above 2% we will be ok .....

 

[Castlevania]

On 14/04/2023 at 12:34, sancho panza said:

The Skipton.A building scoiety that owns an Estate Agency/Mortgage Broker.What could go wrong?

As ever the interesting stuff from page 58

My comments in italics

@spygirl thsi really looks like something else.Already at year end 22,they're admitting to 10% loan book over 80% LTV.0.3% over 100%.Suspect the situation is much much worse now.

ALso,anyone else,they appear to be carrying a huge amoutn of interest rate swaps,bigger than their loan book even...if anyone has aview or understanding ehre it would be mcuh appreciated.

Edit;page numbers are as per the PDF

https://www.skipton.co.uk/about-us/financial-results

 

Page 57 Huge uptick in fees and commissions receviable in the Income statement.I'll have to read further where that came from because it dwarfs the profit for the year at £230mn at £1bn...............

Page 58-£24bn loan book

 

page 72-Economic modelling appears to include 4 variables-I eman what could go wrong with that?And one of them appears to be the last thing they should be including-HPI.It's the same 4 variables the Coventry used.

Page 82-There appears to be a fari amount of what might be termed duration risk in their loan book.It appears as if the bulk of loans mature over five years.

Page 84 list of other businesses owned

Page 88-£320mn of assets is intangibles.

Page 100-They appear to have a lot of Interest rate swaps on there books. @spygirl have you seen anything this size before for a £25bn loan book BS?

 

Page 107-Here we go.The main course.Across the mortgage book

As of year end 2022

stage 2+3=  £4672mn /£25317mn in stage 2+3=16.8% of laon book.

I'd imagien the situation is worsening .

It's significant that it's already way higher than 2021 and yet the SKipton has actually grown it's loan book during that period???????? I clearly have no grip on maths whatsoever.

Page 110 Again huge amount of lending in the book to Londinium and the South East for a Northern BS =circa 32%%

crica 20% BTL simlar to Yorkshire and way lower than the Cov.

What's interesting here is the scale of teh stage 2+3 in London and the South East.London is leading the charge.

London Stage 2+3=£946.3mn/£3985.2mn=25% of loans

South East Stage 2+3=     £658mn/£3658mn=18% of loans

 

Page 111-In a year when they've seena huge uptick in Stage 2+3 they've managed to expand the laon book by nearly £2bn

ALso worth noting they're already cvarrying near £2bn of laons at 80%+ LTV which with a 10% downturn in Londinium could possibly bring another £1bn into junk area.

Also worth noting that I can't find a break down by year of laon origin like was avalaiable with the Yorkshire

 

At the very least it does look like they’ve hedged the interest rate risk on their mortgage book.

[sancho panza]

6 hours ago, spygirl said:

To misquote Mike Tyson - Everyones got a (solvent) model  ... until they get punched in the equity.

 

A floating turd only takes up a v small part of a swimming pool ... but noone will jump in.

 

Brokers know which banks have that but extra risk tolerance, ones that turn a blind eye yo credit wrinkle, or have been so uncompetive that theyll bend over to meet this quarters results.

 

 

 

I lvoe thsoe first two quotes particuarlyl the turd in the pool.So true.

I find it easy to imagine how insiders within banks and the fin services industry find it easy to push the leverage button when the bonuses start running dry nd then because it doesnt come back on them and in fact enriches them,they think they'll jsut blow a little harder next time.

It's one of the reasons why we're where we are.

 

6 hours ago, spygirl said:

Charlie Munger: US banks are ‘full of’ bad commercial property loans

Berkshire Hathaway vice-chair foresees pain in FT interview — but it will not be as severe as 2008

https://www.ft.com/content/da9f8230-2eb1-49c5-b63a-f1507936d01b

Charlie Munger has warned of a brewing storm in the US commercial property market, with American banks “full of” what he said were “bad loans” as property prices fall.

The comments from the 99-year-old investor and sidekick to billionaire Warren Buffett come as turmoil ripples through the country’s financial system, which is reckoning with a potential commercial property crash following a handful of bank failures. “It’s not nearly as bad as it was in 2008,” the Berkshire Hathaway vice-chair told the Financial Times in an interview.

“But trouble happens to banking just like trouble happens everywhere else. In the good times you get into bad habits . . . When bad times come they lose too much.”

 

Berkshire has a long history of supporting US banks through periods of financial instability. The sprawling industrials-to-insurance behemoth invested $5bn in Goldman Sachs during the 2007-08 financial crisis and a similar sum in Bank of America in 2011.

But the company has so far stayed on the sidelines of the current bout of turmoil, during which Silicon Valley Bank and Signature Bank collapsed. “Berkshire has made some bank investments that worked out very well for us,” said Munger. “We’ve had some disappointment in banks, too. It’s not that damned easy to run a bank intelligently, there are a lot of temptations to do the wrong thing.”

I remember BH investment in GS.

I'd prefer the term - balls in vice.

Heres GS spin -

https://www.goldmansachs.com/our-firm/history/moments/2008-buffett-investment.html

Warren thinks we are bestest bank. Evah!I'm surprised they put the detail in

On September 23, 2008 – two days after Goldman Sachs became a bank holding company – the firm announced a private offering to Berkshire Hathaway whereby Berkshire Hathaway would purchase US$5 billion in special preferred shares that would pay a 10 percent annual dividend. The firm had the option of buying back the shares for US$5 billion plus a one-time dividend of US$500 million. Buffett stipulated that Goldman Sachs’ top executives pledge not to sell their own shares before Buffett sold his. Berkshire Hathaway would also acquire warrants to buy an additional US$5 billion of common stock at US$115 per share.

10% dividend. Every year. Til they dumped the stock.

 

 

 

 

I think I noted ref Nat West that the CRE book looked  solid for where we are given that we're seeing some major shopping centres on the UK going under.50%-70% LTV CRE has about 20% in stage 2 but given the situation and how mnay emoty offices and shops there are ,I'm surprised by that

1 hour ago, Castlevania said:

At the very least it does look like they’ve hedged the interest rate risk on their mortgage book.

Yeah I thought it looks like a sizeable trade that could pay out big time if the mian of it was laid down pre Kwame.Prop trading desk tradew ithout the prop trading desk

[wherebee]

I was on the edge of a discussion with one of the Big US banks about a commercial loan package into the Australian commercial property lending market.  Something they were selling to investors, I think.

It had clearly been written by Yanks with no real on the ground knowledge of the local scene.  I wasn't there to comment on it, but it was obviously dogshit for me who knows Sydney and the locations mentioned.  I suspect a lot of Bank commercial loan 'investments' are the same - packaged up and sold onto dumb investors.  I just hope that they aren't your pension fund.

I guess if they can shift it off the bank's books by securitisation, happy days.  If not....

[Castlevania]

6 hours ago, sancho panza said:

Yeah I thought it looks like a sizeable trade that could pay out big time if the mian of it was laid down pre Kwame.Prop trading desk tradew ithout the prop trading desk

No, it appears they’ve done what Silicon Valley Bank should have done. Most of their mortgages would be sold fixed, whilst deposits are largely variable (or at least they’d need to increase the interest rate as Bank Rate increases). There’s a mismatch. Given the notional of the derivatives to their mortgage book, it does look like they’ve converted most of that fixed mortgage rate to variable.

[Castlevania]

NatWest had a lot of crap commercial real estate exposure on their books when they went bust last time around. As far as I’m aware it’s not an area they’ve been keen to lend to, and an area they’ve been actively trying to get rid for the past decade plus. 
 

The exposure in your table has declined every year for the past four. If you looked at their exposure 10 years ago I’d imagine it would have been far higher.