There was nothing much wrong with the HBOS figures announced yesterday. The write-offs were a bit bigger than trailed, while higher funding costs have further compressed the net margin. Yet underlying profits remained relatively robust, albeit with strong growth in corporate lending and fees compensating for a quite sharp fall in earnings from the core mortgage and deposit-taking business.
Even so, the shares took a beating. This was largely because the chief executive, Andy Hornby, refused to be upbeat about the future. Assuming funding costs remain the same as they are now, HBOS will be paying roughly £150m more for its money over the next 12 months than it normally does, or some 3 per cent of profits. Margin compression is expected to continue into this year, though at a less pronounced rate than last.
Mr Hornby expects continued growth in the mortgage and corporate markets for the next few years, but at a much reduced rate than before, and he thinks financial markets will remain difficult throughout 2008. Understandably, he's being exceptionally cautious on providing any earnings guidance. In these circumstances, he seemed to analysts to be almost inviting a downgrade.
Yet the thing that struck me most about the HBOS statement, as indeed it has about the whole bank reporting season so far, is how relatively unaffected the UK banks seem to have been by what Rachel Lomax, deputy governor of the Bank of England, this week described as "the largest ever peacetime liquidity crisis".
Leaving aside the issue of whether she is right about this – I would have thought the banking crisis of the mid-1970s a good deal worse – the reported numbers and even the understandably cautious statements most banks have made about the future give no sense of the scale of crisis widely portrayed in the media and some parts of the City.
Never mind the 1970s, as recently as the early 1990s UK banks saw their profits completely wiped out by the poor lending decisions of the previous decade. Some had to engage in rescue rights issues to survive. No mainstream UK bank is yet predicting anything like that degree of pain this time around.
As one senior banker told me: "If there is a crisis, I'm not entirely sure where it is, as the underlying business numbers don't yet seem to reflect it."
This doesn't necessarily mean it won't happen. Despite everything the banks say to the contrary, there remains a quite widely held view in the City, apparently shared by the Governor of the Bank of England no less, that some UK banks urgently need to recapitalise themselves.
There is also widespread concern that the present liquidity squeeze could get a great deal worse before it gets better, helping to prompt, through lack of access to credit, the feared but not yet observed economic crisis. Yet few bankers seem to believe this a probable outcome. HBOS's Mr Hornby thinks net mortgage lending in the UK is likely to grow this year by £80bn, which is plainly a lot lower than the £100bn to £110bn of the last three years, but hardly counts as a meltdown.
A marked mismatch of perceptions has developed, with the decline in bank share prices reflecting fears of a much worse crisis than bankers generally believe likely. One of the reasons chief executives are being so cautious about the future is that they would be thought mad if they said anything remotely optimistic. By being downbeat, they can only please on the upside.
However, none of this means banking stocks are a rip-roaring buy, or at least not yet. For starters, there's potential for a lot more bad news yet, and there is also self-evident pressure from regulators for capital raising whether banks need it or not.
The wider reason for caution, though, is stock market psychology. There's said to be lorry-loads of cash out there waiting to be invested, but, though there is general agreement that many stocks are now relatively cheap, nobody will buy as long as the prevailing belief is that it might be possible to buy even cheaper tomorrow.
Share prices may need to fall further before they hit bedrock, even if the long-term prognosis remains reasonably good. It is Sir Fred Goodwin's turn this morning to tell the markets they've got it completely wrong. Let's see how he does, but I doubt investors will be more willing to believe the Royal Bank of Scotland chief executive than any of the others.
Ferrovial wields the axe at BAA – again
BAA, owner of Britain's major airports, seems to have been quite seriously mismanaged since it was taken over by the Spanish construction group Ferrovial a year and a half ago, so it is no surprise that the chairman recently brought in to get a grip, Sir Nigel Rudd, has now ousted the chief executive and installed an experienced operational manager, Colin Matthews, in his place.
In short order, there's been a damagingly adverse ruling by the regulator on pricing for the next five years, a furious public row over poor standards of customer service at Heathrow, and as if all this were not enough, a Competition Commission inquiry into whether the country might not be better off if the whole company were broken up.
Ferrovial itself might reasonably be thought of as the primary author of its own misfortune, but, whoever was to blame, this cocktail of negatives cannot have looked good back at head office in Madrid. Rafael del Pino, Gruppo Ferrovial's chairman, must sometimes wonder what on earth he has got himself into as he struggles to refinance the mountain of debt he took on to buy BAA.
Since he acquired ownership, virtually the entire top management team has resigned. Stephen Nelson, the man Ferrovial promoted from retail director to the chief executive's suite, makes it a clean sweep. On paper, Mr Marshall is much better qualified for the post, with both extensive experience of operating regulated utilities, and, from his time at British Airways, some knowledge of the airline industry. Mr Nelson is a retailer by background, and makes an easy scapegoat for the problems of the last year.
They'll take no pleasure in BAA's problems, but Marcus Agius and Mike Clasper, respectively the chairman and chief executive of BAA until Ferrovial took over, will both be feeling jolly pleased with themselves over the turn of events. They didn't solicit Ferrovial's bid, but their timing in achieving a top-of-the-market price for BAA just before the proverbial hit the fan on so many different fronts was immaculate. I argued at the time that they had undersold the company. The evidence so far is the very reverse.
FSA admits mistakes over Northern Rock
Regulators are not on the whole given to mea culpas, yet Hector Sants, chief executive of the Financial Services Authority, came about as close to it yesterday as you are ever likely to see by admitting that supervision of Northern Rock "did not meet the standards I would expect of the FSA". This in any case is what a review of the FSA's handling of the affair will conclude when published next month.
This might be thought a statement of the bleedin' obvious, and therefore not of any significance, yet I beg to differ. To date, the FSA has insisted that Northern Rock was not a case of regulatory failure as such, in the sense that there was negligence involved, but rather of misjudgement in believing the business model safer than it was. There's a subtle but crucial difference.
Mr Sants' comments yesterday suggest real failings in supervision beyond naively accepting the consensus view at the time that there was nothing wrong with Northern Rock.
Whatever the review eventually shows, at least the FSA has had the humility to accept some degree of blame, which is more than can be said for the Bank of England, the Treasury or even the man himself, Northern Rock's former chief executive, Adam Applegarth. Everyone else remains unrepentant.Reuse content