At a banking conference the other day Marcus Agius made the point that bank shareholders still expected and demanded high returns. Talk of investors in future being prepared to accept utility-type returns from banks was “completely unrealistic”, the Barclays chairman said. Cue sage nodding from assembled bankers.
But is this actually true? Bruce Packard at Seymour Pierce has just conducted a straw poll of ten institutional fund manager clients, asking them if they would accept utility-type returns from banks. Three said yes, one said no and six were more nuanced in their answers. This was not a scientific study, but Mr Agius’s assertion is far from proven.
After the bruising of the banking crisis, a smooth, reliable, pedestrian return from bank shares sounds positively delicious. There’s no point in scooping juicy 20 per cent returns for nine straight years if in the tenth you’re clobbered with a complete implosion. Better to receive a less exciting 7 or 8 per cent with no or fewer shocks.
Mr Agius is anxious to see off too heavy an extra capital burden, not to mention ring-fencing rules which could force banks to demerge their racy investment banking arms. He is right that banks can never be risk-free. They are inevitably more exposed to the economic cycle than a water company, say. But it’s not at all obvious that investors would automatically prefer pacier though more volatile returns. Higher capital cushions could make returns more reliable, as could new regulatory ideas such as counter-cyclical capital.
The high returns on equity from British banks are entirely a modern phenomenon. As Andy Haldane, the financial stability chief at the Bank of England, has pointed out, returns from British banks were less than 10 per cent from 1920 to 1970. Only in the next 30 years, when leverage ratios began to rocket, did banks produce returns of 20 per cent or more.
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Doubtless hedge funds, momentum investors and others who thrive on volatility would agree with Mr Agius. Long-term investors steadily building a retirement pot over 40 years might not. For consumers, banking is never going back to the 1950s. Perhaps for shareholders, it should.
Finding the right blend
The Treasury has quickly found a replacement on the interim Financial Policy Committee for Sir Richard Lambert, who quit after one meeting. The choice of Bob Jenkins, a former chairman of F&C Asset Management, sensibly begins to increase the weighting of former City practitioners on the 11-man panel — albeit from one to two.
In Mr Jenkins the Treasury has identified in a single person someone who can lay claim to know intimately some of the darker corners of wholesale finance, having worked in at least three areas that regulators regard with suspicion.
Hedge funds? Mr Jenkins was until yesterday a partner in one, Combinatorics Capital. Bank proprietary traders? He was in charge of them for 16 years at Citibank and responsible for curbing their more exuberant bets. Private equity? He’s a senior adviser to one of the biggest players, CVC.
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He, along with Michael Cohrs, the former Deutsche Bank investment banking chief, will play an important part in keeping the committee au courant with some of the blacker arts of the banking and shadow banking system.
If the powerful FPC is to have a hope of anticipating, and so forestalling, the next financial crisis, it will need well-informed City insiders as well as supervisors and central bankers.
Hidden costs of oil reprieve
It was a timely moment for ministers to announce their concession on North Sea oil taxes yesterday. True, they may not have lifted a finger to save those Bombardier train-making jobs in Derby, but the message from the Treasury is that it is at least listening to the concerns of Aberdeen.
On the face of it, the concession was significant. Norway’s Statoil immediately announced plans to resume work in one oilfield in what looked like a stage-managed announcement. The share prices of a shoal of oil production minnows also climbed higher.
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But in financial terms the reprieve is modest. The Treasury reckons it will cost the Exchequer about £50 million a year by 2015, though the cost may mount thereafter. That compares with £2 billion a year in extra revenue from the original Budget measure in March.
The oil and gas industry is still having to shoulder the vast bulk of the cost of keeping petrol and diesel a penny a litre cheaper than otherwise.
It didn’t help their cause that Centrica quietly reopened its huge South Morecambe gasfield last week. Centrica had claimed that the field was being mothballed partly because of the tax decision. The reopening was triggered by other factors, in particular an increase in the cost of imported gas, but it inevitably looked like Centrica had been bluffing all along.
Given the need for fiscal austerity, George Osborne might have been wiser to stand firm. The message is that the Treasury will yield a bit to those who squeal loudly. It sets an awkward precedent.
The oil industry is buoyed up by Brent at $110 a barrel and is hardly a hardship case. It has just become much more difficult for Mr Osborne to resist the blandishments of those industries in icier straits.
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Case for strikes is falling apart
It’s official. Public sector workers are paid 7.8 per cent more than their private sector counterparts and the gap is widening. Moreover, this is before their much better pension benefits are taken into account. It is comparing like with like. The number-crunchers (public sector workers themselves, incidentally) have gone to a lot of trouble to strip out differences in age, skills and qualifications that might legitimately explain the differential. Arguments from public sector unions that such comparisions are invidious or too generalised to be meaningful look threadbare. The case for public workers to abandon their strike threats and make a bigger contribution to their own pensions is overwhelming.