TMM are in foul moods this morning. You see, it seems that the cottage industry that is the
taxpayer owned "world-beating" UK banking industry have decided that they're not content with helping themselves to tens of billions of pounds of taxpayer money over the past few years. It seems that their profit margins aren't quite good enough. Brilliant, TMM thought, that means that they will reduce overheads, figure out what is going wrong and restructure their businesses to deal with increased competition and the so-called "New Normal", helping taxpayers get a decent return on their investment. But no, it seems. These publicly-owned banks appear to have taken on the classic public sector mentality of deciding the above is too difficult, and instead are opting for screwing the fixed client base. Very British Rail.
Yes, over the weekend,
Reliant-Robin Bank of Scunthorpe RBS & Lloyds hiked their SVR (Standard Variable Rate) mortgage rates (soon to be followed by the rest of the cartel, having watched the recent carbon copy move by the Aussie bank cartel) by 25bps despite the Bank of England Base Rate having sat at 0.5% for 3years and multiple rounds of Quantitative Easing.
The usual reasons of "tightness in wholesale funding markets" and "increased regulation" have been trotted out by said banks. And certainly, to some extent this is true. But of the former, arguably the peak in the stresses emanating from Europe has passed with the gargantuan LTROs from the ECB. And as for the latter, TMM would observe that this has been an excuse for much of the past 25years. Regardless, the Basel III regulations are to be gradually introduced over the coming decade - they did not suddenly appear in the past few months. TMM are also highly sceptical they will be implemented in anything like their current form.
Anyway, TMM decided to take a closer look. None of this is new, and has been covered elsewhere, but is worth repeating. RBS have around £414bn of deposits, which probably pay around 0.2%, they have Short Term secured borrowings of about £300bn, which probably pay something like 0.8% (somewhere in between repo rates and Libor), unsecured borrowing of about £700bn which is probably something like 3.7% (Libor+CDS) and £70bn of equity which is probably about 10%. Which gives a blended rate of just over 2.4%. Against that, RBS's Net Interest Margin is about 1.45%, which, back of the envelope would produce about £22bn a year.
As TMM have noted previously, they find the behaviour of the Bob Diamonds of the world to be abhorrent. And without wishing to spark a religious debate about whether bailing out banks is a good or bad thing, TMM are generally of the view that if taxpayers are going to write a put on the banking system, it needs to be priced correctly. The value of this is not easy to estimate, but one way to arrive at a guesstimate of the implicit state subsidy might be to look at the difference between Subordinated and Senior CDS and multiply that by the unsecured borrowings. For RBS this looks something like £712b*(525bps-262bps) ~£18bn/year. Whether this is an overestimate or an underestimate, TMM do not know. But they do know that, absent the implicit government put on Senior bonds, RBS as an institution would not be able to exist. Because removing £18bn of that £22bn above doesn't leave much over to cover costs and NPLs...
Now, TMM are NOT bank analysts and the above is probably either wrong in at least a few ways at best, or at worst hopelessly naive. But they do think it at least dents the argument that mortgage rates have gone up purely because of increased funding costs or regulation.
It's just that these banks are not very good.
The chart below shows the historical estimated funding rate (red), the SVR 75% LTV rate (green), the difference between the funding rate and the SVR rate (incorrectly labeled 'SVR Margin' for ease of viewing, purple) and the overall Net Interest Margin for the bank (blue). The banks didn't cut their mortgage rates anything like what might be expected in 2008 in order to try and rebuild their margins lost in 2006/7. Then in response to a relatively small increase in funding costs they decided to try and hold on to these out-sized margins by hiking the SVR over the weekend despite the fact that wholesale funding costs have begun to move lower once again.
Now, regular readers will know that TMM are not Merv the Swerv's greatest fans. But they sure are looking forward to seeing his reaction to the banks sticking two fingers up at his latest gift of QE. TMM have also written to their banks demanding to know why their mortgage rate has gone up despite all of the above, particularly just a few weeks after large bonuses were paid out.
TMM would like to start a competition to rename the UK's public sector banks, and will start by offering:
Reliant-Robin Bank of Scunthorpe
Leyland Banking Group