Banks warned to curb payouts as crisis bites

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By Ian Fraser

Published: Sunday Herald

Date: 23 March 2008

Big five banks admonished by governor King as they plead for more support.

BANK OF England governor Mervyn King used his now-famous meeting with the chief executives of the “big five” UK banks last Thursday to admonish them for increasing shareholder dividends, as they came begging for more aid to help resolve their liquidity problems, the Sunday Herald understands.

The dividend increases have been the source of market controversy amid the financial turmoil of recent weeks. Colin McLean, chief executive of SVM Asset Management and a long-time critic of UK banks, said: “It just seems wrong that bankers are looking for support and essentially public money at a time when both dividends and executive pay are not only high but have also just been raised.”

On February 27, HBOS hiked its dividend by 18% to 48.9p meaning the bank offers a yield of 10.3%. Observers have criticised the move as being designed to reassure investors and the wider public that its capital position is secure. It also lowered the targets under which directors would receive payouts on its executive incentive schemes.

Last Thursday’s meeting at Threadneedle Street came the day after the extraordinary “bear raid” on the shares of the UK’s fifth-largest bank, HBOS. The Edinburgh-based bank’s shares crashed by 17% on Wednesday morning amid rumours it was seeking emergency funding from the Bank of England and that it had called a halt to all corporate lending. Andy Hornby, the bank’s chief executive, later said the rumours were “utter trash”. Their source is now under investigation by the Financial Services Authority.

Even after recovering slightly towards the end of last week, HBOS’s shares have fallen by 58% from their February 2007 peak (when they reached 1153p). Having closed on Thursday at 473.75p they are 40% down from their value at the time of Halifax’s merger with Bank of Scotland seven years ago.

Hornby – together with Sir Fred Goodwin, chief executive of RBS and the bosses of Barclays, HSBC and Lloyds TSB – went to visit King at the Bank of England in what bank sources claim was a “routine and pre-planned meeting”.

At the meeting, they urged the governor to take his lead from Ben Bernanke and the US Federal Reserve and open the monetary taps. They are believed to want King to make a more public display that he is prepared to do more to end the financial crisis that has engulfed credit markets. In particular, they are understood to have pleaded for more than the £10.9 billion of short-term funding that the Bank of England said it would release on Thursday. Instead they want indefinite money secured against much wider collateral than has been permissible in the past.

King has, on two recent occasions, publicly demanded that UK banks do more to strengthen their balance sheets, so that they can maintain their capital ratios and support lending even at times of deteriorating credit quality. However, the bankers have turned a deaf ear to these blandishments, instead insisting they do not need any more capital and hiking their dividends in what some see as a herd-like display of machismo.

Carla Antunes da Silva, bank analyst at JP Morgan, said: “We believe UK banks to be still very much in the denial phase’.” She added that “HBOS remains one of the most structurally impaired banks, in our view, with an estimated capital shortfall of £11.4bn.” Last week she advised investors to remain underweight in its shares. However, Hornby described Antunes da Silva as having taken a “highly personal view” and of basing her calculations on an “Armageddon scenario”.

James Eden and Ian Gordon, bank analysts at Exane BNP Paribas, are less concerned about HBOS’s capital position and believe it will have no difficulties in riding out the credit market storm. “The bank’s operational outlook remains robust even in today’s challenging environment. We anticipate that, in time, liquidity concerns will abate and, therefore, we expect HBOS to outperform from here.”

Robin Angus, manager of the Edinburgh-based Personal Assets Trust, suspects “window dressing” in recent bank results. Writing in the PAT Quarterly, he said: “It awakes the unhappy memory of how banks used to put up their dividends five years running, only to hit shareholders with a huge rights issue to claw back everything paid (and more) in the previous five years.”

HBOS has also come under fire for easing the targets for its executive incentive scheme. Previously directors only received bonuses under the scheme should the bank’s shares outperform a basket of UK banks by 3%. Under the new rules, HBOS only needs to be 1.5% above rivals to trigger pay-outs. The bank also softened the basket of banks by increasing the weighting given to Alliance & Leicester and Bradford & Bingley. McLean said: “This chopping and changing of the targets is somewhat egregious.”

The recent collapse in UK bank’s share prices is not directly linked to the collapse of US investment bank Bear Stearns or to the emergence of any new information about the scale of write-downs. It is based on investors’ fears that the banks will eventually face bigger hits to the value of their Treasury books than those already announced, as a result of the worsening US housing market, and a general breakdown of trust. “The real problem is the lack of trust between banks,” said McLean. “We’re going to need a lot more candour before that can be restored.”

Annual reports from RBS and HBOS show that Sir Fred Goodwin’s remuneration totalled £4.19m in 2007. Hornby’s package climbed 22.5% to £1.93m.

This was the business splash in the Sunday Herald on March 23rd 2008 Read article as published on Sunday Herald webite

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