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The month at a glance

March kicked off with a fresh shock from across the pond as insurance giant

AIG announced the largest quarterly loss in corporate historyAnyone hoping that spring would bring some good news for the financial sector must have been left sorely disappointed at the beginning of March, as US insurance giant AIG reported a loss of £43bn ($61.7bn) in Q3 2008, the largest quarterly loss in corporate history.

Having already received $150bn in financial support from the US government the company was forced to ask for an extra $30bn. Ever the bearers of good news, the US Federal Reserve and the UK Treasury said that AIG posed a systemic risk to the global financial system.

And while the US’ biggest insurer was hitting rock bottom Europe’s biggest bank was having a few troubles of it’s own. HSBC began the month by launching a £12.5bn rights issue after revealing a pre-tax profit of just £6.5bn.

The figure was down 62% compared with the previous year’s profit of approximately £17bn.

HSBC also announced it is to close its US consumer lending operations HFC and Beneficial as soon as it can practically do so.

The bank will continue to service its existing portfolio while running it down. It has pledged to continue to help home owners keep their houses.

A statement from HSBC read: “HSBC remains committed to the US financial services market in-cluding the remaining businesses in HSBC Finance, as well as its US banking operations under HSBC Bank.” Regarding the rights issue, HSBC group chairman Stephen Green said: “Further strengthening our capital base will enhance our ability to deal with the impact of an uncertain economic environment and to respond to unforeseen events, as well as give us options regarding opportunities which will undoubtedly present themselves to those with superior financial strength.”

HSBC shares fell 10% in London as news of the rights issue came through.

Meanwhile, beleaguered lender the Royal Bank of Scotland promised to boost mortgage lending by £9bn in 2009. This was its part of the bargain struck in return for the government siphoning £325bn worth of its toxic debt into the Asset Protection Scheme.

The arrangement will only apply to losses incurred after January 1 2009 and RBS will have to pay the Treasury a fee of £6.5bn to participate in the scheme. The government also increased its stake in RBS by £13bn, meaning taxpayers now own a massive 83% of the bank.

At the time Stephen Hunter, chief executive of RBS, said “Participation in this scheme will help us reduce risk for our shareholders while providing support for our customers through increased lending.”

And the bad news just kept on coming as other banks’ results were revealed.

There were no alarms or surprises as lenders’ profits for 2008 were revealed to be strikingly lower than in 2007, while for some losses were much higher.

Britannia’s pre-tax profits took a massive hit, falling from £114.6m in 2007 to £23.8m. The lender claimed the reason for this was its exposure to problems at Lehman Brothers and Kaupthing, both highly rated institutions that collapsed last year.

Britannia had short-term deposits in both banks and as such had to include a provision of £57.4m in its accounts to cover possible losses.

Skipton also suffered due to exposure, this time to the Icelandic banking system. It revealed pre-tax profits of £22.5m for 2008 – a fall from £163.9m in 2007. The society also had to pay £16.3m for its Financial Services Compensation Scheme levy and claimed that its 2008 profits were half what they would have been had this not been required.

Group assets were up 8.9% to £13.6bn while mortgage assets were up 1.7%, compared with a 15.9% increase in 2007.

Profits at the Yorkshire were down at £8.3m compared with £54.6m in 2007. It too put this down to the FSCS levy for the failures of Bradford & Bingley, Icelandic banks and London Scottish Bank.

The huge contributions building societies were having to make towards the FSCS levy led Iain Cornish, chief executive of the Yorkshire, to lobby to the government. More than 150 MPs signed an early day motion on the subject, tabled by MP Ann Cryer.

But it wasn’t all doom and gloom. There was some good news in the form of Spanish banking giant Santander, which hardly surprisingly announced annual UK profits of £991m for 2008 – an increase of 21% compared with 2007.

The leviathan’s loan book grew 43% to £179.74bn thanks in no small part to its acquisition of Alliance & Leicester, which accounted for £51.6m.

Following its purchase of B&B’s deposit business and branches, Santander says it now has market shares of 10% in deposits and 13% in mortgages.

Abbey has become the second largest bank in the UK by mortgages and the third largest by deposits, with 1,300 branches and 25 million customers.

In a statement, Santander said: “These results were obtained against a difficult economic and financial backdrop during which a large number of global financial institutions in Santander’s peer group registered losses and required public support.”

Later in the month it emerged that A&L had made a pre-tax loss in 2008 of £1.29bn compared with a profit of £399m in the previous year.

The bank maintained that the figures were in line with expectations at the time it was taken over by Santander.

Meanwhile, HBOS announced losses of £9.9bn – £1.9bn more than expected. Eric Daniels, chief executive of Lloyds Banking Group, dubbed 2008 “the most difficult operating environment for many years”.

But things were looking up for Nigel Stockton, as he was made sales director of mortgages at Lloyds Banking Group. Previously managing director of HBOS Intermediaries, Stockton now has control of all intermediary mortgage brands at the group.

Stockton said: “I’m looking forward to providing continuity for the intermediary community.”

Commenting on the appointment Fahim Antoniades, partner at Quantum Mortgage Brokers, said: “It’s good that someone with his experience is in this position as he understands brokers.”

From one government-rescued bank to another. Northern Rock’s annual results revealed the nationalised lender had made an annual pre-tax loss of £1.4bn, with its losses more than doubling in the second half of the year.

It was also revealed that the bank’s number of unsold repossessed properties had risen by a massive 63% in a year. Its stock of repossessed homes rocketed from 2,215 in 2007 to 3,620 last year.

Northern Rock’s Together mortgage range, which accounts for 29% of its book, saw arrears in excess of three months jump to 4.53% in 2008 compared with 0.95% the previous year.

Gary Hoffman, chief executive of Northern Rock, believes the bank can now return to what it does best – mortgage lending.

He said: “We have an exciting opportunity to help consumers in the mortgage and savings markets while protecting the interests of taxpayers. I’m confident we will deliver on this opportunity.”

And there were more column inches for the Rock later in the month with the news that it kept churning out Together mortgages for five months after it was propped up by taxpayers.

A report from the National Audit Office on the nationalisation of the bank exposed the fact that the now-infamous supersize mortgage product continued to be produced by the Rock despite the state of its loan book.

Some £1.8bn worth of Together loans business was written by the lender between September 2007 and February 2008.

Although £1bn worth of the loans were promised before September 2007, a further £800m was subsequently lent on mortgages up to 125% LTV. These made up 30% of the bank’s mortgage book at the end of last year but accounted for some 50% of its arrears and 75% of its repossessions.

Tim Burr, comptroller and auditor general at the NAO, said: “Northern Rock continued to write these high risk products during the period it was receiving emergency support from taxpayers, albeit at a reduced volume.

“The Treasury told us that mortgage transactions – although not necessarily Together mortgages in particular – were necessary to maintain the business – for example, to maintain the company’s relationship with mortgage brokers while a longer term solution was sought.”

On March 14 it was time for yet more government intervention as finance ministers from the G20 group of rich and emerging nations pledged to make a sustained effort to pull the world’s economy out of recession.

The group also decided that the International Monetary Fund should be given more money to boost world economies.

After the talks, held in West Sussex, chancellor Alistair Darling said: “We have taken decisive and comprehensive action to boost demand and jobs and are prepared to do whatever is necessary.”

Mid-march brought some good news for Nationwide’s Andy McQueen as he was promoted to divisional director for mortgages and savings at Nationwide, a job that will see him oversee the creation and marketing of the society’s mortgages.

McQueen was previously divisional director of specialist lending, covering both The Mortgage Works and Nationwide’s now-defunct UCB Home Loans brand. He replaces Matthew Carter.

McQueen said: “The current mortgage market is certainly challenging but it is dynamic, and this is an exciting time to be taking on this role.”

The end of the month was dominated by Lord Adair Turner and his long-awaited report on the economic crisis, which at least brought a stay of execution for the mortgage industry.

It was revealed that no decisions would be made with regard to the mortgage sector and its products until September.

However, the report suggests that the regulation of mortgage products may be inevitable and says there could be three possible justifications for their regulation, as follows:

  • To protect customers against the possible consequences of im-prudent borrowing.
  • To protect banks against the possible consequences of imprudent lending.
  • To constrain over-rapid credit growth and the excessive property price increases that increase the amplitude of economic booms and busts.

    Lord Turner looked at the root causes of the credit crunch and found mortgages not alone in their guilt. On a wider scale, financial innovation – most notably securitisation – is blamed. The report states: “The demand for yield uplift, stimulated by micro-imbalances, has been met by a wave of financial innovation focused on the origination, packaging, trading and distribution of securitised credit instruments.”

    Yield uplift is otherwise known as higher returns.

    According to the report, as securitisation grew in prominence in the past two decades it was praised for reducing risks in the banking system and cutting the cost of credit intermediation.

    Thus, rather than a regional Lord Turner’s report dominated the end of the monthlender in the US holding dangerously undiversified credit exposures in its own region, securitisation allowed loans to be packaged and sold on to diversified sets of investors.

    Of course, this was not the case. When the credit bubble burst it emerged that toxic debt was not safely out of the way in the hands of investors but slap bang in the middle of lenders’ books.

    Lending market discipline is also called into question.

    The review questions the extent to which we can rely on market discipline rather than regulatory action to constrain risk, stating that in the past it was argued that market discipline could play a role in incentivising banks to constrain their risks.

    The Basle II capital adequacy framework includes the assumption that improved disclosure will play a role in encouraging firms to act appropriately.

    There was a small glimmer of market hope towards the end of the month, with news from the British Bankers’ Association that there was a rise in net mortgage approvals between January and February. Some 28,179 mortgages were approved for house purchase in February – up from 24,278 in January but still down 31% on a year earlier.

    But before you get too excited the BBA also revealed that gross mortgage lending fell to £9.2bn, the lowest since June 2001. Still, we must be grateful for small mercies.

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