March opened with a continuation of the financial reporting season and promised to be dominated by two events – the Budget and the presentation of Ron Sandler’s business plan for Northern Rock to Brussels.
But as the month unfolded, re-sults proved inconclusive and did nothing to restore confidence in the market while the Budget turned out to be unexciting, with little to stimulate the mortgage market and offering no help to first-time buyers.
Sandler’s proposals were of ob-vious interest but even they were buried by other events during Easter week, most notably the selling of Bear Stearns to JP Morgan Chase for a knock-down price and the subsequent fallout in the London market, with shares in UK banks dipping significantly on 17 March.
Then, on 19 March, shares in HBOS dropped by 17% on the back of unfounded rumours that our fourth largest bank and the country’s largest mortgage lender was about to meet the same fate as Nor-thern Rock.
Coincidentally, the Financial Services Authority chose that day to announce the exit of its managing director of retail markets Clive Briault, the first high profile regulator to fall on his sword following the failure of regulation at the mortgage bank.
The reporting season
But early in the month the big question was – would the reporting season produce the spring clean that some believed the banks and mortgage lenders needed to restore confidence in the market and ease the credit squeeze?
As most of us expected, the ans-wer was no and, at best, results were inconclusive.
Put simply, the building society sector was expected to do well but there were question marks over UK and US banks concerning their exposure to sub-prime debt.
HBOS once again ruled su-preme on the UK mortgage scene with its market share shooting up to 22% from 8% six months previously. It confirmed that it would be sticking with its strategy of going for profitable growth rather than market share.
HBOS’ underlying profit before tax was up 3% to £5.7bn and profit after tax was up 4% to £4.1bn. On the subject of liquidity, it said that despite the effect of the credit crisis, its customer deposit growth and supply of wholesale funding remained strong. At the Royal Bank of Scotland, results were in line with market expectations with profits growing by 9% to £10.2bn. Its mortgage book grew from £65.6bn to £67.3bn in 2007. The focus of this growth was in its branches, where net lending was 14% up.
And despite having to write off some £1.1bn as a result of the liquidity crisis, group chief executive Sir Fred Goodwin was upbeat about the future.
Even HSBC, which as a consequence of its US operation suffered write-downs of £5.85bn last year, reported a 10% rise in pre-tax profit for 2007.
In its results, it revealed that pre-tax profit had increased to £12.2bn – up from £11.1bn in 2006.
In short, the reporting season was looking neutral if not positive, but then came the Bear Stearns sale to JP Morgan for the bargain price of $2 per share (subsequently revised to $10). At their height last year, Bear Stearns shares were trading at $170.
But just like with NR, rumours of a cash shortage led to a run on the US bank, with investors re-ported to have withdrawn $17bn in just two days.
However, unlike with NR, the US authorities didn’t take six months to come to a decision and instead facilitated a weekend deal with an agreement to fund up to $30bn of Bear Stearns’ less liquid assets.
Despite this timely intervention, some UK banks saw their share prices fall on the back of the Bear Stearns crisis.
Shares in HBOS fell just under 10% on the morning of 17 March from 528p to 478p, while Barclays’ share price fell 6.47%, from 433p to 405p, and Lloyds TSB saw its stock drop 3.86% from 421p to 405p.
Shares in the Royal Bank of Scotland also fell, in its case by 7.79% from 333p to 307p.
John Goodall, private client research analyst at WH Ireland, said: “It seems people are moving beyond fundamentals and simply panicking. I can imagine it will be like this for the next couple of days – there has been a flight towards the defensive.”
Of course, markets are motivated by fear and greed and part of that fear might have been driven by the idea that a US recession was migrating to the UK or the decision by the Bank of England that morning to make a further £5bn available as interbank lending had virtually dried up.
The next day proved to be less turbulent and the market re-sponded positively when Lehman Brothers and Goldman Sachs reported better than expected trading figures.
But the respite ended on the Wednesday, not with the news that NR planned to axe up to 2,500 jobs in the next three years but with rumours circulating the London market that HBOS was about to become the next NR and had been knocking on the doors of the BoE with a large begging bowl.
Of course, these rumours were untrue but we live in panicky times and shares in HBOS fell by more than 17% that morning.
Apparently, speculators had been spreading malicious rum-ours and selling short. The matter is now under investigation.
But could it be said that a crisis had been averted or that another banking catastrophe had been avoided?
Either way, a lot of investors aren’t convinced the Tripartite Authority has mended its ways but at least the HBOS drama seems to have had a positive outcome. It virtually coincided with a pre-arranged meeting between leading banks and Mervyn King, governor of the BoE, where the bankers leveraged the situation to good effect.
As a result there seems to be a tacit agreement that the BoE will step in to improve liquidity in the market when needed and that it will be prepared to accept a wider range of collateral against such lending.
Whether King will be as supportive of financial institutions as Hank Paulson, the US Treasury secretary, has been, remains to be seen. The BoE has put no figures on the level of support it is prepared to give but at least there seems to be a commitment be-tween the banks and the King to work together to see the country through difficult times.
On the face of it, chancellor Alistair Darling’s first Budget did nothing to stimulate the housing and mortgage markets. Some lip service was paid to helping key workers. But for aspiring home owners outside that favoured fold there was not even a reduction in stamp duty, although perversely the chancellor chose to be generous to buy-to-let landlords by confirming that capital gains tax on the sale of rental flats or second homes would be 18%.
As always on the affordable housing front, it was hard to determine what had been previously announced and what was new.
But as part of its 2007 comprehensive spending review, the government set a target of 70,000 more affordable homes a year by 2010/11, including direct assistance to home buyers through its shared equity and shared ownership programmes.
Pilot shared equity projects with lenders have met with only modest success with about 700 homes delivered, but in last year’s Budget Gordon Brown announced a competition which invited bids for a shared equity product to be delivered in partnership with government from this month.
The objective was clearly to encourage innovation and develop products that offer improved aff-ordability and value for money.
Co-operative Bank, Places for People, and Chase, a housing association consortium, were confirmed as the winners of this con- test and their products will be made available to eligible households this month.
The new products offer equity loans of up to 50% of a property’s purchase price, reducing the size of the mortgage required.
The government also made changes to stamp duty rules so that shared ownership buyers will generally only pay stamp duty on the last 20% of their property value unless they elect to pay the tax upfront.
As for Darling’s much vaunted gold standard to improve liquidity in secondary lending markets, that was kicked into the long grass by means of a discussion document entitled the Housing Fi-nance Review.
This document describes how the Treasury is establishing a working group to consider market-led initiatives to boost liquidity in the mortgage-backed sec- urities market.
The working group will include representatives of the mortgage industry, the investment industry, the Treasury, the BoE and the FSA.
The chancellor is obviously taking this issue seriously as the group will report to him initially in the summer and then present its proposals at the time of the next pre-Budget report, but apparently he could move more quickly if a consensus is reached on the measures needed to revive the mortgage-backed securities market.
As for the gold standard, the Housing Finance Review talks only of the government’s desire to “encourage industry to develop a gold standard market”.
The review also revisits the issue of long-term fixed rate mortgages which Professor David Miles explored on behalf of ex-chancellor Brown about half a de-cade ago.
For some inexplicable reason, the government continues to be-lieve that longer-term, fixed-rate mortgages could be of benefit, particularly to first-time buyers and lower income home owners. While the take-up of these products has been low in the UK, the government points to other countries that have a high proportion of fixed rate mortgages.
The chancellor seems particularly keen on the sort of fixed-rate mortgages that do not carry early repayment charges that are popular in Denmark and in the US. But he accepts that lenders in the UK have limited means to manage the risk of these mortgages, and need to include ERCs to cover their costs.
He is also inviting views on how to deliver more affordable long-term, fixed-rate mortgages, and the lessons to be learnt from international markets and institutions.
Innovative mortgage products are also on the agenda, presumably not based on off-balance sheet funding, with a shopping list that includes shared equity mortgages, standalone interest rate protection products and house price insurance.
On arrears and possessions, the Budget report notes the FSA’s re-view of lenders’ arrears practices which will conclude later this year.
However, as the Council of Mortgage Lenders ruefully ob-serves in its Budget analysis: “There is no mention of changes to income support for mortgage interest, but there is a reference to a comprehensive review of the working age housing benefit system to look at its effectiveness, particularly in promoting work incentives, efficiency and fairness, and to ensure that it represents value for the taxpayer.”
Finally, regarding the industry’s call for statutory regulation of the sale-and-rent-back industry, the Treasury has been conducting an internal review.
The Budget report states that the Office of Fair Trading will lead a study of the market this year – focusing on consumers’ experiences of these arrangements – and consider options to strengthen consumer protection where appropriate.
Executive chairman of NR Ron Sandler submitted his rescue plan for the bank to the European Commission on 17 March. It was against a background which has seen banks in Denmark, NR’s only foreign market, complaining to European competition authorities that it is using government guarantees to gain an edge over competitors at a time of financial turbulence.
Under the plan, Sandler intends to increase the bank’s deposit base and focus on prime lending – a move which received a sharp re-sponse from Adrian Coles, director-general of the Building So- cieties Association.
Coles said: “This does little to allay our fears of unfair competition from the taxpayer-funded bank.
“NR has confirmed that its market share of retail deposits will be increased over the next three or four years and we have only NR’s guarantee that it will not compete on an unfair basis. This is not good enough and we will look for much more detail on this in the finalised business plan. Taxpayers deserve to see as much detail as possible about the plans of the bank they own.
He went on: “NR has been sensitive to the distortions it has caused in Danish markets, but it and the government must also minimise the much greater potential distortion to the UK savings market as a matter of urgency.
“It is unacceptable for NR to build market share via a combination of artificially high interest rates and government guarantees to savers.”
The rescue package includes plans to cut up to 2,500 jobs. The Newcastle-based lender employs 6,000 staff and job cuts strike at one of the reasons for the government rescue – to save jobs in a Labour heartland.