Monday, November 3, 2008

BANKING NEWS - AIBEA - 2 & 3.11.2008

LLOYDS TSB will tomorrow outline how it will find at least £1bn of cost savings in its merger with HBOS by combining businesses and cutting out duplication.

The company's offer document will not say how many jobs are likely to be lost, nor is it likely to identify which businesses will go, but there is expected to be sufficient detail to reveal which areas will be most affected.
It is believed that insurance will be hit, as the two banks have a big presence through Scottish Widows and Clerical Medical and its general insurers Halifax, Sheilas' Wheels and Esure.Archie Kane, chief executive of Scottish Widows, who will also be director for Scotland in the new group, said the circular would offer some guidance on how the deal will shape up."It will clarify high-level strategy and direction. But there will be nothing on job numbers."There will be specific reference to synergies and cost savings, elements of rationalisation and de-duplication," he said.
He would not comment on potential merging of businesses such as Widows and Clerical Medical or any potential for asset sales. "We have not made any decisions on brands," he said. "But we will be weighing heavily the brands we have. However, we will not be discarding them willy-nilly. It will be a case of identifying the optimal way of driving them forward."Kane was keen to distance the bank from chief executive Eric Daniels' comment that Lloyds TSB was "indifferent" to Scottish heritage when it appointed nine of the 11 new directors from the Lloyds camp.
Kane said Daniels had not meant to cast aspersions on the Scots and had merely meant that individuals were chosen on merit.
Kane declined to offer further comment on the future of Peter Cummings, the head of corporate at HBOS, who has backed a number of Britain's biggest tycoons and was omitted from the new line-up.He said the future roles of Cummings and Susan Rice, chief executive of Lloyds TSB Scotland, will be part of a second round of interviews for top-level jobs in the newly combined Lloyds-HBOS superbank.
Lloyds TSB Scotland has been run as a separate business within the group structure, but Kane hinted in an interview with Scotland on Sunday that this will also be up for review.Rice will be among a number of senior figures who will feature in what he called "wave two interviews". He played down suggestions that she was being "interviewed for her own job", but he said the divisional heads will be talking to senior staff and she will see her line manager Helen Weir, executive director of retail, "as part of that process". Lloyds TSB is offering 0.605 of a Lloyds share for each HBOS share.
Publication of the circular is expected to influence the future direction of the shares of both banks. HBOS is continuing to trade below the price of the new shares it will be issuing, though the discount has narrowed to 17%.
Royal Bank of Scotland will publish the prospectus for its £15bn placing and open offer on Tuesday, when it is also expected to reveal around £5bn in further writedowns.It hopes the shares remain above the offer price so that investors will be encouraged to participate in the clawback. Unlike a rights issue, they have no right to sell unwanted shares.All three banks will be issuing trading updates ahead of schedule. Analysts at Citigroup expect RBS to report a £1bn loss after writedowns at the year-end.

Area Banks Apply for Bailout Funds: Despite Strings, the Pair Couldn't Pass Up Cheap Money
Saturday, November 01, 2008 The News & Observer
By David Ranii, The News & Observer, Raleigh, N.C.
At least two Triangle-based community banks have decided to apply for an infusion of cash from the federal government, while a host of others are studying the pros and cons.

The money is relatively cheap and is designed to boost lending to businesses and consumers, although banks can use the money for other purposes such as acquisitions.

But taking the money means the banks will gain the government as a shareholder, diluting the holdings of existing investors as well as pushing them into unchartered territory. Privately held banks, meanwhile, say it's still unclear how the program applies to them.

Two Raleigh-based banks, Capital Bank and Paragon Commercial Bank, are applying for government money even though they say they're in good shape without it. The U.S. Treasury has set aside $250 billion for the program, and regulators are encouraging banks to use the money to expand their lending.

"If you're a healthy institution, this is a way to get a capital infusion in the short run" at a time when it's difficult for banks to raise capital elsewhere, said Grant Yarber, CEO of Capital Bank.
Capital and Paragon plan to use the money to provide more loans.

Capital is eligible for between $13.6 million and $40.8 million under the government formula that calls for banks to receive cash ranging from 1 percent to 3 percent of their risk-weighted assets, such as loans and investments. Capital had $1.36 billion in risk-weighted assets as of June 30, according to the Federal Deposit Insurance Corp.

Paragon is eligible for as much as $28.9 million.

Paragon CEO Bob Hatley said that even though his bank just raised $11.75 million in subordinated debt this week, the money is too attractively priced to pass up.

"Every banker I know in North Carolina is going to be applying for it, with a couple of exceptions," he said.

No free lunch

The U.S. Treasury will receive preferred stock that pays a 5 percent annual dividend for the first five years, and 9 percent per year after that. The government also will receive warrants for common stock.

Capital Bank has never sold preferred stock and plans to have a special shareholders' meeting to authorize such a sale. That will cost the bank $20,000 or more, Yarber estimated.

Three large regional banks with a presence in the Triangle -- BB&T, SunTrust and Regions Bank -- already have received preliminary approval for billions of dollars in government cash.

Raleigh-based First Citizens said it's not interested in the government program.

Raleigh attorney Tony Gaeta, who represents a number of community banks, said he is urging his clients to at least apply for the money.

"There is no requirement that, by applying, you take it," he added. The application deadline is Nov. 14.

Gaeta said banks face a dilemma with regard to the federal money.

If they accept federal cash, they may have to overcome the erroneous perception that they desperately needed the money. In reality, he said, banks have to be rated healthy by federal regulators to receive the cash infusion. Those ratings are confidential.
Many still on fence

At the other extreme, banks that refuse the money could prompt questions about whether they were healthy enough to qualify. Gaeta said he's counseling banks that that apply for the money but ultimately decide not to accept it to go public with their decision.
"I think they should proactively market [themselves] as saying, 'the money was available to us but we did not feel we should dilute shareholders and take it,' " Gaeta said.

Community banks that say they are considering applying include: Raleigh's North State Bank, Capstone Bank and TrustAtlantic Bank; Crescent State Bank of Cary; and Durham's Mechanics and Farmers Bank and KeySource Commercial Bank.

"I don't know that we have enough information yet to make a decision," said Capstone CEO Steven Ogburn.

One issue that's still unclear, said Ogburn, is how the government would value warrants in a privately held bank like Capstone. Executives at privately owned KeySource and TrustAltantic are considering the same question before applying.

Another sticky point is having the federal government as a shareholder.

Although the government has said "they don't want to micromanage banks, is there the potential, once you take their money, for them to micromanage your bank?" asked Gaeta, "Yes, there is. How much of a potential? You tell me."

BoJ chief papers over 'bungled' rate cut
Peter Alford, Tokyo correspondent November 03, 2008
BANK of Japan governor Masaaki Shirakawa emerged on Friday evening after one of the central bank's most controversial rate-setting meetings of recent times to explain why, contrary to general opinion, the BoJ had not botched a critical policy move.
The governor clarified that people in the markets had been wrong to infer the BoJ policy board's 4-4 split vote meant that he, his two deputies and one "civilian" member wanted a 25-basis-points rate cut, that the four other civilians wanted no reduction and that Shirakawa had used his casting vote to get a compromise 20bp cut.
That misapprehension caused the Tokyo share market to lose 350 points in the last hour on Friday, spiked yen cross rates sharply upwards and created confusion in the bond market. In turn, that sent markets people off to their Friday night bars and restaurants fuming with black humour or just fuming: the first week in more than a month when chaos had abated, marginally, had been roiled right at the close by a BoJ bungle.
What really happened, the governor explained, was he had recommended 20 basis points, three dissenting civilians actually wanted a 25bp easing and only one member -- everybody believes this to be Atsushi Mizuno -- wanted no move at all.
A former fixed interest strategist, Mizuno is an unyielding policy hawk and had there been a few more of his type on the Fed in recent years, perhaps Alan Greenspan might today cut a more dignified figure. But at the BoJ, it's no shock he would be last man standing against a cut.
So the points Shirakawa sought to convey were that a 7-1 majority favoured an easing and in the end they settled on cutting from 0.5 per cent to 0.3, just as he had recommended. Ergo, no botch and markets people should use the long weekend here to calm down and get a grip.
Well, we all hope that happens. But it may be the extra day of mulling that causes people whose livelihoods depend to some extent on BoJ activity to conclude that what they saw on Friday was, in fact, a worse stuff-up than first thought.
To be fair, once again the BoJ appears to have been compromised by blatant government tampering with a supposedly independent policy process. (Justified, whenever anybody in the government even bothers to do so, by the Bank of Japan Act which, while rewritten in 1997 ostensibly to free the bank from Finance Ministry overlordship, insists the bank "shall always maintain close contact with the government ... so that its currency and monetary control and the basic stance of the government's economic policy shall be mutually harmonious".)
The affair certainly suggests the central bank and the Finance Ministry, whose fingerprints are again all over this one, have not learnt much about the psychology of crisis management in the past decade, despite ample experience.
About three weeks ago, probably at the IMF and World Bank meetings in Washington attended by Finance Minister Shoichi Nakagawa and Shirakawa, pressure came on for Japan to join the cascade of interest rat cuts started the previous week in Sydney.
Nakagawa was likely open to persuasion though he probably doubts much activity could be generated by the limited monetary stimulus available to a country with a mere 0.5 per cent official rate.
The Government, however, appreciates the necessity to co-operate in global confidence-building and Nakagawa is also distressed by the yen's huge upward revaluation, which tends to be exacerbated by the other major economies sharply lowering rates.
However, frequent reiterations before and after the Washington meetings by "people familiar with" BoJ policy-making that easier monetary policy won't do much for Japan suggest Shirakawa needed talking around.
The new governor has inherited a very stubby interest rate lever and could be forgiven for not wanting to shorten it just for the sake of appearances. Also, during his 35 years at the bank, Shirakawa has experienced the miserable ineffectuality of zero-bound monetary policy and would not want to head back to a near-zero rate unless it was absolutely unavoidable.
But on Wednesday, the Nikkei financial daily reported it had "learned" the BoJ was in fact eyeing a 25bp cut. From an outlet as authoritative as Nikkei, three days before an undecided policy board considers the first rate reduction in 91 months, that is news to draw a curse from even such a mild-mannered central bank chief.
That was no "guidance" by which the BoJ hints at imminent adjustments to avoid disruptive surprises in the markets. That was a leak calculated to lock the BoJ into a cut. Who did it?
The Nikkei now tells us that "some within the BoJ" began calling for a rate reduction when simultaneous cuts by the Fed and the European Central Bank on October 8 set the yen off like a scalded cat.
Strangely, however, hardly any hints of this about-face surfaced before the Nikkei's decisive scoop on October 29 during a week when, in fact, markets and currencies began to settle. Clearly the Government was leaning on the bank for a rate cut.
Part of this pressure, according to Nikkei, was manifested in the promotion last week of Hirohide Yamaguchi to the second deputy governor's post. Yamaguchi is described as "well-connected with the Finance Ministry" and his elevation "seen as strengthening the government's lines of communication with the bank".
Well, well, there they are again: the Finance Ministry and lines of communication, though the Act leaves unclear Nikkei's role in the process. So how did enhanced communication play out on Friday?
We now know that if ever Shirakawa considered a 25bp cut, he went into the policy board with a recommendation for 20bp. Perhaps he wanted to send the Finance Ministry a (little) message?
In the current environment 5bp one way or the other is unlikely to have noticeable economic effect. This rate movement was about confidence, and reduced confidence in BoJ today has less to do with 20bp versus 25bp than it does with the very messy way the cut was achieved.
By the same token, suggestions that "saving" 5bp of a rate cut allows the bank more "flexibility" later on, or that going straight to 0.25 per cent would have left the BoJ only one cut from zero-bound, are spurious. The BoJ usually moves in 25bp increments, as do most central banks, but there's no rule that it cannot do 10bp or 15bp, as it has in the past.
Oh, and because credit has to have at least a nominal price, even under zero-bound the BoJ's policy rate was 0.15 per cent -- so the margin for further reduction available now is actually more like 15bp than 30bp.
Finally, then, if 5bp is neither here nor there but the BoJ's market reputation and the governor's authority are crucial, why did the three dissenters allow Shirakawa his 20bp cut without recording dissenting votes? Why was it necessary for Friday's meeting to begin early and end late with a split vote, clearly implying policy disagreement?
It was explained later the three dissenters had argued that since Nikkei's report had already caused markets to price-in 25bp, it would be better for the bank's credibility to deliver the cut as advertised.
The dissenters surely had in mind the January 2007 fiasco, which cost some people a lot of money. In that case investors has been guided to expect 25bp rate rise, only to be flabbergasted on meeting day when Shirakawa's predecessor suddenly concluded conditions did not quite justify a hike. Conditions cleared enough for a February hike, after the bank endured a month of cat-calls from the markets.
At that time, the central bank was also under heavy pressure from the Government, as it had been the previous December when it also backed off. Perhaps, the dissenters reflected that if the BoJ had followed its best instincts then, last week they might have been dealing with a 0.75 per cent official rate and thus more room to move.
One thing is certain: in the current turmoil the bank cannot afford more missteps like this. The Government, for its part, should reflect that whoever decided to stampede the central bank last week is equally responsible for the consequences that will continue to play out.

Farming out IT work to cut costs for banks
29 Oct, 2008, Mani Mamallan
As the global financial crisis deepens, every CIO/CTO and CEO of banking and financial institutions in the country are beseiged by disturbing questions: Are we part of it or not? Can we continue spending on IT infrastructure? Or can we delay it till the world financial market stabilises? And how long will we have to wait before things get stabilised?
And what are our options: Cut down on costs? Pink slips? Mergers and acquisitions? Sharing infrastructure and technology services or create infrastructure for the entire industry? Or revalue the IT infrastructure investment and outsource the infrastructure and avail of services?
Most banks will cut down on costs. Conveyance and travel will be first line expenditure to get the axe. Though pink slips have emerged in sectors like aviation, that may not be true in the case of the banking sector. IT industry has to be on the watch. With US close to elections and with Obama emerging as a favourite, the BPO industry may see exits as well.
There are banks that have built oversized IT infrastructure and are looking out for acquiring new banks for optimising the use of IT infrastructure.
The best example is the recent merger of two private sector banks. They will have to identify opportunities for integration and consolidation of applications and focus on leveraging existing enterprise systems. Will their merger help reduce spending? Sure it will in long term, but in short term, the burden of integration spend may not benefit the banks.
Indian banks are conservative and run on good old banking practices. They have not adopted newer technologies and business products for many reasons, including the cost of infrastructure investments. This is the right time to invest in technology and adopt new business products, since the solutions and services may be affordable than they were earlier.
However it is still wiser to avail of services than invest and implement infrastructure solutions. Banks that came together to share common infrastructure did little progress in that direction. For e.g. the tie-up between Bank of India and Union Bank of India tie-up, or the Oriental Bank, Indian Bank and Corporation Bank consortium. In hindsight, these banks should be ruing the missed opportunity to converge and consolidate.
However, the concept still holds good, provided the infrastructure and integration is outsourced to a service provider and the banks continue to avail of services for a fee. It was expected that consolidation in the banking industry shall begin in the early 2010; now, it may be earlier.
Common infrastructure is the way forward. The largest core banking implementation in the world was carried out in China for around 25,000 branches. Even India’s largest bank is consolidating the infrastructure among its associates. The country has 65,000 branches and 35,000 ATMs.
If the entire infrastructure of these banks are shared among all the consumers of all banks, the cost savings in infrastructure investment, installations and implementations will be substantial and the services thus offered shall be much cheaper

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