HBOS saw its share price slide nearly 9% this morning after reporting lower-than-expected profits – a mere 3% rise, to £5.7bn. Its retail banking profits were particularly hard-hit, after a severe slowdown in the second half of the year. Although the bank hiked its dividend by almost a fifth, it clearly wasn’t enough to reassure investors worried about rising costs and falling margins.
Hector Sants, the new chief executive of the FSA, probably didn’t help with his comments on BBC Radio 4’s Today programme this morning, warning that the rise in borrowing costs for banks is likely to be permanent. That’s going to squeeze margins, which is bad news not just for HBOS but also the rest of the UK banking sector. So it’s no surprise that the likes of RBS have also seen their share price slide today.
Sants had some stern words about bankers’ bonuses too, agreeing that they could be dangerous – because by the time everyone works out that a particular product isn’t worth the paper it’s written on, the financial whizz-kid who invented it will have already ridden off into the sunset with their massive bonus. ‘There is a risk that the remuneration structures are too short-term and they do incentivise behaviour which is not helpful in maintaining long-term financial stability,’ Sants said today – and coming from the chief regulator, that represents a big slap on the wrists.
Then again, is the City really likely to sit up and take notice? After all, the FSA hasn’t exactly covered itself in glory during the last few months. Sants may be new to the CEO office but his previous job was to oversee the wholesale markets – and look how that turned out… To be fair, he admitted today that the regulator should have done a better job of forcing Northern Rock’s management to stress-test the bank's business model – and promised that the FSA’s internal review would yield big changes.
For Sants, the prospect of banks taking less risk is clearly a welcome development. But if you’re a house buyer seeking cheap mortgages, or a borrower wanting cheap loans, or even a bank shareholder looking for decent returns, you might beg to differ....