HSBC – which by contrast did not take any state money during the financial crisis of 2008 – issued a trading update in which outgoing CEO Michael Geoghegan said that profit was ‘well ahead’ of the same period in 2009 and that the bank was in better shape than many had expected. Both revenues and profits were growing more slowly than in Q2 this year however, and he sounded a note of caution over price competition in the emerging markets, where HSBC is very active. ‘There are a lot of people going after the same business’ he said.
At RBS, core operating profit for the underlying business rose 10% to £1.7bn, and it has continued the process of selling off unwanted assets, booking £11bn from disposals.
RBS’ retail banking division also seems to be doing well, with profit before impairment losses up a significant 13% thanks to strengthening net margins. Although Hester was quick to point out that this is less to do with new loans, more a result of existing customers moving off very cheap mortgage deals. He also warned that the banks current margins were insufficient to provide for the additional capital requirements which new banking regulations propose.
But what about those accounting charges? £1.7bn is an awful lot to write off on a technicality. There are two main parts to the charges, the first and most straightforward of which is an £825m made to the government’s Asset Protection Scheme. The APS, as you will no doubt recall, was a key part of the state bank bail out. Set up in 2009, it’s a guarantee scheme for bad loans – the charge on RBS is equivalent to paying an insurance premium, albeit a very big one.
The other chunk - £858m – is more technical, and relates to what’s known as the fair value of the bank’s own debt. This is the sort of thing which accountants are paid to understand so that the rest of us don’t have to, but for the sake of you, dear reader, we’ll have a go at explaining it. Essentially, fair value is an accounting option which allows firms to book a paper gain against debt whose current market value is reckoned to be below its ‘fair value’. So the worse your debt performs, the greater the fair value gain you can claim for it.
Easy to see why fair value accounting – which is perfectly legit under both IFRS and US GAAP rules - became so popular with banks during the crisis. But the flipside is that when the credit markets improve, as they have done this year, those fair value gains can very quickly turn to losses. RBBS is very far from being alone in feeling this effect. Win some, lose some. RBS’s share price rose slightly on the news, suggesting that Hester is making a decent job of persuading the City to look at things his way.
Back at HSBC, Geoghegan’s other main concern is one he has voiced many times already – the danger of ‘regulatory arbitrage’ as a result of excessively-tough new European rules. He warned policymakers ‘to consider the long-term consequences of changes of the competitive landscape as they finalise legislation.’
In other words, if you make life for banks here any harder than it is already, they may simply up sticks and go offshore. Not an option open to RBS, at least while it is still 80% owned by the British taxpayer…