RBS - A tale of two banks

Today’s results for RBS were very much a tale of two banks.   Operating profit up from £1.8bn in 2011 to £3.5bn, but net profit showed a huge loss of  £ 5.2bn which was in excess of the expected £3.5bn loss that analysts had been predicting.  CEO Steven Hester will be hoping people will focus on the good news – that under his guidance ‘new RBS’ is improving and moving towards a better future.  But early signs suggest the markets have focused on the losses of ‘old RBS’ – losses created by adjustments to loan values, mis-selling compensation and fines that are the legacy of the pre-crisis world of finance.  In immediate trading after the announcement, their share price fell by more than 3% to some £3.35.

So, what are the issues behind these figures?

The UK grew in Q3 - by 1%

The release of today’s GDP figures will basically allow everyone across the political spectrum to tell the story they wish to tell.

Growth is back.  After 3 quarters of contraction or, as we economists like to call it, ‘negative growth’ we are back on track to expand.  Well, yes and no.  A 1.0% bounce is great news, but not quite enough to completely wipe out the losses of the last year: in Q3 2011, the index of GDP stood at 103.1 and is now 103.  If I were an Olympian having struggled and pushed myself through 12 months of hard training and effort I’d be disappointed not to have improved my performance even if recent training has been ‘going really well’.

The story of the last 12 months is one of flat activity.  Hmmm.  Not so great then.

The winners in the economic race for a turnaround performance

It's my party .....

The Greeks must feel like they have accepted an invitation to a party that nobody wanted them to turn up to.    They have spent a long time getting ready and even brought a bottle of their favourite wine with them, but the host has turned his nose up at the wine (well Retsina is perfect while on holiday on the Aegean but loses its appeal in cooler northern climes) and explains that it’s not a fancy dress party afterall!  Oops!  Nobody is quite sure how to fill the awkward silence that follows.

A year ago it was not an option that Greece should leave the Euro.  The political leaders of the Eurozone

Bad News for the UK from the OECD

The OECD have today warned that the UK economy will contract marginally in Q4 of this year (by some 0.1%) and will further fall in Q1 2012 (by 0.6%) and so enter a second period of recession.  See OECD predicts recession for more details.

Clearly the Ezone crisis will have a decisive role in the OECD downgrade, but it is also clear that the Chancellor has been following a high risk policy approach at a time when high risks are to be avoided.  His main risk is of front loading spending cuts during the Parliament as the central plank of his fiscal consolidation plan.   At a time when the private sector has been finding it hard to regain its growth momentum, the huge cuts in public spending are expecting businesses to find even more ways to expand to make up for the cuts.  Not only do they need to find sales to make up for what they lost in the recession, they have to make good the loss of spending power in the economy driven by spending cuts.

Should this come as a shock that has been brought on by feckless management of the EZone crisis?  Well, not really.

India in transition

I have just returned from a short business trip to Mumbai, India.  The client is a domestic bank with a short history but impressive plans to grow within the Indian retail market.  I must say the relationship has taught be much about what in the West is often described as an emerging market – frequently with little knowledge beyond hearsay behind the realities of the situation of the economic prospects for the country.

I return from this assignment with one major impression of the warmth and energy of the senior management team.  They were open to new ideas and generous in their hospitality.  They are proud in the achievements of their country: proud too of the contribution they can make to its continued growth, development and increasing prosperity.  It is a welcome evidence of pride not just – as they said – in ‘the money’ but in the economic welfare of the economy.  Something that does not seem to pervade the wider global banking industry at present.

A second issue that surprised me was

Bond Market Mayhem - what happens now?

When reflecting on current conditions in the bond markets it is worth remembering two aspects of their behavior.   The first is that traders operate ruthlessly and quickly to changes in sentiment and expectations.  And secondly, these changes may appear to be based on objective assessments of ‘the numbers’ but they embody many subjective views of the prospects for returns on debt.  There is currently quite a divide between the negative mood in bond markets and increasingly positive news in the ‘real’ economy.

 The consequence of the ruthlessness and speed of action of traders is that the markets have become an

Expect the Yuan to rise ….

­­­­­­­­but not for yet a while.

There have two major developments in the last 7 days in relation to the competitiveness of the yuan – or renminbi – the currency of China.  The first was the decision by US Treasury Secretary Tim Geithner to reserve judgement on whether the Chinese are manipulating their currency and keeping it low to maintain its export competitiveness.  The second was the meeting over last  weekend of the Chinese government to discuss its plans for the next 5 years of growth and development.  Unlike western economies the Chinese continue to create 5 year plans to guide the economy.  The one now published – the 12^th - covers the years 2011 to 2016.