The Bankwatch

No surprise but dramatic nonetheless – Ken Lewis is gone as Chairman – the writing is on the wall for him.

Unfortunately he did himself no favours, showing up in Washington looking more like a bling bling movie star, but he was also American Banker’s banker of the year just a few months ago. He left the shareholders no choice today.

How quickly the world changes ……  being chief of a bank ain’t what it was!

New York Times breaking news

Bank of America shareholders stripped Kenneth D. Lewis of his chairman’s title on Wednesday while allowing him to remain president  and chief executive, a vote that may mark the beginning of the end of his leadership at the embattled bank. Walter E. Massey will succeed Mr. Lewis as chairman, the bank said.

Banks are at the centre of the economy.  Business and consumers conduct their day to day business using money and they do this through banks.  Stating the obvious you may say?  This is why I study the economy so closely and try to understand how it will look in the future, because that has a direct relation to how banks will look in that future.

We are in a crisis of debt.  It is a debt crisis because consumers and businesses are over-leveraged.  Their debt is too high relative to todays asset values.  Asset values have decreased by 25 – 60% in the West, whereas debt has reduced only minimally.

So what do we see around us that offer substantive clues to our near term future for banks?

• US economy reducing at annual rate of 6.1% – this has to be contrasted to growth rates of 2 – 3% pre crisis, so thats an almost 10% shift being experieinced
• Lithuania today seeing a 12% reduction in its economy
• Germany seeing 5% – 6% and talk of rioting on the streets, which of course will do no good except create panic
• Citibank and Bank of America today finally wisening up to the reality that they cannot grow out of their leveraged position – they must contract out of it by selling stuff
• corporate jets becoming an embarrassment rather than a status symbol
• Allens & Overy (lawyers in the City) introducing a ‘cull’ of 10%
• 80 – 100% growth in managerial and professional unemployment (UK)
• General Motors in Canada cutting dealerships from 794 down to 400 – 400 within one year

These headlines are all point in one direction.  Less is the new reality.  No-one knows precisely where the new balance will level off, but it is certainly going to be at a level less thn we saw at the peak in 2007.

A smaller economic base results in less of many other things that probably still have to happen;  less restaurants, real estate agents, accountants, grocery stores, plumbers, construction workers, and of course bankers and banks.

Relevance to Bankwatch:

Operating in this new environement will require new thinking and recognition of new opportunities.  This will be the time (for banks) to not just accept internet but to insist on internet as a core component of the business to drive efficiencies.  It will require fresh looks at old ideas that were squandered away and hidden by the excesses of the good times, eg:

• # of branches required?
• style of branches required- which services will be offerred?
• what is the the role of tellers in the new operating model?
• is it time to eliminate cheques ?
• is it time to bring commercial banking into the and up to the same degree of automation as consumer banking?
• Why is business banking still being done by cheques and deposit books?
• What is the role of Head Office?  How many are required to invent bank accounts, mortgages and loans?

In a smaller and more efficient world, new competitors will be prodding away at banks’ business model.  I watched many of the presentations yesterday at FinovateStartup09 and was struck by how they all in some way chipped away a part of banking from banks.  Whether it is Tempo and their de-coupled debit card, or Wesabe and Micronotes pro-actively helping consumers spend wisely, or Prosper and Lending Club introducing “Securitization 2.0′ (online secondary markets with clear line of sight between debtor and creditor),  the coming of Web 3.0 is imminent and in a form that banks may not expect nor be prepared for unless they act now.

This is not a good headline.

The same herd mentality that featured in the credit crisis seeks new outlets all the time.  More on this later based on a paper from of all places the Bank of England.

Just how bad is it, and are we (the world) over reacting.

Swine flu spread points to global pandemic | FT

Caught  a few of the participants this morning and as we wait for the next few rapid fire presentations, some highlights.  Note there are 350 in the audience:

Lending Club:

• highlighted some lender functionality, paricularly in the secondary market
• showed the ability of lenders to compare their returns to other lenders

Tempo Debit Card;

• decoupled debit card
• sign up online, with 90% approval success
• offers rewards on your debit card
• aim to to be the MBNA of debit cards

Wesabe:

• always my favourite – Gabe showed off the new web interface
• highlighted accounts, and discussions
• ability to dig deeper aggregate certain cards and compare expense categories on those cards
• the iphone app which is significnatly more powerful than the Mint app.  Allows sign up to Wesabe, and editing of expenses though the app

Looking forward to following FinovateStartup tomorrow.  While the big banks languish in the worry about their balance sheets, and the losses they still have to recognise, it will be refreshing to see examples of the future of financial services.

FinovateStartup

FinovateStartup will return to San Francisco on April 28, 2009 with an innovative new format that mixes fast-paced demos (no slides allowed!) from handpicked innovators with networking sessions featuring the largest group of financial technology startups ever assembled in one place.

An update to a post last July 2008.  Nissan have had suspend development of the Tanger Med terminal development in Morocco, but their partner Renault appear to remain in. It is noted that this is a suspension, not withdrawal, and partnet Renault is still in.

This development is significant, and is in the same vein as the Gwadar development in Pakistan being mde by China.  The shape of world commerce is changing, and the current economic crisis just means those changes themselves are changing.

As I asked in July 2008 – where is the Tanger Med for banks – that new beachead, real or virtual that will reshape banking?

Nissan pulls out of Tangier-Med car manufacturing project

As part of a large-scale programme of cutbacks due to the global economic crisis, the Japanese carmaker Nissan decided on Monday (February 9th) to suspend its involvement in the project to build a plant jointly with French firm Renault in the Tangier-Med free zone.

… …

The aim of the Renault-Nissan Alliance project at the Melloussa site at Tangier-Med is to build a car assembly plant with an output of 200,000 vehicles per year from 2010 onwards, with the option of scaling up output to 400,000 vehicles per year in the long term. Measuring 300 hectares, the site is located within the Special Economic Zone at the Tangier-Med port complex.

The industrial super-project is expected to attract a total investment of 600m euros and create over 6,000 direct jobs and 30,000 indirect jobs for component-makers and subcontractors. The forecasts announced by Renault-Nissan managers are based on the expectation that the plant will manufacture cars that will be competitive in external markets.

As part of its trickle information  approach the Fed released their methodology for Bank stress tests.  Another acronym SCAP (Supervisory Capital Assessment Program).

General Description of the Exercise:

The BHCs were asked to estimate their potential losses on loans, securities, and trading positions, as well as pre‐provision net revenue (PPNR) and the resources available from the allowance for loan and lease losses (ALLL) under two alternative macroeconomic scenarios. Each participating firm was instructed to project potential losses on its loan, investment, and trading securities portfolios, including off‐balance sheet commitments and contingent liabilities and exposures over the two‐year horizon beginning with year‐end 2008 financial statement data. Firms were provided with a common set of indicative loss rate ranges for specific loan categories under conditions of the baseline and the more adverse economic scenarios. Firms were allowed to diverge from the indicative loss rates where they could provide evidence that their estimated loss rates were appropriate. In addition, firms with trading assets of $100 billion or more were asked to estimate potential trading‐related market and counter‐party credit losses under a market stress scenario provided by the supervisors, based on market shocks that occurred in the second half of 2008.

What really matters is the result, and the impact on the 19 Banks involved, a list that is quite closely guarded.

This from FT:

These 19 firms collectively hold two-thirds of the assets and more than one‐half of the loans in the U.S. banking system, and support a very significant portion of the credit intermediation done by the banking sector.

Here it the full document:

Bank of Canada has released its quarterly Monetary Policy report.  It is useful here in the context of Canada and the impact on consumers, particularly as Canada has been painted as being in better shape than other countries.  Consumer confidence represented by purchasing is down, but consumer credit is still growing at a slower pace.  They question will be to what extent credit defaults arise over upcoming months.

Speech and Report:

Global industrial production has fallen sharply …

… and Canadian GDP has fallen sharply too, and worse than predicted earlier ..

… while the Canadian hit on wealth has been less than the US the impact on Canadians saving (spending less) is similar.

Bottom line – the impact on Canadian banks and merchants must be to expect significantly less spending though to 2011 at the earliest.

Credit growth and credit conditions in Canada remain tight according to the report, although credit is still growing, albeit at a slower pace. 

The only word for this document is breathtaking.  It is breathtaking because it touches a large amount of the US economy, and the largest businesses in the economy.  It deals with:

1. Banks
2. Auto sector
3. executive compensation
4. Executive replacement
5. ‘luxury’ purchases, (eg corporate jets)
6. SIGTARP administration

And the detail contained in the 247 pages is work that is substantially net new since January this year.  I say this in defence of Geithner, and his quiet approach at first.  He has been rather busy.  But to the report to Congress today.

The report sigtarp-april2009_quarterly_report_to_congress:   SIGTARP site.

Summary of Geithners testimony at FT. He descirbes the Stress test results as mixed.  A quick review of the report tells me that the answer is not captured in a sentence, so have to dig further to find out what mixed means.

Tim Geithner acknowledged that evidence of improved liquidity as a result of the bank bail-out was “mixed”, but defended the $700bn troubled assets relief programme against charges that it gave an easy ride to the financial sector.

Appearing before a Congressional oversight panel on Tuesday, the Treasury secretary said interbank lending, corporate issuance and credit spreads showed signs of a thaw in credit. “To date, frankly, the evidence is mixed,” he said.

The IMF report had a spreadsheet in the appendix with bank capital levels around the world.

While it has individual countries, I summarised into this chart.  The data shows Capital as a percentage of Assets so higher is good, lower is bad.

Note the negative trends in most except Canada, and this is based on the latest data to end of 2008.  Use the thumbnail for a larger version that is clearer.