The Bankwatch

This has been a weird week for social lending, but an email conversation with the always clear thinking Ron brought it into perspective.  Ron asked if the new model is in fact simpler – brilliant question.

New Approach Puts Secondary Market to Work in P-to-P | American Banker [note:  access to full story requires registration]

Edward Woods, a senior analyst for Celent, a Boston market research unit of Marsh & McLennan Cos., said the model Lending Club and Prosper have chosen is the one most likely to thrive as this market matures.

“You’ll see fewer experiments” along the lines of what Zopa tried in the United States, he said. “I think the simpler, the better.”

Simpler is usually better, but hardly ever happens.  The original concept  of everyone lending to everyone is not going to happen.  The reason though is not what everyone expected. 

Internet allows lots of things to happen easily, but once you get into finance, you are dealing with peoples money, and that automatically fall within some type of regulatory framework.  The reason is simple – anarchistic finance will always fail because it will automatically re-centre within a small group that can trust each other.  But we want social lending to be relatively freely available.  This tension between the simplistic desires of the masses – “why can’t we just do it, because internet makes it possible” – conflicts with the other simplistic desire for protection of ones money – ‘how can the government allow my money to be at risk?”.

Ron also asked if the new model as we see it evolve, and it will evolve, is even p2p anymore.  Sensible securities law and regulation requires that investors are protected from unscrupulous and criminal offers.  Going back to an anarchist model, the unfortunate reality is that without a proper framework confidence will be eliminated as the extent of the bad will always overweigh the good.  The current credit crisis is proof of that concept.

We need the tension between business and regulation.  Management of that tension is a joint responsibility of government with their regulation powers, and business to continually open up new possibilities that people want.  If we leave it to one or the other we gain nothing.  What we are seeing with LendingClub, Prosper, and CommunityLend are examples of business working with the regulatory powers to extend the thinking into the possibilities that internet provides.

Relevance to Bankwatch:

Internet offers such potential and possibility by connecting people in a trusted yet open framework that surely something better can exist. 

This is the promise of social lending – one that stretches the known financial framework, yet offers the protections and knowledge that informed users of financial services deserve.

The degree of shift that has occurred and is occurring as we speak with respect to bank valuations is simply staggerring.  What got me going on this was when I noticed that the combined market capitalisation (stock exchange value of a company) of Lloyds Bank, Barclays, and HBOS was less than several of the Canadian banks.  So with the valuable assistance of Google Finance here are some statistics, with some notes following.

1. the banks picked here have had their value cut in half
2. the UK banks are in terrible shape with low market cap, and reflecting low P/E
3. the Canadian banks are in fact on a par with UK banks now in terms of market cap, despite being much smaller, less than half, in size

Relevance to Bankwatch:

The question will be:  which banks can break out of this with their customers and gain at the expense of the others.  CitiBank are trying to do it in the courts in the fight with Wells over Wachovia.  That sounds like desperation to me.  They (Citi) were caught out with a ridiculously low offer for Wachovia, a panicked US Federal Government accepted the offer, and now they are left to find a respectable way out.  Wells are always innovative, and make good use of internet and trying to understand current / new customer behaviours, so I hope they make it.  Wells/ Wachovia would offer national coverage, and a real competitor to Bank of America.  That reason alone is good for consumers, and would be a good reason for the Government to let it proceed.

Which banks will take advantage of their internet presence to improve service to an increasingly Gen X/ Y oriented customer base, and reduce costs, with a view to building their way out.

The press is all doom and gloom at the moment.  Not without reason, but the causes and implications are getting blurred.  So I did a simple analysis comparing three stock markets, their fall since mid 2007, and the relative importance of the banking sector in that fall.  The results suggest that it does depend where you live.  There is an all out banking crisis in the US and UK, based on market sentiment.

Somehow Canadian banks are not regarded with such fear as the others.  This no doubt partly due to the early work of Purdy Crawford and the Federal Governments efforts last year to manage the $35bn in ABCP.  In retrospect this was a far-sighted move (Fall 2007).  In a very complex manouvre, they carved the $35bn held by smaller banks and investment houses into tranches that were backed by hastily arranged lines of credit from the Banks.  In any event the outcome was an orderly shift away from certain bank or investment house bankruptcies.

IN the clearest indication yet of the depth of the credit crunch and how it will impact Canadians, Nixon of RBC speaks about the impacts on consumers. 

Credit crunch fallout will cast a long shadow

The consensus of the big brains? The credit market is stabilizing, finally. But the after-effects of the Great Debt Squeeze will linger. (And by the way, they’ll probably hit your wallet, if they haven’t already.) No one was more pointed about this than Mr. Nixon, who called it the most severe financial crisis since the Great Depression and used the word “bubble” to describe the period of shrinking credit spreads and risk-taking that peaked in the first half of 2007. Here’s the thing about bubbles: Excessive enthusiasm is almost always followed by excessive pessimism when it finally bursts. Recovery to “normal” always takes longer than you think. Ask anyone who bought into the Nasdaq in 1999

… …

That means the banks’ own cost of money is likely to stay high. The credit crunch was a useful reminder to bankers of the value of a large, stable base of retail deposits. The institutions that failed – Northern Rock and Bear Stearns – didn’t have it. Everyone else wants it and they’re going to have to pay for it. That could work to savers’ advantage, but for borrowers, it’s nothing but grim news. The banks will pass on their elevated funding costs to the customers.

“I do think it’s a long-term phenomenon … perhaps until the next bubble occurs,” Mr. Nixon said.

I have been waiting for mention of one of the Canadian Banks and merger/ takeover prospects, in the context of capital adequacy. This in light of never ending announcements of new sets of losses, some tied to subprime, and some tied to bad decision making and market speculation. Those losses have grown consequently since that 2007 post.

CIBC a takeover candidate? – FP Trading Desk

The possibility of more writedowns at CIBC could force the bank into another’s hands, says John Aiken, analyst at Dundee Securities.

Following on the heels of the U.S. Federal Reserve’s Fannie Mae and Freddie Mac intervention and the U.S. bank failure of IndyMac, Mr. Aiken said CIBC may be forced to raise common equity once again as a result of continued write-downs on its credit and liquidity exposure.

Mr. Aiken said CIBC is safe for now from needing to raise additional capital, noting it can withstand pre-tax charges of up to $2.5-billion. But with potential charges of roughly $4-billion to come, he believes CIBC would need more capital before all is said and done.

That won’t be an easy task, he added, and could leave CIBC with possibly no other option than to be taken over by another bank.

RBC have had their student blog up for a few months now, and thought I would check back in.

About RBC p2p – Everything students need to know about money

Ever notice that bank commercials tend to have a lot of grey haired people waxing poetic about retirement? Or suits conferring with more suits about leveraging assets?

This isn’t for those people.

The posts are smart and well written. Its difficult to know how much review occurs before posting but the result is a good collection of posts varying from speaker reviews, cultural events, to basic budgetting.

The main quibble I have is the dreaded “you are leaving this site” message. It appears the lawyers won that one, but all in all a good effort.

You are now leaving this Web site.

You will be entering a third party Web site, which is not owned or
operated by Royal Bank of Canada. Although we carefully select the Web
links we place on our Web sites, the content, products and information
contained on third party Web sites are not owned or controlled by Royal
Bank of Canada. Therefore, we make no representations about, do not
endorse, and are not responsible or liable for damages relating to the
third party, its products or services, its Web site, its privacy
policies or practices, or the content of the third party Web site.

Do you wish to continue?

The blogs get a few comments, some of which are internal, and that will take time to build up momentum. Coverage in google blogsearch is evident, but gets diluted by the RBC acronym having multiple uses.

Relevance to Bankwatch:
They key for RBC has to be in their learning from use of the tools, watching comments, and listening to others speak about their blog.

The usually impenetrable RBC gets into a dispute over future loss potential with Citi analysts.

TheStar.com | Business | RBC disputes critical Citi assessment

Citi Investment Research analyst Shannon Cowherd lowered her rating on the stock from “hold/high risk” to “sell/high risk” and cut her price target from to C$40 from C$47.

“The downgrade is driven by our conservative estimate of a $5 billion potential credit-related writedown and a $2-billion increase to the provision for credit losses,” Cowherd wrote in a report to clients.

Nice interactive map showing the worldwide impacts.

FT.com / In depth – Mapping the credit crunch

The FT’s exclusive interactive map charts how and when many of the financial groups affected by the crisis in the US subprime mortgage markets and the consequent turmoil in credit markets worldwide either made a killing or lost their shirts.

 Old stats here but the Canadian usage of Firefox is significantly higher than elsewhere – further evidence of the geekiness of Canada.

The most popular browsers on the web are:

1. Microsoft IE   85.45 %

2. Mozilla Firefox  11.51 %

3. Apple Safari  1.75 %

4. Netscape  0.26 %

5. Opera  0.77 %

The most popular browsers in the USA are:

1. Microsoft IE  80.73 %

2. Mozilla Firefox  14.07 %

3. Apple Safari  3.55 %

4. Netscape  0.76 %

5. Opera  0.77 %

The most popular browsers in Canada are:

1. Microsoft IE  78.52 %

2. Mozilla Firefox  16.98 %

3. Apple Safari  2.05 %

4. Netscape  0.68 %

5. Opera  1.67 %

The most popular browsers in the UK are:

1. Microsoft IE  93.37 %

2.Mozilla Firefox  4.94 %

3. Apple Safari  0.99 %

4. Netscape  0.23 %

5. Opera  0.39 %

Source: Mozilla Firefox global usage share is still growing

 Some interesting stats from eMarketer on North American Internet and broadband penetration.  These numbers seem lower than I had thought, but they follow usual eMarketer approach of summarising and aggregating other research, and it seems credible.

Executive Summary: Some 58% of Canada’s population is online, which is only slightly behind the US penetration rate of 63%. Broadband growth has exceeded that of the US, with 59% of households connected via a high-speed Internet connection at the end of this year compared with 44% of US households.

Source: eMarketer.com – Canada Online

The penetration is predicted to level off at close to 70%.

What is more interesting is the Internet penetration levels at different age brackets.  This is the best predictor of future Internet usage, and expectation, with close to 80% in the Gen Y category.