To nationalise or not to nationalise?
That is the question. But analysts' answers differ.
Chancellor of the Exchequer, Alistair Darling, is currently in talks with RBS and Lloyds Banking Group, which will announce its own full-year figures this Friday, to strike a deal as part of the Government’s asset protection scheme. The scheme, which is expected to involve the two banks insuring up to £500 billion in toxic assets, could also be entered into by Barclays depending on the terms.
Darling has persistently called for RBS and Lloyds to remain as listed companies rather than be nationalised—the two banks are 70% and 43% publicly owned at present—but not all analysts agree that nationalisation should be avoided.
George Manus, senior economic adviser at UBS, said in a report published yesterday that nationalisation may be a cleaner, and ultimately cheaper, option compared to the avoidance strategies.
“Although governments want to avoid having to nationalise insolvent financial entities, markets are becoming more convinced, and there may indeed be no alternative now to the need to ‘fix’ the inadequacy of bank capital and the isolation of bad assets,” he commented.
Manus added that the issue that the US and UK rescue plans are bypassing is that of balance sheet stability: credit guarantees, insurance plans and asset purchase schemes may work to protect lenders from full losses and to generate some lending that would otherwise have not occurred; but they will have a limited impact on the deep sense of suspicion and lack of trust in bank balance sheets, they can’t make borrowers more creditworthy, and they can’t protect banks from future write-downs and losses on their legacy assets, he wrote.
The economic adviser concluded that a clean and clear line between good and bad assets—or good and bad banks—needs to be drawn in order to carve out a path towards financial stability, and if the cost of a bad bank in its current ownership structure is deemed too high, the conclusion should be to jump to the endgame and nationalise rather than over-complicate the issue with “anything-but-nationalisation schemes.”
However, while Manus talked of the UK and US banks as a whole, analysts at Sanford Bernstein argued that the two should be treated separately. In a report entitled “Fate of Troubled US Banks Should Not Be Guide to UK”, the analysts reasoned that the situations of the two nation’s banks are rather different, with the UK players holding far more tangible common equity, driving higher Core Tier 1 ratios, even before the potential boost from the imminent asset protection scheme, which could take the Core Tier 1 ratios to 8-9%.
Sanford Bernstein estimates that UK banks are still pricing in only a 30-40% chance of avoiding nationalisation. But the analysts believe that a successful conclusion of the asset protection scheme negotiations, which they expect to be confirmed at RBS’s results tomorrow, could add up to 200 basis points to the banks’ Core Tier 1 ratios, boosting the market's view of their chances of survival and, therefore, their share prices.
“We would view RBS and Lloyds as very likely to take up the [asset protection scheme] offer, while the decision at Barclays is more finely balanced. While the UK banks are by no means safe from nationalisation, the depressed current prices mean we are Outperform on RBS and Barclays, and Marketperform on Lloyds,” the brokerage concluded.
At 2.30pm on Wednesday, Lloyds shares were 9.5% higher at 59p, RBS added 7.7% at 23.8p and Barclays was up 7.3% at 105.4p. The banking sector recovery helped fuel a 40-point gain on the FTSE 100 index, up 1.1% at 3,857.42.
