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UK’s big lenders would lose £12bn in commercial property stress scenario

Research identifies RBS as the bank with most to lose from a crisis in UK commercial property market

August 16

 

by: Martin Arnold and Judith Evans

Royal Bank of Scotland has been identified by credit rating agency Moody’s as the bank with the most to lose from a crisis in the UK commercial property market.

Overall, Britain’s biggest banks are in better shape to handle a property crisis, having cut their exposure to commercial real estate by about 40 per cent since 2010, according to research by the rating agency released on Tuesday.

However, the research found that the country’s six biggest lenders would still suffer £12bn of total losses over two years from a hypothetical stress scenario in commercial property — equivalent to 14 per cent of their total exposure to the sector.

The commercial property market is being closely watched by investors and regulators after it was one of the early victims of Britain’s vote to exit the EU in June.

Falling prices prompted investors to pull their money out of property funds, forcing several of them to suspend redemptions to give them time to raise cash by selling property.

In July, UK commercial property prices suffered their biggest slide in value since 2009, according to MSCI’s IPD property index. Capital values dropped 2.8 per cent, their biggest fall since March 2009.

“The July decline, coupled with the decline of 0.3 per cent in June, indicates that the market is formally in recession post-Brexit referendum as weak investor sentiment hits yield pricing,” said Colm Lauder, vice-president at MSCI.

A senior banker said that appetite for syndicated loans had reduced significantly since the vote, affecting in turn the volumes of loans that banks will underwrite. “Overseas lenders have really pulled back, although those in the UK are still active,” he said.

Moody’s said that RBS, the largest commercial real estate lender, would be the hardest hit in the stressed scenario, losing £4.1bn, or 16 per cent of its total £25.3bn portfolio of loans for offices, shops, hospitals, hotels, warehouses and factories.

Paul Coates, RBS’s head of real estate finance, said: “I don’t recognise those numbers or where they have come from.” He said the Bank of England’s stress test last year had assumed a 30 per cent fall in commercial real estate prices and that only produced £900m of losses for RBS over three years. He added that RBS had reined in its property lending in London and the south-east in the past year to reduce risk.

The next hardest-hit would be Lloyds Banking Group with £3bn of losses, followed by HSBC losing £1.7bn, Barclays losing £1.5bn, Santander UK losing £1.2bn, and Nationwide losing £400m.

Moody’s said its base case scenario assumed a 10 per cent drop in commercial property prices, much less than the 45 per cent fall witnessed in the financial crisis, partly because lenders have improved their underwriting standards.

The loss assumptions in its stressed scenario — which were milder than those seen in the financial crisis — were based on multiplying the probability of default figures from each lender’s commercial property loan book.

“While we consider that large UK banks are better placed to withstand a deterioration in the quality of their commercial real estate portfolios than during the 2008-09 global financial crisis, we believe that further stresses will place some negative pressure on these banks’ standalone credit profiles,” Moody’s said.

On average, the losses in Moody’s stressed scenario wiped 1.13 percentage points off the capital ratios of the big lenders.

The Bank of England last month flagged up the commercial property market as one of the channels through which the Brexit vote in June’s referendum could increase risks to financial stability.

Some property deals concluded since the referendum have carried discounts of up to 17 per cent off their asking prices, but these were fire sales by property funds racing to meet investor redemptions, and have not been reflected across the wider market.

Analysts emphasise that the market does not so far seem to be undergoing a rapid plunge in values like that seen in 2008. “In spite of some forecasters predicting the end of the world … early signs following the EU referendum are failing to live up to these expectations,” said Robert Duncan, analyst at Numis.

 

Deutsche Bank Staffer Aims for Cupcake Supremacy on British TV

August 16, 2016 — 7:03 PM EEST

• Selasi Gbormittah taking part in ‘The Great British Bake Off’

• BBC One program was most-watched TV show in the U.K. last year

From long hours at Deutsche Bank AG to baking cupcakes on national TV.

Selasi Gbormittah, who works in global transaction banking at Europe’s largest investment bank, is challenging other contestants on BBC One’s “The Great British Bake Off,” one of the country’s most popular TV shows. A spokesman for Deutsche Bank confirmed Gbormittah works for the firm in London.

Starting on Aug. 24, the banker will join 11 other hopefuls competing on the cooking program. The contestants will be whittled down each week until one is eventually crowned champion. The 2015 final, won by Nadiya Hussain, was the U.K.’s most-watched TV show last year with a peak audience of 14.5 million.

Gbormittah, 30, is originally from Ghana and moved to Britain 15 years ago. He previously raised money for charity in bake sales at Deutsche Bank, according to online fundraising websites. The banker recently ran a half-marathon and trekked through Malawi for good causes.

His colleagues are often “blown away by the beautiful cupcakes he makes,” according to the BBC’s website.

 

Banks Won’t Wait Around to See What Brexit Deal the U.K. Can Get

August 16, 2016 — 2:01 AM EEST

• Executives said to assume U.K. will lose passporting rights

• Firms need the two-year period to set up elsewhere in Europe

Big investment banks with their European headquarters in London will start the process of moving jobs from the U.K. within weeks of the government triggering Brexit, a faster timeline than their public messages of patience would imply, according to people briefed on the plans being drawn up by four of the biggest firms.

Dismayed by the lack of a clear plan to protect the U.K.’s status as a global financial hub, executives are planning for the worst – that they will lose the right to sell services freely around the European Union from the City, said the people, who asked not to be identified because the plans are private. Facing a long process with potential waits for regulatory approvals before workers can pack their bags, banks want to start quickly in order to have new or expanded offices set up in Europe before the end of the two-year Brexit negotiation period.

"This year is all about understanding potential scenarios, your options, and what your contingency plans are," said Andrew Gray, head of Brexit for U.K. financial services at PwC, which is advising banks on how best to respond to Brexit. "Some plans will take time to execute, and firms can’t afford to wait until Jan. 1, 2019, and risk not being able to do business."

Discouraging Talks

While U.K. Prime Minister Theresa May has said she will fight for the City of London to retain its passporting rights, bankers and lawyers say she faces an uphill battle trying to win concessions from EU partners still smarting from the outcome of the June 23 vote. Bank executives are privately discouraged that seven weeks after the referendum, the ministers in charge of negotiating the best deal for the U.K. believe they can retain the benefits of being in the single market without accepting the free movement of EU citizens, the people said.

Given the limited number of suitable destinations to relocate operations, and the shortage of prime real estate in those cities, banks are in a race against each other to secure the best office space and accommodation for the thousands of workers they would eventually move from the U.K. They also want to be first in the queue with the local regulator, which will likely struggle to cope with an influx of investment banks asking permission set up shop.

The possibility that London is cut off from the rest of the 27-nation bloc is a particularly acute problem for Wall Street banks as a significant amount of the revenue they generate in the region comes from serving EU clients. Eighty-seven percent of U.S. investment banks’ EU staff are located in the U.K., which is also home to 78 percent of the region’s capital markets activity, according to New Financial, a think tank.

Avoiding Logjams

Before the referendum, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said he would relocate as many as 4,000 employees to the continent after Brexit. Morgan Stanley may move as many as 1,000 employees out of the U.K., while Goldman Sachs Group Inc. and Citigroup Inc. indicated they would also shift people abroad. European banks including HSBC Holdings Plc and Deutsche Bank AG said they may have to move people or activities to France and Germany.

Since the vote, bank bosses have struck a softer note in public, saying that they would wait and see how the U.K.’s negotiations with the EU panned out before making any decisions on the number of employees or timing.

To be sure, beginning the process won’t mean employees would immediately start moving, the people said. The first steps would involve setting up a new legal entity structure with a home base inside the EU, applying to the local regulator for a banking license and getting approval for the internal models they use to calculate their capital requirements, a process which can take takes years on its own.

To avoid any logjam with local regulators, the banks would need to coordinate with one another on where and when they were planning to move staff, said one of the people. Those discussions could be facilitated by one of the industry lobby groups such as TheCityUK, the person said.

Banks could yet delay their departure from the U.K. if the British government was able to secure a lengthy transition period from the current rules to whatever fresh terms of trade are agreed with the EU, said the people. That would need to be agreed before the U.K. actually triggered Article 50.

 

UN’s $54 Billion Pension Fund in Power Struggle Over New Rules

        –  Fund pays out $2.3 billion annually in 15 different currencies

• Over past decade, UN fund has performed in line with Calpers

The United Nations needs some financial peacekeepers.

A dispute over whether new regulations governing the $54 billion UN Joint Staff Pension Fund will result in higher fees paid to outside bankers or modernize oversight of the 67-year-old trust has divided fund CEO Sergio Arvizu and union leaders, sparking accusations of mismanagement.

Lost in the fight is the fund’s performance: the account returned 5 percent the past decade, according to a June 30 report by Northern Trust Corp. That 10-year performance compares with 5.1 percent for the California Public Employees’ Retirement System, the largest in the U.S., and the 5.7 percent median for U.S. public pensions, according to Keith Brainard, who tracks pensions for the National Association of State Retirement Administrators.

Yet internal rules approved this month that shift authority over issues such as staffing and budgeting from Secretary-General Ban Ki-moon’s office to Arvizu have fueled the spat. At stake is a fund with more than 126,000 participants which pays about 71,000 retirees in 190 countries. Those payments go out in 15 currencies, including dollars, euros, kroners and rupees.

“We have arguably one of the most complex pension plan designs,” said Arvizu, a 55-year-old former director of investments at Mexico’s social security institute, via e-mail.

Divided Leadership

Adding to the complexity is the pension’s structure. Arvizu oversees benefits and operations and reports directly to the UN General Assembly, the main body representing all 193 member countries. The investment division is headed by Carolyn Boykin, a former president of Bolton Partners Investment Consulting Group. Boykin reports to Ban.

The fund’s broad investments are typical for a pension: it holds 61.3 percent of assets in stocks and 29 percent in fixed income, according to an internal report. It also has 6.9 percent in categories such as real estate, timberland and infrastructure and 2.7 percent in alternative investments, including private equity, commodities and hedge funds.

Moreover, the UN pension is 91 percent funded, above the 73.7 percent median for state pensions, Brainard said. If a plan can meet its projected payments, “it’s in good shape,” he said.

For a QuickTake explaining U.S. public pensions, click here.

With backing from the UN General Assembly, Arvizu in 2014 began campaigning for changes he said were needed to modernize pension management at an institution famous for its Cold War-era bureaucracy. His argument: running an investment fund can’t be judged the same way you measure success for a humanitarian mission.

The union pushed back, seeing in the proposals the potential for managers to direct more investments to external institutions, undermining UN oversight and undercutting returns.

“This is a plan to move the pension fund outside the UN financial regulations,’’ said Ian Richards, president of the Coordinating Committee for International Staff Unions and Associations of the UN system, which has more than 60,000 members. “We don’t feel this management should get flexibility over how to manage the fund without all the checks and balances.’’

‘Outsourcing to Wall Street’

Allegations of mismanagement and conflicts of interests followed. On its website, the main UN union urged its members to “protect our pension fund: stop its exit from the UN at a time of outsourcing to Wall Street.”

In a letter to members last year, Arvizu said he was facing a “malicious campaign with gross misrepresentations.” The allegations triggered an internal investigation by the UN’s anti-corruption watchdog, which cleared Arvizu.

Fund officials reject the idea that they are planning to outsource management.

“There are no plans to privatize the pension fund, it’s not even an issue,’’ Lee Woodyear, the spokesman for the fund, said in a phone interview. “There are a lot of checks and balances in place and the new rules solidify what’s already taking place in practice.’’

Yet Arvizu, who joined the UN fund in 2006, argues he does need flexibility to hire and promote employees with specialized experience.

“The expertise to carry out this work – including entitlements, risk management, plan design, asset liability management, and client services – are different from other parts of the United Nations system,” he said.

Measuring Risk

The UN also needed to adopt modern tools for measuring risk and ensuring transparency, he said. Asset liability management studies, which help managers assess risk and strategy, “were not done before in the fund,” Arvizu said via e-mail.

Relations between management and the unions soured further when benefits management software installed in 2015 had delays enrolling beneficiaries. Thousands of new retirees, some of whom had to wait six months before receiving payments, were enraged.

“No doubt more could have been done with 20/20 hindsight to ensure that no new retiree was delayed,’’ said Woodyear. “There were delays, and the fund was slow to communicate clearly on the delays.’’

‘Compliance Risks’

Yet disputes keep flaring up. In July, the fund’s Asset and Liabilities Monitoring committee warned the pension was “exposed to significant governance, investment, operational and compliance risks.’’

According to an analysis by the UN union, the fund faces “significant concentration risks’’ from its two biggest portfolios, North American Equity and Global Fixed Income, which combined account for $30.5 billion. Two senior investment officers run these funds and vacancies in risk management have not been filled. 

That’s now underway, Boykin said, hinting at the fund’s broader concerns about bringing capable professionals into the global body.

“The hiring process at the UN is lengthy,” she said.

Union leaders say they’ll keep pressing for the backlog of beneficiary payments to be fixed and on management to scale back the scope of the new regulations. But like other battles at the UN, little can happen quickly: the next fund review won’t take place until July 2017.Sym.