Tuesday, May 19, 2009

it's boom time again for those firms lucky enough to be alive

TO BE NOTED: From the BBC:

Victor Blank may be proved right (eventually)

Robert Peston | 08:48 UK time, Monday, 18 May 2009

The most colossal amount of lending capacity has been taken out of the banking system.

That is another way of saying that we've been living through a credit crunch. D'oh!

But for all the damage that the collapse of some banks and the shrinkage of others has caused to the global economy, there is an attractive consequence for shareholders in those banks that are still standing.

barclays and rbsYou can already see it in investment banking, where the few remaining independent investment banks and the investment banking arms of Barclays and Royal Bank of Scotland among others have been coining it since the start of the year.

Whether it's underwriting and distributing issues of bonds and equities, or trading in currencies and fixed interest, it's boom time again for those firms lucky enough to be alive.

And for banks more widely, including retail banks, the reduction in capacity means a reduction in competition.

So the margins that banks earn on lending - the gap between what they pay for their funds and what they charge to borrowers - has widened very considerably.

Actually, that's not quite true yet for those banks disproportionately dependent on special taxpayer-supported funding and asset insurance from central banks and finance ministries.

Finance provided by taxpayers tends to be pricier, which most would say is only fair: we wouldn't want the banks to make a habit of coming to us with the begging bowl.

So the likes of Royal Bank and Lloyds aren't yet coining it.

Also, of course, any widening in margins they achieve this year may look irrelevant when bad debts on conventional lending to households and businesses are rising so fast.

To put it another way, since Royal Bank and Lloyds will make massive losses this year, you may think that I'm bonkers to be extolling their intrinsic profitability.

But make no mistake: these are giant money-making machines with enormous and rising market shares in a relatively closed retail banking market called the UK.

If you thought that they were monsters before the credit crunch - and many did - you ain't seen nothing yet.

They face far less competition than they did a couple of years ago: the American and Irish banks have reduced their presence in the UK; the Icelandic banks, former building societies and newly created specialist lenders have crumbled and most extant mutual building societies simply can't raise sufficient deposits to pose much of a threat.

Yes, the mighty Tesco is coming in and promising to be a formidable competitor. But the sensible way of seeing Tesco's ambitions is as proof of the huge profits to be made in a market where the balance of power has shifted decisively from the consumer (that's you and me) to supplier.

Against that backdrop, the claims of Lloyds that buying HBOS represented a once-in-a-generation opportunity don't look exaggerated.

Lloyds' shareholders will argue that they've paid far too big a price for this opportunity: HBOS's losses on its reckless loans hobbled Lloyds and led to it being semi-nationalised.

But there will come a moment when it has absorbed all the losses generated by imprudent loans and investments made in the bubble years.

At that point, Lloyds will be a gargantuan collector of our earnings and savings.

So if you believe that wholesale sources of funding are unlikely to gush again for years, if ever, Lloyds will have a mind-boggling competitive advantage: disproportionate power in banking will reside with those, like Lloyds, able to hoover up precious cash from households and small businesses, for recycling into loans.

Perhaps, therefore, Sir Victor Blank - jumping from Lloyds before being defenestrated (see yesterday's Picks) - will, in two or three years, be able to blow a raspberry at his critics."

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