• Euroland nightmare weighs on UK
• BP and ‘on target’ results
• HBOS hubris
• Lord Green visits Latin America
→It is tempting from a UK perspective to regard events in Cyprus as a case of domestic violence within the eurozone that doesn’t much affect us.
That would be mistake. The serving of “poison” to Cyprus, as the country’s parliamentary president put it this week, amounts to another statement by Germany that the hard way is the right way. There will be no slackening in the austerity message ahead of September’s election, and thus no meaningful debate on how creditors and debtors are going to live in harmony. Minor accidents like Cyprus, it seems, will simply be allowed to happen and eurozone lenders will try to minimise the bill for themselves.
Progress on banking union, supposedly last year’s big step forward, has been negligible and there’s an unfilled hole at the centre. The European stability mechanism (ESM) was intended to deal with insolvent banks, but then it turned out the fund would not deal in “legacy” issues. That’s not an advance.
Thus every bailout remains an ugly scrap in which, as in Cyprus, heroic assumptions are made about recovery and business confidence across the continent is jolted. Is the next crisis Portugal mark 2, or Slovenia? Only then will companies and large depositors discover whether a Cypriot-style savings-grab is the new template.
Add up the austerity, the mixed messages and the backtracking and it’s no surprise that the IMF expects the euro area GDP to contract 0.2% this year, after contraction of 0.4% last year. For the UK economy euro recession is impossible to ignore. “Engineering a recovery while our main trading partner is in a downturn is a difficult undertaking,” said the Bank of England governor, Sir Mervyn King, in January.
You bet. The economy is not rebalancing in favour of manufacturing. Britain’s trade deficit in goods widened to £9.4bn in February, we learned this week, and factory production is back at levels seen last September. A government desperate for growth – any growth – is reduced to trying to pump up the housing market by underwriting sub-prime mortgages. Stagnation and indecision in euroland are infecting not just the economy but economic policy.
Hope springs eternal that Germany, after the election, will finally decide how far it is prepared to go to save the single currency. Well, maybe. But it’s a reasonable guess that markets, currently understanding of Angela Merkel’s political bind, will demand a quick answer. And a post-election mini-revolt in the eurozone debt markets would be no bad thing: the current muddle-through approach is leading nowhere.
→BP’s pay structure, according to remuneration chief Antony Burgmans, employs a “relatively simple” system. Relative to what, he doesn’t say, but it’s a challenge for ordinary mortals to keep track of the moving parts. The annual cash bonus scheme alone has 13 “measures and targets”. Then there’s the deferred bonus, and the performance share scheme, not forgetting basic salary and pension.
Thankfully, somebody is paying attention. He is Guy Jubb of Standard Life Investments, who told the board at this week’s shareholder meeting to “raise its game”. He’s right about the complexity, and he’s also right when he says the executives have the potential to receive “significant rewards for achieving unchallenging performance targets”.
The giveaway is the table that illustrates what chief executive Bob Dudley should receive in a year in which he achieves merely an “on target” performance – a cool $10m (£6.5m), even if the share price went sideways.
How is that possible for a middling performance? It’s because long-term incentive plans (LTIPs) have become vastly inflated over the years. Once upon a time, 100% of salary for an LTIP was seen as the largest carrot that could be offered to an executive. These days Dudley can earn 550% of salary under his LTIP. In cash terms, today’s “on target” performance equates to yesterday’s hit-the-ball-out-of-the-park performance.
Jubb calculates that by merely coming third out of five in a league table of oil companies ranked by total shareholder return (TSR), BP’s chief executive can receive shares equivalent to nearly two-thirds of his $1.7m salary. Third out of five? If BP really believes that’s worthy of a £1m bonus it should drop the pretence that Dudley’s package is driven by tough performance targets.
The company was very pleased that 94% of voting shareholders backed the pay report. The reason for that, one suspects, is that executive payouts from incentive schemes have been depressed by the Deepwater Horizon disaster in 2010. Now that the effect of the disaster on the share price will drop out of the three-yearly TSR calculations, Dudley’s generous rewards for “on target” results are much more likely to materialise.
Complexity and the redefinition of success are how boardroom pay outstripped shareholders’ gains in the past. It’s happening again. BP is probably not unique.
→HBOS famously ignored a cardinal rule of banking: never take an equity stake in a company to which you are a lender. If you do, you are no longer a bank but a private equity house and there’s trouble in store in the event of a restructuring.
Some of HBOS’s early loan-plus-equity adventures turned out spectacularly well, such as Sir Philip Green’s takeover of Arcadia, the Top Shop group, in 2002. But that doesn’t deflect from the wisdom of the basic risk-management principle that lenders should not dabble in the shares of a customer.
Less remembered is how far HBOS was prepared to go. Ray Perman’s lively book – Hubris: how HBOS wrecked the best bank in Britain – recalls the detail of Green’s attempt (eventually abandoned) to buy Marks & Spencer in 2004. In that case, HBOS would have been a major lender in the £9.5bn offer. But the bank’s chairman, Lord Stevenson, was also lined up to be a non-executive director of Green’s bid vehicle. It is hard to think of a more glaring example of a conflict of interest.
Perman reports that arrangement caused one of the few rows within the HBOS board. It also caused a fuss in the outside world at the time, but should have caused more. It was an early clue that HBOS directors had deluded themselves that traditional rules of banking didn’t apply to them.
PPI scandal and fines undermine improved performance at Barclays, HSBC, Lloyds, RBS and Standard and Chartered
An increase in profits at the big five UK banks was wiped out by more than £11bn of fines and compensation payments in 2012.
Despite an improved core business performance, fines from regulators and the costs of the mis-selling of payment protection insurance contributed to a 40% cumulative drop in profits from 2011 to £11.7bn, according to accountants KMPG.
Barclays, HSBC, Lloyds Banking Group, RBS and Standard Chartered posted results in a year where bleak headlines included the Libor scandal, the mis-selling furore, and slack control of money laundering.
KPMG’s bank performance benchmarking report concluded that banks had improved in their core performance due to better credit performance, or fewer bad loans, and stronger results from investment banking divisions, helped by more positive sentiment over the eurozone’s future.
Alongside the punitive costs banks incurred, profits were also written down because of a £12.8bn revaluation of the banks’ debt. Bill Michael of KPMG said: “Banks had a better performance year in 2012 but their improved core profits were eaten up by fines and other exceptional items. In terms of their reputations, 2012 was a dire year. This is why it is so important for them to address cultural and ethical perceptions and issues. Restoring customer trust is critical.”
KPMG warned that banks would need to significantly reduce costs to convince shareholders they could continue to generate strong returns, including cutting staff and wage bills.
The warning comes amid reports that Lloyds, bailed out by the taxpayer during the credit crunch, paid more than 20 of its staff more than £1m last year. Details of its high earners will be revealed in its annual report this week, but the bank said it could not comment on speculation.
Manufacturing activity in China picks up speed in March, an initial HSBC survey indicates, adding to hopes of a sustained recovery in its economy.
Follow this link: China manufacturing picks up speed
Banking giant HSBC, which was hit with a US fine for money laundering last year, is facing fresh accusations of illegal activity in Argentina.
Read the rest here: HSBC in new money laundering claims
I have lost £5,500 after transferring money from HSBC into a stranger’s Santander bank account instead of my own
My dad recently lent me £5,500 for vital house repairs, which he put into my HSBC account. I then decided to transfer the money to my Santander account. This was on 4 February.
After two days the money had not appeared in my Santander account, so I sent an email asking where it was. After a further day, alarm bells started to ring and I checked my HSBC account and realised that I had made a mistake when tranferring the money: I had used the correct sort code but the first four digits of my 123
Banks’ response is predictable they will drive up basic pay because those at the top earn far more in bonuses than salaries
The European parliament’s insistence on capping bankers’ bonuses will clearly be popular. That doesn’t mean it’s logical. In fact, the measure looks doomed to fail in its own terms. The ambition is to make banks safer and more able to withstand the next financial crisis. In practice, banks’ response is entirely predictable: they will crank up base salaries, thereby making their cost bases less flexible.
The shame is that Capital Markets Directive 4 mostly contains sound and worthy reforms. For example: big banks must erect sturdier capital buffers and the sums they keep as liquid assets must be greater than in the past.
But the bonus cap is the point where good intentions lose touch with experience. Did the parliamentarians not notice how Goldman Sachs UK, for example, wanted to defer its bonus payments this year to April to dodge the 50p rate of income tax? That’s how banks behave: they will exploit any change in the rules.
The sure-fire response to a bonus cap will be a rise in salaries. That’s because very high earners at the top of investment banks earn far more in bonuses than in salary. Look at the top earner at HSBC last year, as revealed in this week’s annual report. He or she (the individual is not identified) earned £7m, comprising a salary of £650,000 and a bonus of £6.35m.
Under the cap proposal, HSBC would have been restricted to paying a bonus of £1.3m, assuming the bank won approval from its shareholders to pay bonuses up to twice the level of salaries. But is it credible that would happen? Of course not. The individual would first expect to be awarded a higher salary, perhaps as much £2m, so his or her total earning power was closer to the old level.
Note, too, that a large slice of that big bonus at HSBC was subject to deferral and clawback – it is dependent on performance not turning sour. But, if the cash is already out of the door in the form of salary, it’s harder to claw back.
That is not to deny that perverse pay structures contributed to the crisis. Of course they did, and the parliamentarians are right to say so. But there is no point in trying to cap bonuses if you are not also prepared to cap salaries. This is territory where the “waterbed principle” applies: if you push down in one area, another goes up.
The better response would be to concentrate on improving banks’ capital ratios and liquidity cushions and, like the Swiss, give shareholders greater powers to stamp on greedy managements. Until now, reforms had been heading in exactly that direction.
The City is resigned. It, like everyone else, can see chancellor George Osborne is isolated and humiliated; that the eurozone’s move towards banking union has changed the balance of negotiating power; and that Angela Merkel, normally a UK ally on financial matters, has an election to fight this year.
And, if they are honest, banks will also admit they invited over-prescriptive legislation by being so slow to cut bonuses even when their financial returns were so lousy and regulators, not only the public, were appalled by the display of naked self-interest.
Banks will now study the text of the final legislation and draw up their responses under the radar. Just don’t expect them to tell their high earners to take it on the chin.