RBS

RBS' DOJ subprime settlement was below estimates (of around $11billion): at $4.9 billion, that's 70% covered by provisions.

"The pro forma impact on RBS's 31 March 2018 Common Equity Tier 1 ratio ("CET1") is a reduction of approximately 50 basis points and a reduction of 9p on 31 March 2018 fully diluted TNAV per share"

RBS will be 300bps above CET1 target this year at around 16%.

By 2020, CET1 target is >13%. From this and a CIR <50% (continued benefits of automation/technology, branch transformation), ROTE is targeted at 12%.

If all goes according to plan with DOJ, market attention will shift to the sale of the government stake and dividend and buyback policy. There are the Stress Tests too but being a reformed student, RBS should sail through them.

With pension (£7.7bn over last 2 years) and litigation exposures sharply reduced (remains some residual FX, Libor and Treasuries issues with PPI reserves at adequate levels) and NatWest Markets (13% of Income) under restructuring, there will be other matters for the market to focus on. Ulster Bank (4% of Income) still represents > a third of impaired loans.

Greek Banks

Stress Tests seem to have been a bit of a non-event (given adoption of policies after last recapitalisation and phased in IFRS9) though Alpha clearly comes out of the process as the most resilient lender (by Texas Ratio and stressed CET1). Alpha's CET1 of 9.69% in an adverse scenario is well above implied 5.5% test hurdle.
TSCR leaves something to work on though.

Chinese Banks : Initiatives to keep the music playing

  • August 2016-present: PBOC starts offering funds to banks at longer tenors and boosting money-market rates as a way of deterring companies from borrowing.
  • March 2017: The banking regulator asks lenders to submit reports on entrusted investments - funds that Chinese banks farm out to external asset managers.
  • April 10, 2017: The China Banking Regulatory Commission issues guidelines on stepping up risk control in the banking industry, requiring lenders to ensure stable asset quality, improve liquidity risk management, strengthen their bond and investment businesses and improve interbank operations.
  • July 15, 2017: President Xi says the central bank will play a stronger role in defending against risks and safeguard the financial system. China will set up a commission under the State Council to oversee financial stability and development.
  • Aug. 31, 2017: The PBOC bars financial institutions from issuing negotiable certificates of deposit with maturities longer than one year. NCDs, introduced in 2013 to help smaller lenders compete with big state banks for funding, have morphed into a way for banks to fund purchases of each other's debt.
  • Sept. 30, 2017: The PBOC announces reduced reserve requirements for banks on the condition that they lend to small business and rural borrowers. This is viewed as a direct challenge to the shadow banking industry. May free up about 600 billion yuan in new lending.
  • Nov. 17, 2017: Sweeping rules are proposed to curb risks in shadow banking products, partly aimed at breaking an implicit government guarantee that drove investment into WMPs. The regulations, set to take effect in 2019 after a consultation period, mark a shift in Chinese financial supervision.
  • Jan. 4, 2018: Market participants should "reasonably" control leverage in their bond trading, according to rule posted on PBOC website.
  • Jan. 5, 2018: Insurers should not guarantee investment returns or provide fixed returns when setting up equity investment schemes, the insurance regulator said.
  • Jan. 6, 2018: Banks must strictly separate entrusted loans made for clients from their proprietary operations and are not permitted to get involved in lending decisions or offer guarantees, under rules issued by the banking regulator.
  • Feb. 23, 2018: Insurance regulator to run Anbang for a year. Founder Wu Xiaohui to be prosecuted for "economic crimes."

Chinese Banks

China's five biggest banks posted Q1 numbers that some commentators relate to an economic recovery improving margins and asset quality.

Industrial & Commercial Bank of China Ltd. posted a 4 percent increase in quarterly profit.  China Construction Bank Corp., Agricultural Bank of China Ltd., Bank of China Ltd. and Bank of Communications Co. also reported moderate growth.

Combined profits at the Big Five, which together control more than a third of China's $40 trillion in banking assets, will probably increase by high single digits this year after growing 4 percent last year. Rising global interest rates are boosting margins and the banks are benefiting from President Xi's crackdown on shadow financing, - the combined outstanding volume of trust lending, entrusted loans and bank acceptances  climbed to 27.8 trillion yuan last year- which is forcing smaller banks to turn to big lenders for funding. (In January, top bank regulator Guo Shuqing emphasised in public that there is a need to "dismantle" the shadow banking sector and "suppress" household leverage).

Some are waging that earnings of the big banks will withstand the deleveraging campaign have helped their stock prices outperform smaller rivals this year. With shares of the five banks now trading at an average 0.76 times their estimated book value, they do not appear too dear.

However, there are plenty of worries out there: By the end of 2016, total borrowing exploded to about 260 percent of the size of the economy, up from 162 percent in 2008. China accumulated its record debt pile after the global financial crisis, when it pumped credit into the economy. Many say the risks to financial stability are mounting. Kyle Bass and Jim Chanos have been vocal in identifying risk. The IMF warned that China might eventually suffer a hard adjustment unless it addresses its indebtedness. And both S&P Global Ratings and Moodys cut China's sovereign credit rating in 2017 due to debt risk. BIS has highlighted a monster credit-to-GDP gap.

In the worst case, the government might take over some liabilities and sell them to distressed debt operators. 


Chinese Banks

The PBOC will cut the reserve-requirement ratio for some banks by one percentage point, effective April 25th.

By easing the requirements, the PBOC may be able to continue to curb shadow-bank activities while supporting the official lenders that can access its facilities.

This move is a clear effort from the PBOC to mitigate the pain of financial deleveraging given rapid decrease in shadow credit growth. 