A busy week for banks leaves locals looking for a new home

Those of us who returned to work this week after a half term holiday came back to a flurry of news on two of the UK’s weaker banks. The most important of last Friday’s three announcements from Royal Bank of Scotland told us that the government has decided not to split it into “good” and “bad” banks after all. Archbishop Welby’s idea to split RBS into several regional banks has also fallen by the wayside – it might have been good for promoting competition, but not so great for promoting the value of the taxpayers’ stake. Rumours that RBS would sell the half of Ulster Bank that’s not impaired were also scotched on Friday as the bank committed to remaining a key player on both sides of the Irish border. It will however require its Belfast subsidiary to follow a “viable and sustainable business model” going forward, something it has clearly failed to do so far.

The stock market didn’t react too well, with RBS’s share price falling by 10% in the last week. The market had hoped that the government would take full ownership of the worst of the bank’s Irish loans and commercial property assets, leaving them with a larger stake in the loans that are actually being repaid on time. But at least we can now be fairly confident what RBS will look like in a few years’ time – it seems it will now “only” be split into three parts. First, 314 branches and Natwest Direct will be spun off in 2015 to form Williams & Glyn’s, as part of the penalty for receiving state aid in 2008. Then, the Vickers reforms will see the remainder of RBS split into a ring-fenced retail bank, dealing with simple banking products for individuals and small businesses, and an investment bank dealing with mergers and acquisitions, share and bond issues and derivative trading. Legislation to force this separation is in its final Parliamentary stages as I write.

Then, over breakfast on Monday, we were finally treated to the details of Co-operative Bank’s recapitalisation plan, first heralded in June. This will see the bank’s junior bondholders, including pensioners who bought Britannia PIBS in the 1990s, suffering haircuts of up to 40% on their investments. The only snag is that the loss is entirely voluntary, and so the Co-op needs 75% of each of four classes of affected investors to vote in favour of giving up their future income. UK law also requires two thirds of ballot papers to be returned for the losses to imposed on all bonds, including the holdouts. With the results due in the middle of December, the parallel with turkeys voting for Christmas is a difficult one to resist.  The level headed investor will probably vote to be plucked (turkeys can’t have haircuts) when the alternative is to suffer a complete roasting.  Even the Co-op management admits that the bank will be placed “into resolution” if the recapitalisation fails. In the absence of Santa Claus charging to the rescue at the last minute, resolution is likely to lead pretty quickly to insolvency. Co-op helpfully estimates that junior bondholders will lose everything in insolvency, and that even senior creditors and depositors will get back just 91.5% over a five year period.

Resolution would most likely see the current accounts and the first £85,000 in savings of individuals and small businesses moved to another bank. But larger companies, charities and local authorities would be left behind. And it’s difficult to see how the regulator could allow the 100 or so local authorities to continue making payments from their current accounts, without it having a detrimental effect on the bank’s other creditors. So the big danger is that if the turkeys don’t vote for Christmas, or if pensioners can’t understand or be bothered to return their forms, then many council staff and suppliers won’t get their December pay cheques and won’t have a very merry Christmas themselves.

We’ve also learnt that even following a successful recapitalisation, the Co-op will stop providing local authority current accounts within a year or so. The 700 page bond prospectus included the cryptic clue that while they currently service charities, social businesses and public sector bodies, in future they will continue to look after charities and social businesses but not certain customers who are either too complex to be supported by the bank’s retail IT platform or who fail to deliver a sufficient profit margin for the bank. Guess for yourself which category you fall into. At least they hope to help you smoothly transfer your accounts to a new supplier “in a controlled and ethical manner.”

On the plus side, this recent turn of events should help galvanise authorities that were previously too worried about either breaking procurement rules or upsetting their relationship manager to start looking for a new bank any earlier.  And with mid-December only a few weeks away, I wouldn’t waste any time on this, just in case.

David Green is Client Director at Arlingclose Limited. This is the writer’s personal opinion and does not constitute investment advice.