Banks, Financial

Banking app targets millennials who want help budgeting

Graduate debt, rent and high living costs have made it hard for millennials to save for a house, a pension or even a holiday. For Ollie Purdue, a 23-year-old law graduate, this was reason enough to launch Loot, a banking app targeted at tech-dependent 20-somethings who want help to manage their money and avoid falling […]

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Eurozone inflation climbs to highest since April 2014

A welcome dose of good news before next week’s big European Central Bank meeting. Year on year inflation in the eurozone has climbed to its best rate since April 2014 this month, accelerating to 0.6 per cent from 0.5 per cent on the back of the rising cost of services and the fading effect of […]

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Wealth manager Brewin Dolphin hit by restructuring costs

Profits at wealth manager Brewin Dolphin were hit by restructuring costs as the company continued to shift its focus towards portfolio management. The FTSE 250 company reported pre-tax profits of £50.1m in the year to September 30, down 17.9 per cent from £61m the previous year. Finance director Andrew Westenberger said its 2015 figure was […]

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Travis Perkins and Polymetal to lose out in FTSE 100 reshuffle

Builders’ merchant Travis Perkins and mining company Polymetal face relegation from the FTSE 100 after their recent performances were hit by political events. The share price of Travis Perkins has dropped 29 per cent since the UK voted to leave the EU in June, as economic uncertainty has sparked concerns among some investors about the […]

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RBS share drop accelerates on stress test flop

Stressed. Shares in Royal Bank of Scotland have accelerated their losses this morning, falling over 4.5 per cent after the state-backed lender came in bottom of the heap in the Bank of England’s latest stress tests. RBS failed the toughest ever stress tests carried out by the BoE, with results this morning showing the lender’s […]

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Archive | November, 2016

Defaults gather, and now our Ratesetter watch begins

Posted on 30 November 2016 by

Here’s a deceptively simple question: what are the expected defaults on Ratesetter’s loan book?

It’s simple because there should be a straightforward answer, even if there’s some uncertainty and subjective judgement built into the number. It’s deceptive because there seem to be two answers, one that makes everything look fine and another, which requires some calculation, that’s not so great.

Ratesetter is one of the UK’s top three online lenders, which call themselves P2P, and probably the most complicated of the lot. While the classic P2P lending model involves individuals taking individual risk, Ratesetter collectivises risk. The startup, which is backed by star fund manager Neil Woodford, does this through its provision fund, which exists to protect loan investors against defaults.

As we’ve discussed in detail before, Ratesetter now reserves the right to take interest payments and capital away from investors and put it into the provision fund, in order to make sure there are enough funds to account for loans going bad. The upshot is that investors in Ratesetter need to pay attention to the entire book of loans, rather than their individual investments. (Whisper it softly, it’s sort of like a bank.)

So how’s the provision fund doing? Well, here’s one set of data the company shows to investors on its provision fund page, as it was on Tuesday, with the relevant numbers highlighted:


As you can see, the current and expected money in the fund is larger than the expected losses. Great, even if the reliance on “contractual future income” has increased in recent months.

But there’s another set of data provided by Ratesetter, which tells a slightly different story. It’s on their statistics page, which provides “data on annual performance of loans and returns, updated automatically in real time.” Again, the relevant numbers are highlighted below:


The first thing to note is that the expected bad debt rate for 2014, 2015 and 2016 are all well above 3 per cent. Those three years account for about 90 per cent of Ratesetter’s lending to-date, which raises a question mark over the 2.8 per cent or less bad debt rate figure provided on the provision fund page.

The second thing to note is that it’s possible to calculate the total value of expected bad debt using the numbers on the statistics page. It’s a simple matter of applying the “actual lifetime bad debt rate to date” figures to the total amount lent, and then comparing that to the value implied by the “projected lifetime bad debt rate”. The difference is the total amount of defaults that are yet to happen.

It comes to £24.3m, according to our calculations, which is about £2m higher than the amount of current and expected money in the provision fund. However, according to a Ratesetter spokesperson, that’s not the whole story. They said “around £3m” of those losses are on loans not covered by the provision fund, which means they are held by institutional rather than retail investors.

We’re not the only ones to get tripped up by this nuance. Ratesetter is updating the 2.8 per cent bad debt rate on its provision fund page to 3.1 per cent because it too was including loans not covered by the provision fund in its calculation.

But, even after accounting for that, the figures on the statistics page suggest total expected bad debts of £21.3m, which is a little too close for comfort to the total value of the provision fund. It also doesn’t match with the £18.6m of expected bad debts shown on the provision fund page.

So what’s going on here? Well, it’s complicated in the kind of way that makes you wonder if any of Ratesetter’s investors actually understand what’s going on.

According to Ratesetter, the difference is because they use different methodologies to calculate the expected bad debts on each page. Bear with us here as we try to explain.

The expected bad debts on the provision fund page are estimated by looking at a 12-month cohort of loans that are at least 18 months old. So, at the moment, it reflects the performance of loans originated between June 2014 to May 2015. The company then extrapolate that performance to the entire loan book, taking into account the split between loans that are less than one year old or more than one year old. Older loans are given a lower expected loss figure, on account that they are past the point where default risk is highest.

The projected year-by-year loss numbers on the statistics page are calculated in a different, slightly weirder way. Take 2016, for example. As we’ve still got a month to go, Ratesetter does the same thing it does above in terms of looking at a past 12-month cohort of loans that are at least 18 months old. When the year is finished and no more 2016 loans are being originated, the company then looks at the actual performance of loans originated this year and adjusts its expected losses. If the loans originated in 2016 have lower defaults than in previous years, which Ratesetter believes will be the case, then the expected loss number will come down over time.

However, the key reason for the difference today, according to Ratesetter, is that on the statistics page they don’t take into account lower expected losses on older loans — this, apparently, is why the loss number is higher than the one given on the provision fund page.

The obvious point here is that it’s not particularly helpful for a company to be putting out two sets of numbers about the performance of its loans that are calculated in two different ways. Or, at least, it’s not helpful to do that without a careful explanation and comparison of the methodologies.

Ratesetter has had issues with its data in the past. In March, when we dived into their loanbook, we found that some of the loans had been mislabelled. Two weeks ago, a spokesperson for Ratesetter emailed us to let us know they were updating some of the numbers on the statistics page, specifically the figures for provision fund usage and percentage repaid. Apparently there was a problem with how they had been pulled from their database. Here’s how far they were off:


If companies are going to sell loans to retail investors, there has to be some confidence that the retail investors are able to grasp the risks involved. Regardless of the intelligence of investors, it’s impossible to do that without clear, straightforward and consistent information.

Otherwise, you’re just left trusting the platform when they say everything is fine, which, for fear of repeating ourselves, isn’t very “peer-to-peer”.

Related links:
Wake me up when online lenders are done turning into banks — FT Alphaville
P2P lending rediscovers balance sheet magic — FT Alphaville
Re-setting Ratesetter’s provision fund — FT Alphaville
Re-setting Ratesetter’s default ratings — FT Alphaville
Ratesetter’s provision fund “is going to be pushed to the limit” – FT Alphaville
Peer-to-peer maturity transformation – FT Alphaville
The curious state of UK “peer-to-peer” lending – FT Alphaville
It’s lenders all the way down – FT Alphaville
Lifting the bonnet on an online lending business – FT Alphaville

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US pending home sales inch higher in October

Posted on 30 November 2016 by

A forward-looking indicator of US home sales edged slightly higher in October, indicating steady recovery in the country’s housing market.

The National Association of Realtors said pending home sales, based on signed contracts to buy previously-owned single-family homes, rose 0.1 per cent from September, in line with economists’ estimates. The rate of growth had slowed from September, when sales rose 1.5 per cent to post their biggest gain in five months.

“Most of the country last month saw at least a small increase in contract signings and more notably, activity in all four major regions is up from a year ago,” said NAR chief economist Lawrence Yun.

The figure comes hot on the heels of Tuesday’s report of September’s S&P CoreLogic Case-Shiller national price index, another closely-watched gauge, which surpassed a previous high notched in July 2006.

Wealth manager Brewin Dolphin hit by restructuring costs

Posted on 30 November 2016 by

Profits at wealth manager Brewin Dolphin were hit by restructuring costs as the company continued to shift its focus towards portfolio management.

The FTSE 250 company reported pre-tax profits of £50.1m in the year to September 30, down 17.9 per cent from £61m the previous year.

Finance director Andrew Westenberger said its 2015 figure was boosted by the one-off sale of a stake in Euroclear, worth £9.7m.

Brewin said it was a “good achievement in the difficult market conditions experienced in the first half of the period and immediately around the UK vote to leave the European Union”.

The wealth manager has spent the past three years transforming itself from an old-fashioned stockbroking group into a more modern wealth manager, increasing its focus on discretionary fund management.

It grew the discretionary arm of its business to £28.9bn over the year, a 16.5 per cent rise from £24.8bn in 2015. Core income was £263.3m, 4.8 per cent higher than the same period last year.

David Nicol, chief executive, said the numbers reflected the recent “strategic transition” of the company. “We have made encouraging progress in 2016,” he added.

Peter Lenardos, analyst at RBC Capital, said the wealth manager had “takeover potential”.

“Following recent sector consolidation, we believe that excess capital, a weak sterling, ultra-low interest rates, and an uncertain outlook could drive further M&A across the sector,” he said, adding that Brewin’s “attractive valuation” and strong balance sheet could make it a “tempting target”.

Paul McGinnis at Shore Capital said the wealth manager’s management team had done “a fine job of turning around the business over the past three years”, but said growth would now be “more of a struggle”.

Mergers and acquisitions swept across the £1.8tn sector this year, with a focus on midsized wealth managers that had between £5bn and £10bn of assets under management.

Brewin, whose results beat analysts’ consensus, was cautious in its outlook, acknowledging a “heightened sense of political and economic uncertainty”, but insisted it was “well placed to withstand any near-term downturns”.

Mr Westenberger said wealth and asset managers would face “pressure on pricing” following increased regulatory scrutiny and forthcoming European regulations known as Mifid II.

“There won’t be change that will happen overnight, but with Mifid II we’re going to have to be transparent for clients,” said Mr Westenberger. “We will participate and become more efficient, and even if pricing is under pressure we can provide a good service to clients.”

Brewin’s adjusted-profit-before-tax figure, which took account of the one-off Euroclear sale and excluded ongoing redundancy costs of £2.7m, was £61m in 2016 — marginally down from last year’s £62.2m. The company increased its full-year dividend by 8 per cent to 13p.

BoE stress tests reactions: ‘No room for complacency’

Posted on 30 November 2016 by

The results of the Bank of England’s toughest ever stress tests are in, and it’s safe to say results have been mixed; RBS was forced to present a new plan to bolster its capital position, while Barclays and Standard Chartered also failed to meet some of their minimum hurdles.

Here’s a roundup of what analysts and investors are saying in response:

Lucy O’Carroll, chief economist at Aberdeen Asset Management, said that, despite some weaknesses, the tests show the banking sector overall is “broadly well capitalised” :

The individual vulnerabilities show that the job of ensuring our banks are capable of withstanding shocks remains challenging. The tests give banks no opportunity for complacency. Which is a good thing. This year has illustrated how the apparently unthinkable can happen and we all need banks that can absorb the inevitable unforeseen shocks.

Raul Sinha at JP Morgan stressed the relatively positive results for Barclays and Standard Chartered.

Both Barclays and StanChart were not required to submit a new capital plan which is the key outcome from a market perspective.

Overall, we conclude that capital return expectations from Lloyds and HSBC will remain underpinned following this test and believe investors should overweight Lloyds given the potential to positively surprise on capital return at at 4Q’16 or a highly accretive acquisition.

Meanwhile, UBS’s Jason Napier didn’t see much new in RBS’s plan to bolster its capital position by at least £2bn.

We believe this plan, which includes cost cuts, asset disposals and further capital management, mostly is the formal inclusion of measures planned and known by the market. We expect a bigger cost and restructuring plan in February – with associated capital costs – and colour around non-core, low return assets within the Commercial Bank, including £8.5bn in risk-weighted assets.

With uncertainty around timing and cost of Williams & Glyn and Department of Justice residential mortgage-backed securities, we think RBS remains under pressure to deliver on core profits, principally by achieving further significant cost cuts.

Basel Committe fail to sign off on latest bank reform measures

Posted on 30 November 2016 by

Banking regulators have failed to sign off the latest package of global industry reforms, leaving a question mark hanging over bankers who complain they have faced endlessly evolving regulation since the financial crisis.

Policymakers had hoped to agree the contentious new measures at a crunch meeting held in Chile this week, but a senior official said a key element will have to be decided later -meaning the Basel Committee on Banking Supervision will likely miss a self-imposed target of completing the reform package by the end of the year.

At issue is how banks can use their internal models to determine the riskiness of their loans, an area on which US and European policymakers have publicly clashed on.

The reforms are an attempt to stop banks gaming rules put in place in the wake of the financial crisis, known as Basel III. Banks argue the reform package amounts to another capital-raising exercise by the backdoor, dubbing it “Basel IV”- something policy makers strongly push back against.

The US – at least under its current administration – is pushing for output floors, which would restrict banks’ use of models to assess their loan books. But European banks and politicians have warned that such a measure will disproportionately hit their balance sheets since European banks hold most of their mortgages themselves whereas US banks typically sell them on.

While the Chile talks forged an agreement around output floors, there is still no consensus on what level they should be set at, a senior Basel Committee official said on Wednesday.

“I expect an output floor will be part of our package of reforms. It will be based on the standardised approaches and the final calibration of the floor is subject to endorsement by the GHoS,” said Stefan Ingves, chairman of the Basel Committee who is also governor of the Swedish central bank.

GHoS is the Basel Committee’s supervisory board and is chaired by Mario Draghi, governor of the European Central Bank. The board is next expected to meet in January – although it could convene again before the end of the year – meaning no clarity on the final level of an output floor will happen until then. The committee had pledged for at least the last two years to finish the reforms by the end of 2016.

Mr Ingves’s speech, published after the meeting in Chile, revealed “the contours of an agreement” reached by the various countries that are members of the Basel Committee, which sets global minimum standards for banks.

Barclays: life in the old dog yet

Posted on 30 November 2016 by

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have a mountain of work in hand, little relates to recent alleged misdeeds.

Those incurable optimists on Threadneedle Street envisaged a severe world recession, a financial shock and, for all we know, plagues of locusts. Barclays undershot its main 7.8 per cent target for equity as a proportion of risk-weighted assets in the war games, even after projected dividend and coupon cuts. However, the bank would have weathered the apocalypse by half a percentage point after hybrid bonds converted to equity.

Despite the skinniness of that margin, the Old Lady did not require chief executive Jes Staley to rework his numbers, a process that might have raised the possibility of a cash call. He apparently got credit for an anticipated one percentage point increase in headline capital, currently 11.6 per cent, reflecting the sale of shares in Barclays Africa and a noncore asset rundown. Just as well. He got no credit at all for any ability to lift capital in a crisis through managerial ability.

These days, central bankers are immune to the charisma of Barclays bosses. The City, which is more impressionable, has warmed to Mr Staley. His vision of a bank and a credit card business serving corporate and retail clients on either side of the Atlantic has coherence. The shares have been lifted by enthusiasm for Wall Street banking following Donald Trump’s presidential win, pricing them at a substantial premium to former glamour stock Lloyds.

Most of the misconduct issues Barclays now enumerates at the back of results statement are of mature enough vintages to merit the title “legacy” too often applied to anything bank bosses feel embarrassed about. Analysts expect steady step-ups in profits over the next few years. With an investment bank in the mix, the real numbers will be volatile. But the mood around Barclays is better than it has been for years. Give the old dog a stroke. There’s life in him yet.

Draghi: Eurozone will decline without vital productivity growth

Posted on 30 November 2016 by

It’s productivity, stupid.

European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation.

Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the eurozone – as measured by workers’ output per hour – have fallen significantly behind the US in the wake of the financial crisis, with growth falling from 2 per cent to 0.5 per cent in recent years.

Raising productivity is vital to boost future economic growth, improve living standards, and help ease the burden on government public finances. Weak output per hour has also plagued the UK and the US since 2009, posing a major headache for economists who have sought to explain its decline.

Mr Draghi attributed weak productivity growth to non-manufacturing firms’ poor ability to absorb technological changes to improve their efficiency – a situation made worse by weak competition in many sectors.

Should governments fail to undertake reforms to lift productivity, encourage business innovation and liberalise labour markets, he warned income growth in the single currency area “is likely to stagnate and may even decline”.

Ahead of a key ECB meeting next week, the Italian central banker said policymakers were taking action to ensure that low interest rates do not become a permanent feature of the eurozone economy, “but we alone cannot eliminate that risk”, he said.

“Monetary policy is providing support and space for governments to carry out necessary structural reforms. It is up to euro area governments to act, individually at national level as well as jointly at European level”, he said.

Zoopla wins back customers from online property rival

Posted on 30 November 2016 by

Zoopla chief executive Alex Chesterman has branded rival OnTheMarket “a failed experiment”, and said that his property site was winning back customers at a record rate.

OnTheMarket was set up last year, aiming to compete with Zoopla and Rightmove, the UK’s two biggest property portals. It allowed estate agents to list their properties more cheaply than rivals, but insisted that any agents using its site could only use one other portal. As the number two in the market, Zoopla was expected to suffer most.

However, reporting full-year results on Wednesday, Mr Chesterman said Zoopla had won back 600 agents. “This is the beginning of the end for OnTheMarket,” he added.

Zoopla’s property services revenue rose 9 per cent to £87m in the year to September. The company said it had 927,000 properties listed on its sites, up almost a tenth on the year. It said it had more than 23,000 estate agents and other customers using its products, with numbers growing for 18 consecutive months.

But Mr Chesterman was cautious about the property market’s prospects. “Brexit has caused uncertainty, which has naturally led to a slowdown in property sales, but the rental market remains very strong.” He added that rental deals outnumber property sales by a ratio of three to one.

Overall Zoopla, which also owns the PrimeLocation and uSwitch sites, reported revenues of £198m, up 84 per cent on the previous year partly due to an acquisition. Pre-tax profits rose 38 per cent to £46m while earnings per share rose from 6.2p to 8.9p.

The dividend was increased from 3.5p per share to 5.2p.

Zoopla’s shares, which have risen by more than a third in the past year, outperforming those of rival Rightmove, gained more than 7 per cent on Wednesday morning.

Alongside the results, Zoopla unveiled two new investments. The company has put money into Neos, a home insurance company which uses connected devices such as alarms, smoke detectors and water detectors to monitor what is happening in the home.

It has also bought Technicweb, which provides web design and hosting services to estate agents.

“We now have significant cross-selling potential with over 23,000 partners taking at least one of our services,” said Mr Chesterman, who added that the company was “stronger and more diversified than ever”.

China stock market unfazed by falling renminbi

Posted on 30 November 2016 by

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors.

The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi devaluation caused an already falling market to drop further.

That episode seems to be a distant memory for investors, who say the central bank is getting better at communicating policy moves. Now the renminbi’s reference rate is determined by the previous day’s currency market movements.

“The domestic stock market rises when the renminbi goes down, which means equity investors don’t think lower renminbi is bad,” said Chen Long of Gavekal Dragonomics, a Beijing-based consultancy.

The positive half-year for the stock market is mainly fuelled by a lack of alternative investment options as domestic real estate has cooled, according to Chen Xingdong, chief China economist at BNP Paribas in Beijing.

“Last year stock investors moved their money into property. But that market’s tightly regulated now, and so money has flooded back into the stock market,” he said.

The current appetite of investors for stocks is a “classic short-term versus long-term response”, according to Chris Powers of Z-Ben Advisors, a Shanghai-based consultancy. “People can see in the short term that a falling renminbi may benefit exporters and aid monetary easing efforts.”

The enthusiasm comes despite a weaker renminbi hindering the Chinese government’s goals of internationalising its currency and rebalancing the economy towards consumption, he suggested.

Meanwhile China’s chances of being included in the highly desirable MSCI index are even lower now that Beijing plans stricter capital controls to stem the renminbi’s further decline.

China’s leadership has been pushing to get Chinese stocks into the index, which would mean funds would automatically send a wave of capital in Shanghai’s direction.

China capital curbs reflect buyer’s remorse over market reforms

Posted on 30 November 2016 by

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar.

In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency by the International Monetary Fund. Some people familiar with Mr Zhou’s sales pitch described it as a “Trojan horse” strategy because it wrapped difficult reforms in an alluring package. 

The State Council, China’s cabinet, now appears to have buyer’s remorse over its new gift horse. In recent days, draft proposals to tighten investment outflows from China have been widely leaked. 

This has led executives, bankers and lawyers to fear that many of the overseas mergers and acquisitions they are working on will be delayed if not derailed by the restrictions. The curbs focus on transactions worth more than $10bn but also much smaller ones if they fall outside the scope of the buyer’s normal business activities or involve real estate. 

“The People’s Bank of China is reluctant to impose such restrictions,” says Fred Hu, chairman of Primavera Capital Group. “They have worked very hard over the past couple of years to spur financial reform in general and capital account reform in particular. This is clearly a setback for these reforms.” 

One of the PBoC’s biggest financial reforms was announced in August 2015. The central bank said the renminbi’s dollar reference rate, around which it is to allowed to rise or fall no more than 2 per cent, would be set in accordance with the previous day’s trading and overnight market moves in Europe and the US. 

Under the earlier system, the PBoC had been free to set the reference rate wherever it wanted. When market pressures are driving the renminbi downwards, China’s central bank can now stem its fall only by selling dollars from its foreign exchange reserves. 

Such interventions have helped drive China’s forex stockpile from almost $4tn in early 2014 to $3.12tn at the end of October and also raised concern about another outflow — this year’s unprecedented surge in overseas M&A activity by Chinese companies. Non-financial outbound investments by China Inc reached almost $150bn over the first 10 months of this year, after a $121bn outflow in all of 2015. 

This has given ammunition to critics of another of the PBoC’s main reform initiatives of recent years — a more open capital account. 

“The PBoC has been very keen to open up the capital account and downplayed the risk that poses for the financial system,” said Louis Kuijs, Asia economist for Oxford Economics. “It’s the State Council, finance ministry and everyone else who are less keen in making capital account progress.” 

Yu Yongding, a former central bank adviser, argues that outflows are dangerous and that the PBoC’s use of forex reserves to counteract them has been a waste of money. Even with steady intervention to support the renminbi, the currency has depreciated more than 5 per cent against the dollar this year and last week fell through the 6.9 level. 

“Better late than never,” Mr Yu told the Financial Times this week. “The policy of increasing capital controls and stemming outflows is completely correct.” 

The PBoC is not, however, completely comfortable with this year’s M&A outflows. According to people close to the central bank, Mr Zhou has been a strong advocate of the need to reduce China Inc’s high debt levels and much of this year’s surge in overseas direct investment has been driven by highly leveraged companies venturing into areas far beyond their expertise.

Recent deals with doubtful synergies include an iron ore producer’s purchase of a UK video game developer and a copper smelter’s bid for the Hollywood production company behind Oscar-winning film The Hurt Locker. 

“So much money has been spent by Chinese companies on overseas hotels, football teams and properties,” says Huang Weiping, an economics professor at Renmin University in Beijing. “It is what Japanese companies did in the 1980s. These kind of outflows are not rational.” 

But many people doubt Chinese bureaucrats will be able to tell the difference between good acquisitions and bad ones. 

“In reality it’s very hard to differentiate the good guys from the bad guys,” Mr Hu argues. He suspects that the “the good guys will pay a heavy price and the bad guys will still find ways to move their money offshore”. 

Additional reporting by Wan Li