UK. Bank stress tests: Co-op fails as Lloyds and RBS scrape through

Three banks – the Co-operative Bank, Lloyds Banking Group and Royal Bank of Scotland – were found to be lacking financial strength by the Bank of England after being subjected to tests designed to measure their ability to withstand economic shocks.

In order to test the resilience of the financial sector, the central bank created a hypothetical scenario involving a deep recession, an unprecedented collapse in house prices, soaring unemployment and a sharp rise in interest rates.

Threadneedle Street stressed it was not handing out a pass or fail on the eight lenders exposed to the extensive exercise, nor did it intend to order any system-wide changes to the banking industry.

Only the Co-op Bank – whose capital would be “exhausted” under the most severe stress test – was ordered to submit a revised plan to the Bank. It was the only one to fall below the 4.5% minimum core tier one capital ratio – a key measure of financial strength – set by the central bank.

Owned by the Co-operative Group until last year, the Co-op bank had already warned it might fail the test.

The results published on Tuesday showed its capital would fall into negative terrority, knocked by losses on commercial property loans under the hypothetical scenario.

Bailed-out RBS, 81% owned by the taxpayer, would have been required to submit new plans had it not already begun to raise its capital buffers at the end of 2013, which was the starting point for the tests. .

Lloyds, which is 24% owned by the taxpayer, was not required to submit new plans although it may now face questions about its ability to resume paying dividends to shareholders for the first time since the 2008 banking crisis.

The Bank of England governor, Mark Carney, said policy makers had been reassured about the banking sector after the first ever industry-wide stress tests, which are to become an annual event.

“This was a demanding test. The results show that the core of the banking system is significantly more resilient, that it has the strength to continue to serve the real economy even in a severe stress, and that the growing confidence in the system is merited,” Carney said.

Publishing its half-yearly outlook on risks to the financial system, the Bank of England also said the global economic outlook had weakened from six months ago. It added: “The recent sharp fall in the oil price should support global and UK growth but it also entails some risk to financial stability.”

The bank also said its financial policy committee had been worried in June about the risk of the housing market and debt levels in UK households, which remain high relative to income.

HSBC, Barclays, Santander UK, Standard Chartered and the Nationwide building society were the five other institutions tested and were not found to have any capital inadequacies. They were not required to submit new plans to the Bank of England’s regulation arm, the Prudential Regulation Authority.

Over the three-year test period, which ran from the end of 2013 to the end of 2016, the banks made £13bn of losses before making profits in the third year. Without the series of economic stresses, the lenders were projected to make £100bn of profits over the three years.

Impairment charges would rise by £70bn under the stress tests. Capital ratios are also severely affected, with systemwide ratios falling from 10% to 7.3%.

The Bank of England also took into account actions that banks could have taken during the three-year period, which included cutting staff costs and dividends, and changes in lending patterns. But banks were not allowed to reduce their lending to the economy.

The Bank has stepped back from including more banks in the tests next year and warned that the leverage ratio – another way of measuring financial strength – would become part of the test in the future.

The Bank of England said that while the banking system was stronger than the 2008 banking crisis there were still other concerns. “Recent misconduct and other operational failings have highlighted that rebuilding confidence in the banking system requires more than financial resilience. That, and changes to banks’ business models in response to commercial and regulatory developments, make it important for banks to continue to enhance the effectiveness of their governance arrangements,” the Bank said.

Source: The Guardian(UK.)

Investing wisely in uncertain environment

The National Bureau of Statistics in its trade statistics for the third quarter of this year stated that the country recorded N359.6bn or 5.4 per cent drop in merchandise trade from N6.65tn to N6.29tn.

The decline was attributed to a fall in the value of exports and imports in the third quarter relative to the second quarter of this year.

Similarly, the Nigerian Stock Exchange recorded 35 per cent decline in foreign investments to N153.28bn in October from N226.68bn in September.

Experts say the reduced foreign investment is as a result of the unstable business environment due to insurgency and the fears of 2015 elections.

In view of these, experts advise that business managers have to make investments decisions in line with the changing business landscape for them to record success.

According to them, the old business models that guide investment decisions may not be effective as it used to but proper understanding of the business terrain and the risks involved may help out.

A report by Accenture states that firms face a number of challenges that complicate their efforts to choose the right ways to invest capital or operating funds.

The report titled,’ Invest to Win: Placing the right bets in a shifting competitive environment,’ said traditional approaches no longer meet stakeholder expectations; blurring industry lines and make the playing field less transparent than before.

It states that the current unprecedented changes taking place across industries have compromised many traditional investment approaches that worked adequately in the past adding that most companies cannot repeat historical investment patterns and expect to receive the same returns because their industries no longer grow at their former pace.

More so, organisations grow today by expanding into existing markets or creating new markets or product segments that meet customer needs, it adds.

The report advises business leaders to challenge themselves by identifying what customers really value and are willing to buy, and seek out new ways to exploit their current assets.

In the main, it says that companies aspiring to grow start by identifying how to deploy their assets in the following areas:

Opportunities in technology

The Accenture report states that advanced technology which involves the use of advanced mobile devices, digital software and sensors to monitor and maintain patient health on a 24/7 basis is a growth opportunity.

Moreover, it says the emergence of location-based apps that are transforming everything from hailing a cab to the convenient shopping experience online provides other opportunities.

New customer-centred initiatives

Customer-centred approaches make companies to offer one-stop shopping for current customers that goes beyond their traditional offerings. It adds that the goal is to understand what else consumers might want to purchase, and use the insights to sell more offerings or provide a service that enables it to increase its share of wallet.

Extending brands and generating customer bonding

The report says these can work, if the company’s assets and brands provide a plausible rationale, adding that leaders need to determine how they can improve the customer experience and what product add-ons to offer.

Areas of concern could include the expectations of new and innovative products that offer good value, as well as a positive, expedient customer experience with purchased products and subsequent service.

As a result of increased consumer expectations, the report explains that people also want companies to engage them digitally before and after a purchase, by having an online presence.

It says, “This implies that simply expanding a company’s brick-and mortar footprint will not generate the same levels of retail growth that it once did. Many customers also expect firms to exhibit good corporate citizenship and have effective sustainability strategies.”

Disruptive new entrants make an impact

Evolving customer demands keep raising the bar on expected company performance and the arrival of disruptive new entrants is changing competitive dynamics.

In the process, they are challenging incumbent business models and investment choices and in many cases, roiling established markets.

Citing the example of businesses with strong online presence, it says Uber, which digitally connects drivers that have cars for hire with people looking for transport, Gilt Groupe, an online fashion retailer, and Pinkberry, a restaurant franchisee in upscale frozen desserts have carved a niche for themselves.

It notes that in their early stages, each of these upstarts could have been a low-priced opportunity for existing players to develop a new market but they now represent competitive threats.

Companies need a clear rationale for any investment, which means that before deciding where to invest, they need to clarify why they are spending the money, what they expect in return, and over what time frame.

Choosing where to invest

To make wise investment decisions, the report suggests that companies can develop new products, services and solutions, investing to develop innovative offerings that consumers seek.

According to it, they can invest to maintain or expand an already introduced product’s position in the market, or focus on sales and specific channels, spending to improve their go-to-market capabilities.

It says, ”Strengthening marketing performance and brand image can be a way to go. Boosting the company’s pricing capabilities also makes sense. Actions here could include investing in capabilities to improve the organisation’s understanding of target customers, revising the positioning and promotion of offerings, and optimising the company’s returns for its offerings.”

Another option it suggests is simplifying and optimising the company’s internal capabilities in areas such as manufacturing, supply chain management or at the corporate centre by introducing new processes and technologies.

Source: Punch Newspaper