Across the Atlantic, bank stocks are crumbling like a Jenga tower, posting losses of up to a half in a single day, with big banks seemingly just as vulnerable as small ones. At this rate, the entire American public will end up banking with JP Morgan, which thanks to its rescue missions so far, already has 15 per cent of all deposits in the US. Meanwhile, it’s business as usual over in the UK. Bank deposits have fallen a bit, but nothing to see here, let’s move on.
Can this insouciance really last? Are conditions so different here? Well, up to a point. The US banking system is much more fragmented than that of the UK, but it would seem that the banks overdosed on the Kool-Aid of thinking that long-dated US Treasury bonds were low-risk. They are, of course, in that a US default is highly unlikely (assuming that the traditional stand-off in Congress over the debt ceiling is resolved) but if you buy a long-dated bond on a yield of 1 per cent, its current value was always going to fall a long way once interest rates climbed off the floor. It is all very well telling the auditor that you are holding the bond to redemption 20 years hence, but that’s no help when your depositors can demand their money back at the click of a mouse.
Professor Amit Seru, a banking expert at Stanford University, told the Daily Telegraph: “Thousands of banks are underwater. Let’s not pretend that this is just about Silicon Valley Bank and First Republic. A lot of the US banking system is potentially insolvent.” The US Fed monitors securities for sale, and those that are (now euphemistically) called “held to maturity”. The combined unrealised losses are over $600 billion. Add in pension funds and insurance companies, and the unrealised losses could top $5 trillion.
This is the bill presented after the binge with our old fair-weather friend, Quantitative Easing, the practice of central banks buying long-dated government stocks (and driving the yields right down to those ridiculous levels) with money that they effectively printed. As we know now, there is a terrible price to pay for dancing down this primrose path. Central banks everywhere must decide whether embedded inflation is worse than stalled economies. So far, having failed for so long to see what was coming, they are trying to tackle inflation. The Bank of England is highly likely to follow the US Federal reserve and raise Bank Rate again next week.
Such moves only have an impact after a lag, typically many months. There are growing signs that one more rise will be enough to start the UK on the long and painful road back to 2 per cent inflation. Indeed, an increasing minority is arguing that the monetary tightening has already been too fierce, and that interest rates will need to be cut to prevent a severe recession, with plunging share and property prices, rising unemployment and general misery.
The traditional beneficiaries of such conditions are holders of bonds. Ironically, a recovery in bond prices, with the concomitant fall in yields, would ease the “mark-to-market” problem for holders who are currently under water.
The unrealised losses are less for UK banks, and the shares look like havens of stability by comparison with US banks. All of them, even Barclays, have substantial reserves, and are making hay from the growing gap between the interest paid on deposits and that charged on their loans. They look increasingly like building societies, with mortgage lending accounting for most of their advances, and our paranoia at any significant fall in house prices would surely see the government stepping in to help.The Bank of England keeps saying that all is well, which is not a good sign, but the best guess today is that the banking panic virus will not cross the Atlantic.
The lost plot at Shell
They are a pretty cloth-eared lot in the Shell boardroom. This week the oil giant declared giant oil profits, prompting the predictable knee-jerk reaction from the usual suspects about “obscene” profits, the need to confiscate even more of the gains, etc etc.
You might think the shareholders were lighting up their cigars, or at least revving up their SUVs, but consider the recent history. Going back to the company’s great panic of March 2020, when the world was about to end, the board ditched a dividend policy stretching back more than half a century. The 47c a share quarterly payout was scrapped, and cut to just 16c.
The world did not end after all, and six months later the payout was raised to 16.65c. We all know what happened next, so another new dividend policy was needed. This week’s quarterly is 28.75c, and this policy is to raise it at 4 per cent a year. Four per cent! That means the payment will take another nine years until 2032 to get back to the 2019 level.
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Shell is spending much more money now on share buybacks than on dividends, although there is little to show for it with the shares at the same price as they were in 1997. The board would doubtless disagree, but the damage to sentiment and confidence from the dividend cut, and the seeming indifference to restoring it is a major reason why Shell shares have been such a miserable investment.
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