Neil Collins Notebook: Who owns the UK banks?

Are you a big bank shareholder? Silly question: of course you are, either directly or through the UK government’s leftovers from the last financial crisis. But assuming you own the shares yourself, what exactly do you own? The textbook says that you have a vote and an entitlement to the same assets per share as all the other “members”.

For the big UK banks, it’s not quite like that. The Prudential Regulation Authority simply told them not to pay dividends. Oh, the humiliation. Apparently, the PRA can see the future more clearly than those running the banks, and the outlook is much worse than they imagine. Since that awkward moment, the banks have come to look less like commercial businesses, and more like agents of the state.

This week they were told to be less pessimistic in booking impairment charges, lest their published figures scare the horses – were Barclays to kitchen-sink its loan book, it could report a loss. So on the one hand, banks cannot pay out what their boards decide is surplus capital, while on the other they are told not to hit their published reserves too hard with savage provisions.

They were not told, either, until the last minute, that the UK government was to guarantee loans of up to £50,000, rather than the expected £25,000. The only certainty about this latest spray of public largesse is a massive rise in bad debts and fraud, followed by endless legal action hinging on the word “guarantee.”

Before the latest crisis, bank shareholders might reasonably have expected to see capital beyond the regulatory minimum coming back to them. They can have no such expectation now. To paraphrase Alastair Ryan at MLI Research: “A system with no distributions is one that will inevitably see capital providers demand banks shrink and exit – not grow, as regulators would like. It is not viable for boards to sanction balance sheet expansions for banks trading at deep discounts to book, as each pound freed up in a bank trading at half book value is worth £2 to owners.”

In other words, from the shareholders’ point of view, the big UK banks are worth more dead than alive – which is why they are not being asked for their view.

Now you see it – now you don’t

Still on dividends, or the lack of them. Here is the statement from Aviva, the accident-prone UK insurance company, on March 5. After some boilerplate waffle about the right to cancel the declared dividend, comes the pledge: “The directors have no intention of exercising this cancellation right, other than where required to do so by the Prudential Regulation Authority.”

The PRA made no such demand, yet one month later, Aviva boasted about its strong solvency ratio – and cancelled the dividend. The payout had been one of the few sources of comfort to shareholders in this chronically mismanaged company. The shares, at 242p, lower today than they were before the ‘orrible three-way merger that became Aviva in 2002, yield 12.5 per cent – or rather, zero, now the payment has been scrapped. The virus can be blamed for all sorts of things, but bringing earlier death to holders of life annuities is an unexpected (unwanted, even) bonus rather than a cost for the likes of Aviva.

Last year, in desperate need of decent management, the board promoted Maurice Tulloch, a 28-year veteran of the business to CEO. This year chairman and City grandee Adrian Montague is going, but not far, since he is to remain on the board at least until his successor is found. It could be a tough search, remembering the adage that if good management collides with a poor business, the business usually wins.

For many years, Aviva’s annual meeting has given shareholders the opportunity to complain, but this month’s has gone virtual, so no chance for anyone to answer back or cause trouble. Of course, the institutional investors think making a fuss at annual meetings is vulgar, or for disgruntled individuals, but the real mystery is why those big holders are not revolting at what has been such a useless long-term investment.

Neil Collins used to write the Inside London column for FT Weekend for many years, and before that was City Editor of the Daily Telegraph.

He writes a Friday blog at neilcollinsxxx.wordpress.com