UPDATE:UK Banks May Post Declines On Own Debt In 2Q -Analysts
June 26 2009 - 12:56PM
Dow Jones News
U.K. banks that reported gains on their own debt when credit
spreads widened during the first quarter could be forced to book
reversals for the second quarter, when spreads tightened, analysts
said Friday.
This means that the banks' second-quarter earnings could show
huge declines to reflect the reversal of recent gains on the value
of their own debt.
But analysts quickly pointed out that any impact on net-profit
figures should be discounted because these reversals are only due
to accounting procedures and have nothing to do with a bank's
day-to-day operations.
The issue of reversing gains on own debt emerged after Swiss
bank UBS AG (UBS) late Thursday highlighted it as one reason behind
its forecast net loss in the second quarter. UBS said internal
restructuring charges will also contribute to its loss.
Exane BNP Paribas analyst Ian Gordon said that UBS' warning
"could have a read-across on HSBC and most other banks which mark
the value of their debts to market."
"For HSBC and others, like Barclays, we may see reversals in the
second quarter offsetting the widening in the first quarter. It
could lead to a decrease in profits," Gordon said.
RBC Capital Markets said UBS' warning indicates that "the long
period of uninterrupted gains that banks enjoyed as their credit
deteriorated may be coming to an end."
In the first quarter, HSBC Holdings PLC (HBC), for example,
booked a $6.6 billion gain on its own debt as credit spreads
widened. This was up from a gain of $2.5 billion in the first
quarter of last year.
Another analyst said that there is a chance that not all recent
gains by banks will be wiped out. "The spreads have expanded
massively in the past couple of years. The tightening started only
recently, so that will wipe out only a part of the previous gains,"
he said.
The spread to the risk-free borrowing rate on bonds issued by
many banks has tightened significantly since peaking in
mid-March.
According to the widely watched iBoxx indexes of financial
companies' debt, senior bond spreads peaked at around 3.2% but have
recovered to just above 2%.
Spreads on more junior lower Tier 2 debt have tightened from
around 9% to around 5.4%.
Credit spreads widen when markets are stressed and investors
worry about higher default risk, driving the price of existing
bonds, as a percentage of their face value, down.
When investors are more confident that they will get their money
back, spreads tighten and bond prices rise.
Some banks have argued that they could buy their bonds back in
the secondary market at a cheaper price than they had originally
sold them for, making gains in the process. Some of these gains may
be reversed as spreads tighten and prices recover.
Barclays PLC (BCS) said May 7 that it had a gain of GBP279
million on the revaluation of its own credit for the first
quarter.
Royal Bank of Scotland PLC (RBS) similarly recorded a gain on
the value of its own credit in the first quarter, which it said
amounted to GBP1.28 billion.
A spokesman for HSBC said Friday that "the positive or negative
impact in a particular reporting period will be determined by the
movements in credit spreads." He pointed to the bank's statement
May 11, which already noted that credit spreads have narrowed in
April, reversing a "significant proportion" of its recent
gains.
Spokesmen for both Barclays and RBS declined to comment on
whether there was likely to be any reversal in gains. Most U.K.
banks report first-half earnings in early August.
Exane BNP Paribas' Gordon said any reversal shouldn't have much
of an effect on particular banks in the immediate future. "We know
that these gains could reverse over time. Whether it happens now or
at a later date, it doesn't really matter."
Gordon said the reversals could hurt stated profits.
"But will it have any impact on regulatory capital? No," he
said. "It provides a negative shock to the headline number but not
to the underlying number. We only care about the underlying number,
stripping out one-offs like own debt."
"Fair valuing of own debt doesn't create or destroy capital.
It's just an accounting procedure you have to do once in a while,"
he said.
Gordon cited HSBC's presentations on the matter, saying that
"HSBC has been very open and honest about this."
The other analyst said that "good analysts will know that you
need to strip out the gains or losses on own debt. I wouldn't have
taken them into account as profits last year, so I wouldn't take
them into account as losses this year."
-By Vladimir Guevarra, Dow Jones Newswires. Tel. +44 (0)
2078429486, vladimir.guevarra@dowjones.com
(Marietta Cauchi contributed to this article.)