Credit increments of British banking behemoth

Last week the first half results reported by British banks demonstrated their excellent incremental credit position. The British banking system is indeed a behemoth.

This word has two meanings, according to the Webster Dictionary: it is a mighty animal, perhaps the hippopotamus mentioned in Job 40: 15-24; or in the US context any monstrous, grotesque creature or thing.

It is self-evident that British banking is a mighty phenomenon, which metaphorically merits to be called a behemoth, but what is not so clear to investors is that this behemoth can be unprofessional, monstrous and grotesque under certain highly exceptional circumstances.

Let us not expatiate on the collapse of the prestigious Barings Bank ten years ago, when the Maltese lost millions, and many a widow was left in tears. This was one of the oldest British banks.

Some months before the Barings collapsed, I pointed out in this paper the highly unprofessional conduct and misleading financial literature distributed in Malta by a team of its brokers. That bank threatened to take action against me. It collapsed utterly a few weeks later and was sold for £5.

This by no means little story is being narrated as it underlines the fact that in finance, as in everything else, vigilance is the price of prosperity, and that the financial journalist who only burns incense in front of the golden image of the banking behemoth is certain to lead his readers to disaster.

Malta has had in the past hundred years more than its fair share of financial disasters. It can be easily proven that the higher the financial education of a people, the less is the chance of any financial loss striking that nation.

The 'Tango Argentinean' bond disaster of which Wall Street banks, according to Blustein's book on the subject, carry the greatest responsibility, hit hardest those nations with the weakest financial education. These proved gullible to the advice that a sovereign country cannot go bankrupt.

It is a historical fact that during these past 120 years Argentina defaulted five times on its debt. This nonsense cost Malta Lm160 million. The amount of Maltese money in the maw of the British banking behemoth amounts to billions.

All the signs point that it is a benevolent behemoth and evidence of this is its strengthening credit position. This is revealed in its recent results. In this age of globalisation banks have got to be behemoths to survive.

Small banks find life difficult as their destiny is either a merger or a takeover. A bank needs to be big not because it enjoys being big, but because efficiency demands it.

Benefit of the doubt

Lloyd's Bank was the first to publish its results, the salient point being its 8% increase in profits. Its incremental credit position confirmed the predictions Fortune magazine made on January 17 when it listed Lloyd's among the 20 best bargains in the market.

Since then, its share price has advanced by 1.43%, and what is more important for the investor, it has been able to pay a dividend of 7.5% in 2004, and 6.9% in the first half of 2005.

This makes it the highest yielder on the FTSE100. If there is anyone who would like to study in detail the position of Lloyd's, he should read what is, to my mind, the over-optimistic appraisal by David Heiro of Oakmark International in the same issue of Fortune, and balance it with what I judge to be an over-pessimistic valuation by John Jackson in the Sunday Telegraph of January 17.

The advice of 24 Ore, the Italian business newspaper, on Lloyd's is hold, and it gives its trend as one of an appreciation of share price. Its powerhouse dividend seems to be secure. Tony Jackson of the Sunday Telegraph would like to point that out.

When one compares it to the other British banks, one sees that it is a dividend hard to justify on the terms of operational cash flow. Events have so far proved the Jackson analysis to be a failure. Investors have given Lloyd's the benefit of the 'doubt' to borrow a word from the Financial Times.

They have pushed up its share price by about 1.4%, following the publication of its results. The 'doubt' was the ability of Lloyds to justify its mighty dividend. Those who have held Barclays shares during these last ten years have made a packet.

They have enjoyed capital growth of over 400%, and a generous flow of dividends. Have they deserved their success, or was it simply luck? If Barclays has boomed during the past ten years, what will the next ten years be like?

Making money out of Barclays shares was not a matter of luck but of calculated risk. Ten years ago Barclays was a takeover target simply because, among other things, it had wasted £500 million of a rights issue. Anyone who bought Barclays shares at the time was taking the calculated risk that Barclays would recover.

I stated so much in this newspaper in my very first contribution of that time. The position of safety and strength now, as revealed by its results, is completely different. Barclays seems destined through the absorption of the ABSA Bank of South Africa, to become one of the great banks of that continent.

It is preaching there the 'profit' ethic and not, as politicians are doing, the 'charity' one. 'Charities' as we see in Malta from the Marchese Vincenzo Bugeja's Conservatorio story, tend to vanish in thin air.

Barclays', like that of HSBC, is poor. Dividends are by no means the only thing that make a bank's share price attractive. A very high dividend may be a sign of a temporary management weakness, but not of a coming bankruptcy.

HSBC is the leader of the pack among British banks and, along with Barclays and Lloyd's, rules Malta's financial destiny. It is a bank, which develops its presence and influence increasingly among us.

I have welcomed it in my financial articles ever since it started operations in those islands and find no reason why I should change my stand. It has introduced highly desirable products to Malta, such as those with capital security.

US operations have helped to push the bank's overall profits 5% higher to $10.6 billion. That is, HSBC has further improved its credit position, making it safer than it was before. The results of the other British banks confirm the increasing credit trend of the banks we have written about.

John Azzopardi Vella has advised Standard and Poor's and been a promoter of the Malta Development Fund. At present he is executive manager with DBR Investments Ltd. E-mail: johnazzopardivella@hotmail.com .