RBS Success?

Royal Bank of Scotland has returned to profit for the first time in a decade as it continues its recovery.

 

A big deal? Well, given that we taxpayers own 71% of the company still, I reckon that it’s at least ‘pretty important’!

 

After a £45 billion public bailout and nine years of accumulated losses totalling £58 billion, the positive profitable results seem symbolic for RBS. The results highlight an annual profit of £752 million compared with a near £7 billion loss the year before.

 

Not all the news is positive though as there are legacies that are still to be addressed……mainly a US fine the bank is expecting on the back of mis-sold securities that contributed to the banking collapse. RBS has set aside an extra £492 million for US litigation, taking the total set aside for US court action around the sale of these products to £3.2 billion.

 

In summary, RBS returns to trading profit but there is a big US knuckle rapping to come that will be a huge blast to finances.

 

Still, it’s a start for us.

EU Phew

If we take our attention away from all of the hullabaloo surrounding Brexit and the political boxing taking place with our European friends we are to divorce, there is a good news story beneath the surface. Don’t expect too much publicity regarding it though……it’s a good news story after all!

 

After many false dawns, there appears some sunlight on Europe's strongest economies with economic growth across the European Union at levels not seen since 2007. And the continent's powerhouse countries - Germany and France - are seeing growth at levels not experienced since 2010.

 

And that’s not all……the Eurozone Economic Surprise Index (what a name by the way) which is a measure of whether economic data is better or worse than forecast, is comfortably above 60 (where above 50 is considered positive). Figures like these have not been seen since the beginning of 2014.

 

That’s great, but what’s in it for ‘us’?

 

Well, better EU growth is good news as nearly half of all we export goes to the EU. If the EU is growing, they will want more of it. As we are still in the single market and the customs union, this gives us tariff free access to the EU (for now).

 

Although that relationship will change (with this thing called Brexit) the UK is still the major beneficiary as the EU marches forward economically speaking.

 

So……good news. You would be forgiven for thinking it was fake news though as it is a positive story after all.

Vaporous Volatility

You will have been hard pressed to have avoided stories of an apparent ‘imploding’ of stock markets over the last 10 days. It’s a negative story so our media jump all over it.

 

Yes there have been some volatile days that have seen some stock markets fall by over 4% in a day’s trading……including the largest economies across the world. But what our ‘doom addicted’ media have failed to explain, is the positive long term reason that sparked the sell off.

 

The first Friday of each month is a big deal for investment analysts and investment markets as it is when the US announce their latest job data. Positive data that shows unemployment reducing and wage growth increasing is seen as a positive indicator that the world’s largest economy has the right ingredients to grow (and vice versa). The most recent job data announcement was good……but investment analysts and investment markets thought it was too good!

 

The concerns are that the Fed / Bank of England et al will need to raise interest rates quickly and significantly to stop a potential inflation issue. Increasing interest rates then hinders business growth as the cost of servicing debt is more……stunting growth as a consequence.

 

The long and short of it is this……Trump’s tax cuts for businesses seem to have had the desired impact he wanted. More people are employed and wage growth is increasing.

 

Surely, our media can see the long term benefits of this rather than scaremongering on the back of very short term investment market volatility?

 

When did it become so unfashionable to report something good?

Property Timebomb

As a tribe, the UK really is emotionally attached to property ownership to the point of irrational behaviour. Which makes the results of recent research by the city regulator all the more intriguing (for once!) for the property obsessed UK.

 

In summary, hundreds of thousands of homeowners could be at risk of losing their homes by ignoring how they will pay off their mortgage. Nearly one in five mortgage holders has an interest-only home loan, meaning they would need savings or other funds to pay a final lump sum.

 

The Financial Conduct Authority (FCA) said the end of these mortgage terms would peak in the next 10 to 14 years. The FCA said that 1.67 million full interest-only and part-capital repayment mortgages were still outstanding, representing 17.6% of all mortgages in the UK.

 

Frightening stuff. Which leaves me to consider the impact of this in 10 to 14 years.

 

Firstly, there is little prospect of banks allowing mortgages to continue as ‘interest only’ by extending terms. The way in which lenders are scrutinised post banking collapse ensures that the regulator will not permit lenders to continue with interest only mortgages after the end dates of the original terms.

 

Secondly, a high proportion of the interest only mortgage holders have no plan or insufficient savings in place to repay the debt. This will leave the only option being to sell the property to raise the necessary money required to repay the debt. The result will be a property market flooded with properties for sale, bringing house price valuations down as a consequence. Elasticity, demand, supply and all that.  

 

The alternative to all of this is for banks to work with interest only homeowners now to construct plans to repay the debt and avoid the timebomb in 10 to 14 years. But that takes accountability, ownership and humanity in addressing the issue. And that’s not something we associate with the banking sector.

 

My prediction......the issue will be ignored, the can kicked down the road and the issue only addressed when it reaches alarming levels in 10 to 14 years.

 

All very predictable. All very avoidable.