Banking

• Under intensive care
  

  UBS and Citigroup take steps to reassure investors. But big questions remain

  SURGERY, as any doctor knows, is just one step on the road to recovery. Two of the biggest banking casualties of the carnage in America's mortgage market are out of the operating theatre--though not by any means in the clear. On December 11th, after five leaderless weeks, America's Citigroup announced that Vikram Pandit, the head of its investment-banking division, would be its new chief executive. The previous day Switzerland's UBS had unveiled write-downs and capital injections designed to reassure investors that the worst of the subprime crisis was over. But the long-term prognosis on these two huge banks remains decidedly uncertain.

  UBS looks the healthier. Its announcement of a $10 billion write-down on its exposure to subprime-infected debt, to go with a third-quarter hit of $3.6 billion, hardly sounds like good news. UBS now expects a loss for the fourth quarter, which ends this month. It may end up in the red for the entire year. But in today's topsy-turvy market, the bank's decision to take a much more conservative view of the value of its assets was welcomed as a sign that further big mark-downs are less likely. ...

• Sunnier climes
  

  A less crunched corner of Europe

  HAPPY bank shareholders are a rare breed in Europe this year, but the industry can still point to some pockets of contentment. Greek banks have outperformed their euro zone brethren, notching up impressive gains in revenue, profit and share prices. Reporting quarterly results, a painful experience elsewhere, has by and large been a pleasant task. National Bank of Greece (NBG) boasted a 66% year-on-year increase in net profit for the first nine months of the year; Eurobank EFG saw earnings grow by 29% in the same period.

  Immaturity, in various forms, explains their success. Greek banks have little direct exposure to the subprime-related instruments that have tripped up sophisticates in other markets. The domestic market, although decelerating, still has plenty of scope for growth, thanks to generally benign economic prospects and comparatively shallow levels of private credit, which is expanding by about 20% annually. "Greece is somewhere in between a mature and an emerging market," says Nicholas Nanopoulos, Eurobank's boss. ...

• Shotgun wedding
  

  One suitor has been chosen, but others are forcing their way into the church

  AT FIRST it proceeded at a glacial pace, but the sale of Northern Rock has now picked up unseemly haste. On November 25th Richard Branson's Virgin Group was chosen as preferred bidder for the stricken bank, which is kept alive only by public money. The Sunday decision caught many by surprise, not least rival bidders who were either due to present their bids to the bank and the government in coming days, or had done so that weekend and had no inkling that things would move so fast.

  Such haste at this late stage is unlikely to serve the interest of taxpayers, who have lent over GBP20 billion ($41 billion) to the mortgage lender since it came cap in hand to the Bank of England in September. That was the time for urgent action, and Alistair Darling, the chancellor of the exchequer, could have moved far faster to sort out the mess. ...

• Dishdashing to the rescue
  

  Citigroup calls on sovereign wealth. It joins a long line of supplicants

  CITIGROUP may have lost its bearings and its chief executive, but it has not yet lost its memory. In 1991 a Gulf investor came to the rescue of Citicorp (as it then was), which was strapped for cash as a result of an American property downturn, among other things. Saudi Arabia's Prince Waleed bin Talal, the man in question, largely owes his place on the world's rich-lists to that decision. On November 26th the Abu Dhabi Investment Authority (ADIA), a secretive sovereign-wealth fund, displaced Prince Waleed as the bank's biggest shareholder, paying $7.5 billion for a 4.9% stake.

  Citi's shares rallied heartily, but it is not out of the woods yet. The boost to the bank's faltering capital ratio from ADIA's investment will offset expected write-downs on subprime-related investments in the fourth quarter. On the other hand, weakening consumer credit in America and uncertainty over its exposure to off-balance-sheet assets will add to the subprime worries. And ADIA has driven a hard bargain: the fund bought convertible securities that will yield a hefty 11% rate of interest until they become shares in 2010 and 2011. ...

• Dog days of winter
  

  Liquidity concerns grip the banking industry. How long will they last?

  WRITE-DOWNS of $45 billion, and billions more to come. A collapse in share prices that has destroyed even more value. The blood of two Wall Street chieftains and many more underlings on the carpet. The fallout from the credit crunch has been so intense that some feel a pain barrier may have been breached. On November 27th and 28th the S&P 500 posted its first consecutive daily gains since October, partly on hopes of a cut in American interest rates and on some rare good news about Citigroup (see article). But four months after they first seized up, the credit markets remain in a state of paralysis. The banks still have a long, hard slog ahead.

  Short-term interbank rates at which banks lend to each other, and which are a good gauge of concern, have risen steadily since mid-November. On November 28th the two-month London Interbank-Offered Rate hit its highest level in euros since May 2001. Rates in euros and dollars tower obdurately above central-bank targets, despite announcements from both the European Central Bank and America's Federal Reserve that they will inject extra funds into the money markets. ...

• Tightening the safety belt
  

  Banks' capital needs could end up tying them in knots

  THE only thing bankers can have felt grateful for this Thanksgiving was a rest. Confidence in subprime-related mortgage products continues to fall. Rating agencies are slashing collateralised-debt obligations (CDOs) faster than you can slaughter turkeys. Analysts at Goldman Sachs reckon that, despite the large write-downs already announced by financial institutions, another $108 billion-worth of losses on subprime CDOs have yet to surface (see chart). Adding to the gloom, a $2 trillion source of mortgage funding in Europe, known as the covered-bond market, was temporarily suspended on November 21st because of sliding prices.

  All this turmoil is focusing attention on banks' capital ratios, the amount of money they set aside as a percentage of assets to cover unexpected losses. This cushion is being squashed in a number of ways. First, net losses eat directly into capital. Second, since capital ratios are typically calculated on the basis of how risky a bank's balance sheet is, the ratings downgrades add to the amount of rainy-day money banks need to set aside. Third, assets are growing as banks take on the financing of more off-balance-sheet vehicles, which again adds to the capital they need. ...

• Serial crunching
  

  Credit problems refuse to go away

  NO LONGER can the credit crunch be dismissed as a blip or an isolated phenomenon. Every other financial wobble since 2003 has lasted just a few weeks. This time, even two rate cuts by the Federal Reserve have failed to do the trick.

  Indeed on some indicators, things now look even worse than they did in August. The desire for safety has driven the yield on ten-year Treasury bonds below 4% for the first time since 2005. The gap between the three-month dollar London Interbank-Offered Rate (which banks use to borrow from each other) and the federal funds rate has reached half a percentage point, higher than it was in the summer. According to Manoj Pradhan of Morgan Stanley, two-year swap spreads, another measure of risk aversion, are significantly higher than they were three months ago. ...

• Pulling the plug
  

  The market has said what it thinks of Northern Rock. The British government should listen

  EVERY banker knows John Paul Getty's dictum: "If you owe the bank $100 that's your problem. If you owe the bank $100m, that's the bank's problem." What then of a bank that owes taxpayers some GBP24 billion ($49 billion), with another GBP18 billion or so of deposits underwritten by the public purse? Northern Rock, it seems, is everyone's problem.

  The bank, once Britain's fastest-growing mortgage lender, is now a wreck. Having turned to the Bank of England for an emergency bail-out in August, it is unable to repay its loans unaided. Its debt to the central bank is growing. A mortgage book that was the envy of the industry looks less robust by the day. Its share price plummeted this week to less than GBP1, down from more than GBP12 at the beginning of the year. ...