Friday, August 8, 2014

This Week in Bank Failures

Calm has returned in Portugal after the government took over the regular banking assets of Banco Espírito Santo on Sunday. Political observers in Europe are pointing to the result as evidence that the bank rescue, done vaguely along the lines of the new European rules, shows that the new rules are more practical than the supposedly investor-friendly approach of the previous European bank resolution regime.

Bank stocks in Portugal are suffering somewhat from worry about how much money banks will have to put in to restore the bank rescue fund. It could be another €500 million in addition to the €500 million the banks paid this week. The fund was more than wiped out by the resolution of Banco Espírito Santo. The Bank of Portugal says there could be an IPO within months for the new Banco Espírito Santo. The new bank, though operating as Banco Espírito Santo, is officially Novo Banco and will surely take on a new name after it is under new ownership. Funds raised in an IPO would likely fall short of the amount needed to replenish the bank rescue fund.

Bondholders in the old bank will not be protected by credit default swaps. The ISDA Determinations Committee, which decides these things, has determined that the bank resolution was a succession event, so the credit default swaps transfer to Novo Banco.

Regulators say the failure of the old Banco Espírito Santo was a direct result of improper loans made at the beginning of July. If regulators had taken over the bank in the middle of June when a breakdown in governance became obvious, the failure could have been avoided. In retrospect it is a costly miscalculation that has even the business press moaning about lax banking supervision.

There was some initial confusion about the division of assets between the good bank and the bad bank in the bank resolution. The bank’s overseas banking subsidiaries in Angola, Cabo Verde, and Macau were transferred to the good bank, since they were not related to the bank’s troubled loans to its parent companies.

All is not well at Banco Espírito Santo Angola (also known as BESA). Regulators in Angola responded to the bank rescue in Portugal by putting the local subsidiary into administration. The state guarantee of $6 billion of the bank’s loans has been revoked. Regulators say the bank may have made too many loans in the last two years, and many of them are performing poorly because of the state of the national economy. “Extraordinary measures” will probably be sufficient to restore the bank to normal operation, regulators believe.

In South Africa, African Bank Investments, also known as Abil, is looking for $800 million in new capital. It made this announcement on Wednesday, a day before its furniture retail subsidiary filed for protection from creditors. The bank had gone into the furniture business hoping to make furniture loans to low-income consumers, but this plan went badly, and the problems were compounded by a weak economy and rising energy prices. Abil estimates it has about $4 billion in viable loans on its books, of a total of $6 billion, compared to about $4 billion in long-term debt. The bank’s stock market value has shrunk to $100 million, so it has no realistic prospect of raising capital by issuing stock in its current form. Instead, it may attempt to spin off a good bank with a new stock offering.

Comeback: Bank of America has been limited to paying a 1¢ dividend to stockholders for the last 7 years because of the bank’s financial weakness and accounting problems. After years of attempts, this week it finally received approval to raise the dividend to 5¢ per share.

Guilty: A senior manager at Wilmington Trust in Delaware pleaded guilty to two counts of conspiracy in connection with fraudulent transactions designed to make the failing bank look financially stronger than it was. The indictment in February mentioned a reciprocal loan scheme between the bank and MidCoast Community Bank. The latter bank was acquired by another bank last year, and its top executive then pleaded guilty to fraud and related charges. Any secret agreement to trade capital between two banks is considered fraud because it makes the banks appear financially stronger while actually making them weaker. Wilmington Trust was rescued by M&T Bank, which bought the bank at a steep discount in a stock-swap deal that closed in 2011. Banking regulators and the SEC are investigating the collapse of Wilmington Trust, and there have been indictments of other officers and customers on more serious charges related to real estate loans.

In the hot seat: HSBC this week declared “war” against regulators and their strictness about accurate accounting, while Standard Chartered complained that bankers are being treated “like criminals” when they commit money laundering offenses (apparently meant as an exaggeration, as there is no indication of anyone at Standard Chartered going to jail). According to reports, both banks have new reasons to complain, as their conduct may subject them to further U.S. fines. Also, both are hurting financially in the economic slowdown in East Asia, where there is a sudden increase in impaired loans across all banks.