CITY AND SUBURBAN
Reverend Mother warns her feckless girls against the perils of prudence
CHRISTOPHER FILDES
We can see it coming, but when it arrives it must still shock. This month brings the results from the Big Four banks, starting with the Midland next Thursday and, for the first time in their history, two of the four will show losses. In 1986 they made £3 billion of profits between them. In 1987 that figure will shrink to £400 or £500 million — which, as it happens, is probably the amount that the Midland has lost. Lloyds, its companion in the red, is ex- pected to show a loss of between £200 and £300 million, though one City guess puts it higher still. In high streets up and down the land, Lloyds and Midland managers must prepare to be ribbed by their customers: `Well, Mr Bradbury, so you're worried about my overdraft? You wouldn't rather I lived in South America? You say I've been feckless, improvident and unrealistic and now need to bite on the bullet? And how about you?' What will rile Mr Bradbury most is that he has not lost the money. His business has been highly profitable, and has needed to be, to pay the bill for the glamour boys in his bank's international division. The culture of the big banks has until the other day treated international banking as the job for the ambitious, who would despise the home market as the place for golf-course managers. To see what nonsense that has been, look at the Plight of Standard Chartered, now con- ducting fire sales to reduce the size of its balance-sheet — because it has never been able to develop a home-market business to match its business overseas. It is, of course, the Big Four's international exposure, to some or all of the 35 countries not servicing their debts on time, which has brought on this year's shock.
These debts (which are not all the same, by any means) have on balance deterio- rated over the last year, but by no means as dramatically as the banks' swing into loss suggests. What the banks will now in effect admit is that, by not providing enough against them, they had been overstating their profits for years. They are encour- aged to find that the Inland Revenue agrees, to the point of accepting that if they have paid genuine tax on spurious profits, they are entitled to some genuine tax relief. Now they are likely to provide against some 35 per cent of these debts. Is that enough? For that, let me refer you to the Governor of the Bank of England, who has told the banks to stick to his guidelines, and not provide more just to show that they could, or to impress their sharehol- ders. He will have had his eye on his old colleagues at National Westminster which was thought to be tempted to raise its provisions to 50 per cent, which it could well afford, thus putting its competitors, who could ill afford it, on the spot. The Governor thus becomes the first holder of his office to warn his flock against the perils of prudence.
It is as though the Reverend Mother of a convent school was worried about her girls' enthusiasm: 'Now, of course you must all be virtuous, but there's such a thing as overdoing it, Thomasina. You must think of others. Why, if they had to live up to your standards, poor Kitty and Jemima would never be out of the confessional, and to see the prefects always having to stand in the corner saying Hail Marys is simply not good for the tone of the school.' I hear that, across in New York, Reverend Mother Corrigan at the Fed has been preaching to her charges on similar lines, which cannot be coincidence. We now have a doctrine. It appears to derive from St Augustine of Hippo: Give me chastity, but don't overdo it. I am not sure how that will go down with Mr Bradbury in the high street. He already knows that in the figures coming up, he has to pay for his bank's most recent glamour boys, in the new securities businesses. Some of the glamour has worn off. All the Big Four were determined to get into these businesses. Their choices and their approaches dif- fered, but each in its way has been expen- sive. Lloyds spent money setting up a market-maker in government stock and Eurobonds, spent money running it, and spent money shutting it. The most that can be said for this performance is that the losses were cut early. The Midland cut its losses on market making in shares even earlier, months before the market turned down, but still found that half of Green- well, the broker it had bought, came to pieces in its hands. (The other half, the government stocks side, has done well.) Barclays paid premiums to buy a big presence in the stock market, poured capital into the company, found its nerve tested on 19 October with a loss of £60 million, but has established one of the two leading British-owned firms in this busi- ness. National Westminster, with all its resources, has not achieved that, and cannot now be said to have succeeded on its own terms of orderly progress and the minimum of surprises. NatWest deliberate- ly bought its stock-market firms from outside the first division — why pay a premium, it argued, for obsolescent skills, and why build a culture-shock into the system? It poured in people as well as capital. The surprises started to pop up in the last few months, and, as the timing suggests, they were unpleasant. NatWest's response has been to buy and inject another broking firm, Wood Mackenzie, for its skills and its management. Cultures have been shocked, and people have been poured out.
Ihave the idea that all these expensive operations will find that Mr Bradbury in the high street is their best friend. The big banks can bring to the securities business and its nine million shareholding customers what it has never had — economical systems, and nationwide distribution. They can make it, what it never has been, a retail business. They do, after all, know more about their customers than any other re- tailer could. Their vast investment in elec- tronics will enable them to operate systems which will take the paperwork out of buying and selling and owning shares, and cut out the costs which the paper now generates. They will be able to offer this service across the counter, across the coun- try. As for the international business which will now make the banks look so silly, they can only say that it has made them look sensible before, when they did not have a fast-growing economy and a credit boom on Mr Bradbury's doorstep, and may do so again. A dozen years ago, their best busi- ness was international, and their big bad debts were at home. That is true, but of limited use as a shock absorber now.
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