Will Mortgage Bonds Be the Next Disaster–Again?
For some investors, any mention of US mortgages takes them back to the dark days of 2008. But today’s mortgage bonds aren’t the devils some market participants make them out to be.
We understand why the topic provokes anxiety. In the 2000s, rapidly rising home prices prompted lenders to make risky loans, often without verifying a borrower’s income or requiring a down payment. Many of those borrowers defaulted when US housing prices started to fall.
Because the loans were bundled into residential mortgage-backed securities (RMBS), the poison was able to spread through the global financial system. The result: what might have been a simple US housing correction became a global crisis.
Mortgage Bonds Today’s Nontoxic Loans
By now, the story is well-known, thanks to countless books and the critically acclaimed film The Big Short. But just before that film’s credits start to roll, an on-screen warning darkly implies that nothing much has changed. This gives the impression that Wall Street is again busy stuffing toxic loans into a new breed of mortgage-backed securities, setting the stage for another crisis.
We disagree. The majority of today’s loans aren’t toxic. Tight lending standards mean only high-quality borrowers are getting loans. Several credit metrics, including average FICO scores and borrower debt-to-income and loan-to-value ratios, are at or near their best levels since 2006.
In other words, if there were ever a time to take on mortgage credit risk, it’s now. That’s one reason why we think new credit risk-transfer securities (CRTs) from government-sponsored housing agencies Freddie Mac and Fannie Mae offer an attractive opportunity.
Beyond having mortgages as underlying collateral, CRTs have very little in common with traditional agency debt or the precrisis non-agency RMBS that banks issued. That’s partly because these new securities have less risk layering than did their precrisis counterparts.
There is less risk because CRTs contain fewer loans to borrowers with multiple red flags. For instance, nearly 11% of the loans in the securities Freddie issued in 2006 went to borrowers with low FICO scores (weak credit) and high debt-to-income ratios. For the 2016 CRTs, only 0.7% did.
Mortgage Bonds Sharing Risk, Reaping Rewards
CRTs are different from traditional agency debt in another important way: they have no government guarantee. Before the crisis, investors assumed interest-rate and prepayment (unscheduled early return of principal) risk, but Fannie and Freddie guaranteed coupon and principal payment, even when the underlying loans would default.
Washington: Worldwide public and private debt is at an all-time high, posing a substantial impediment to getting global economic growth back to normal, the International Monetary Fund said Wednesday.
The easy money policies of the worldacute;s top central banks has fed the problem, stoking a private-sector credit binge in China and rising public debt in some low-income countries, the IMF said in a new report.
Meanwhile, slow economic growth is making it hard for both companies and countries to cut their debt burdens — a process that can also drag on growth momentum because deleveraging companies slow spending and investment.
Without deleveraging, however, countries run the risk of fresh financial crises that can turn into deep recessions, the IMFacute;s Fiscal Monitor report says.
For a significant deleveraging to take place, restoring robust growth and returning to normal levels of inflation is necessary, the fund said.
Getting there requires governments to stimulate growth though investment, certain fiscal and business reforms, and targeted programs to help heavily indebted companies lower their debts.
Global debt is at record highs and rising, the IMFacute;s Fiscal Affairs Department chief Vitor Gaspar said.
Public and private debt — excluding the financial sectoracute;s — at the end of last year hit $152 trillion, with around two-thirds owed by the private sector, the report said. Measured against the size of the world economy, it rose from less than 200 percent of global GDP to 225 percent over the 15 years to 2015.
Debt at such levels while economic growth remains tepid heightens the risk of financial crises, Gaspar said.
High debt levels are costly as they often end up in financial recessions that are deeper and longer than normal recessions, he said in comments accompanying the report.
Moreover, excessive private debt is a major headwind against the global recovery and a risk to financial stability.
While central banks have had to cut interest rates to support the recovery from the 2008 financial crisis, that has encouraged the debt pileup, the report said.
Dealing with the problem requires governments to implement well-calibrated programs to reduce private debt — by cleaning up poor balance sheets of European banks and non-financial companies in China.
Generally, where the financial system is under severe stress, the report said, resolving the underlying problem quickly is critical.
The Fund said european banksacute; weakness looms large on the horizon as threat to global financial system, with thin margins and an unsafe share of poor quality loans.
The Funds review of the health of the worldacute;s financial system came as global investor jitters persisted over the fate of Deutsche Bank, Germanyacute;s largest but capital-weak and troubled lender.
Dangers in the near-term have lessened since April, according the Fund, as commodity and asset prices rise and markets adjust to the shocks of Britainacute;s vote to secede from the European Union.
But trouble is brewing in the medium-term, according to the global crisis lender, which said that more broadly, banks, retirement funds and insurance companies needed to clean their portfolios and adjust to an era of low growth and low rates.
In advanced economies, 25 percent of banks, holding $11.7 trillion in assets, would remain weak even in a cyclical recovery. The solvency of many life insurance companies and pension funds is threatened by the prolonged period of low interest rates intended to stimulate recovery from the Great Recession. Weak credit demand in advanced economies, in addition to low rates, is also hindering profitability, according to the IMF.
Since the start of the year, the market capitalization of advanced economy banks has fallen by almost $430 billion, increasing the challenge of addressing banking system vulnerabilities, particularly for weaker European banks, the report said.
The hounds bay for Stumpf, Tolstedt, and other Wells Fargo officials to pay through the nose for abuses caused by their high-pressure sales culture. Yet where is the penalty for those who enacted just for example the disastrous Affordable Care Act? That fiasco, which has caused at least 7 million Americans to lose their employer-based health insurance, was premised on a gargantuan deception that has done vastly more damage than the Wells Fargo debacle. Even Bill Clinton describes Obamacare as a crazy system under which some of the most exhausted workers in the country wind up with their premiums double and their coverage cut in half.
When will clawbacks be in order for that ruinous decision?
Or, to take another example, when will restitution be exacted from those responsible for the subprime mortgage crisis and the financial devastation it triggered? As former New York mayor Michael Bloomberg noted in 2011, one of the key culprits in the meltdown was, plain and simple, Congress. Obsessed with boosting homeownership rates, Congress passed laws that forced lenders to soften underwriting standards and make it easier for home buyers with weak credit to get mortgages. When the inevitable day of reckoning came, millions of ordinary Americans suffered. But no Capitol Hill eminence resigned in disgrace or gave up a paycheck.
Time and again, members of Congress make foolish decisions that have terrible impacts. Fuel-economy standards imposed by Washington lead manufactures to make cars smaller and lighter and therefore deadlier. Collective bargaining in the public sector forces ordinary taxpayers to bear the cost of government employees exorbitant perks and pensions. Agricultural subsidies drive up the price of food. Federal minimum-wage hikes make it harder for low-skilled workers to get jobs. The ban on incentives for organ donors condemns hundreds of patients to die needlessly every year.
If corporate leaders like John Stumpf deserve to be raked over the coals when their business actions lead to wretched outcomes, there is no reason why government leaders like Elizabeth Warren shouldnt be subjected to equally withering denunciations when their legislative actions cause widespread harm. But it never seems to work that way, does it? Members of Congress dont hesitate to unleash the Furies on anyone whose misjudgment it is politically advantageous to attack. Of their own misjudgments they are infinitely tolerant and voters, they know, have short memories.
Jeff Jacoby can be reached at firstname.lastname@example.org. Follow him on Twitter @jeff_jacoby.
Even as public sector banks continue to be weighed by weak credit growth and poor asset quality, a few small regional private banks that continue to deliver healthy growth in loans and earnings offer a good opportunity for investors. City Union Bank that has a strong foothold in South India has been able to deliver healthy traction in loans, driven by the MSME (micro and small and medium enterprises) and wholesale and retail traders segment. These high yielding segments constitute a little over half of the bank’s portfolio. The bank’s focus on secured lending, cautious approach to corporate lending, improving margins and strong capital base are key positives.
Investors with a two to three years time horizon can invest in the stock. It trades at 2.2 times its one year forward book value, higher than its three-year historical average of 1.6 times. However, the valuations of most private banks have gone up sharply in the past year, a typical case of too many investors chasing too few opportunities.
Nonetheless, expected earnings growth of about 20 per cent over the next two years, sound return ratios — return on asset of 1.5 per cent and return on equity of 15-16 per cent — and strong capital position still offer good upside for investors.
City Union Bank’s strong presence in South India, particularly in Tamil Nadu, where more than half its branches are present, has helped it build a strong SME (small and medium enterprises) client base. This along with the traders segment has kept the bank’s loan growth in good stead over the last couple of years.
In the latest June quarter, the bank continued to deliver strong loan growth of 19 per cent year-on-year. Itssteady growth in loans is encouraging and its cautious stance on the corporate segment lends comfort. The management is not in favour of pursuing aggressive growth in loans at the cost of compromising asset quality. The bank’s focus on working capital loans (65 per cent of loans) and secured loans (99 per cent of its loans) also mitigates risk.
The bank is well capitalised for growth over the next two years. Its Tier I capital ratio stood at 14.76 per cent as of June 2016. The management expects 15-18 per cent growth in loans in the coming year, and will look at growing at a faster pace once the economy improves.
Aside from healthy traction in loans, notable improvement in margins has also kept earnings in good stead. Over the past year or so, the rate easing by the RBI has led to a fall in both lending and deposit rates. But for City Union Bank, the fall in yield on advances has been lower than the reduction in the cost of deposits. This has aided margins.
The bank’s strong retail deposit base has also aided margins. The net interest margin (NIM) improved from 3.4 per cent in 2014-15 to 3.8 per cent in 2015-16. In the latest June quarter, the NIM inched up further to around 4 per cent. The margin may contract over the long run as competition builds up. But it should remain within the 3.5-3.7 per cent band.
Bad loans under check
With the stress in the banking system, City Union Bank saw its bad loans inch up from 1.8 per cent of loans in 2014-15 to 2.4 per cent in 2015-16.
However, the slippage ratio (additions to bad loans as a percent of loans) has been moderating in recent quarters and the trend is likely to continue. The management expects the slippage ratio to remain in the 1.75-2 per cent range for 2016-17; in 2015-16, the ratio stood at 2 per cent and in the latest June quarter it was 1.8 per cent (annualised).
The management has indicated though that it is facing challenges in liquidation of collaterals. This is expected to improve as the economic cycle picks up.
ISLAMABAD: Auditors have expressed concerns over the existence of Pakistan Hunting and Sporting Arms Development Company (PHSADC) for its poor financial standing.
The company established to divert the skilled gunsmiths away from grey market to a formal export-oriented sector is in stress financially, according to the Auditor General of Pakistan’s report 2015-16.
The report highlighted that the company incurred expenditure of Rs13.64 million against the total income of Rs5.43m in 2014-15.
“The company’s management needs to explain the reasons for its failure. Instead of its primary objective, the main source of income for PHSADC was the profit on investments and the profit on bank accounts,” the report highlighted.
The company increased its investment in banks by 18.75 per cent to Rs70.58m in 2014-15 compared to Rs59.44m in 2013-14. However, returns were Rs4.83m in 2014-15 against Rs5m in 2013-14.
The company faced an overall deficit of Rs100.3m as of June 30, 2015. “These conditions indicate that the existence of a material uncertainty cause doubts about the company’s ability to continue as a going concern.”
Meanwhile, PHSADC Chief Executive Officer Tahir Khattak refuted the charge sheet.
“We are not a commercial entity but a sector development institution,” Mr Khattak said, adding that we are neither in manufacturing nor in selling of arms or accessories, PHSADC helps develop the sector and not a competitor to the private sector.
The PHSADC established in 2006 by the Ministry of Industries and Production as a subsidiary of Pakistan Industrial Development Corporation (PIDC), with the target to promote quality hunting and sporting products for local and international markets.
The Auditor General Report has also highlighted issues related to the establishment of Common Facility and Training Centre (CFTC), which was initiated in 2011-12 at the cost of Rs48m.
“The project could not be started and the matter required detail investigation for mis-utilisation of funds along with cost escalation of the project,” the report added.
But Mr Khattak has said that the establishment of the CFTC was delayed because there was no board of the company for a long time and added that the CFTC would be operational in the first week of November.
The units manufacturing fire arms such as shotguns, pistols and rifles, knives and daggers, including multi tools and archery equipment, leather and fabric accessories such as belts and slings, holsters, shot shell bags, gun slips, rucksacks sleeping bags, tents and other outdoor accessories fall under PHSADC domain. Units producing sports wears also fall under the ambit of PHSADC.
The main centres of such units are Dara Adam Khel, Peshawar, Wazirabad, Sialkot, Gujranwala, Lahore and Karachi.
However, the main firearms manufacturing units are situated in Peshawar, that have been established by the government to streamline the gun manufacturing workshops into the formal sector.
Published in Dawn October 11th, 2016
A report released earlier today by Peel Hunt about (LON:OSB) Onesavings Bank maintains the target price at 270GBX
Onesavings Bank (LON:OSB) had its target price maintained to 270GBX by Peel Hunt in an issued report issued 8/15/2016. The new target price implies a possible upside of 0.18% based on the company’s most recent closing price.
Previously on 7/21/2016, Barclays Capital reported on Onesavings Bank(LON:OSB) recommending Equal weight with a target price of 215GBX that indicated a possible upside of 0.00%.
Yesterday Onesavings Bank (LON:OSB) traded 1.82% higher at 229.70GBX. The company’s 50-day average is 211.42GBX and its 200-day moving average is 274.79GBX. The last close is down 16.41% relative to the two hundred day moving average, compared with the Standard amp; Poor’s 500 Index which has decreased 0.00% over the date range. Volume of trade was was down over the average, with 305,811 shares of OSB changing hands under the typical 419,338 shares..
See Graphic Below:
Onesavings Bank has a one-year low of 173.20GBX and a 52 week high of 412.60GBX with a P/E ratio of 7 and has a market cap of 558.4M GBX.
A total of 10 brokers have reported on the stock. Three firms rate the stock a strong buy, two analysts rate the stock a buy, four analyts rate the company a hold, one brokerage rate the company to underperform, and lastly zero analystsrate the stock as sell with an average target stock price of 338.20GBX
About Onesavings Bank (LON:OSB)
OneSavings Bank plc (OSB) is a United Kingdom-based lending and retail savings company. The Company operates through three segments: Buy-to-Let/SME, Residential Mortgages and Personal Loans. The Company provides Buy-to-Let mortgages secured on residential property held for investment purposes by experienced and professional landlords and commercial mortgages secured on commercial and semicommercial properties held for investment purposes or for owner occupation. It also provides residential development finance to small and medium sized developers and secured funding lines to other lenders. The Company lends to owner-occupiers with a geographical bias towards London and the South East. OSB also offers bespoke residential first charge, and second charge and shared ownership mortgages through specialist brokers. It also provides secured funding lines to other lenders. The Company also offers unsecured lending services.
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Discovery, the health-insurance administrator that has sold nine out of every 10 Apple watches in South Africa to encourage its members to exercise, has hired a team of bankers as it steps up efforts to create a new lender.
“We ‘re flat-out with the infrastructure and the regulatory process for banking,” co-founder and chief executive Adrian Gore said.
“We’ve got the capital, we’ve hired bankers, we’re building substantial systems. We want to make an offering that’s relevant and can win market share,” he said.
Gore started Discovery as a private health insurer in 1992 and has since expanded into investments, credit cards, life insurance and property and casualty cover.
With partnerships across the US, China, Europe, Singapore and Australia, Discovery has access to a network of more than 200 million customers it can tap for its Vitality loyalty programme, which offers discounts to people who keep fit and eat healthily in a bid to lower claims against its policies.
Discovery offers Apple watches – which sell from R6 000 on the iStore website – via Vitality to members who have a credit card through the company for a one-time fee of R350.
Customers who maintain and increase their exercise regimes over the next two years will not have to pay for the watches, while missing their goals means having to make monthly payments depending on how much they fall short.
“We ‘ve distributed more than 30 000 Apple watches,” Gore said.
He wears one himself and is known to walk at least five flights of stairs to his office, where a range of dumbbells lie near his desk.
Discovery, which has alliances with insurers including AIA Group and Ping An Insurance Group of China, planned eventually to offer the Apple Watch programme in the US, Asia and the UK, he said.
Banking might boost future earnings, he said.
A year ago, Discovery said it wanted to build a lender after buying control of its credit-card unit from FirstRand, Africa’s biggest lender by value.
It hired former bank executive Barry Hore to head the team and has applied to the Reserve Bank for a licence.
Five lenders control more than 89% of South African banking assets and at least 16 other companies and 15 local branches of international banks offer services from private banking to wealth-management services and unsecured lending.
The company’s Discovery Card unit hasmore than 250 000 customers.
“We ‘re looking at the modern and traditional structures that people need,” Gore said. “We ‘ve got a good embedded base with Discovery Card . . . It will take a year or two to get it into the market.”
A former top executive behind China’s biggest acquisition of an overseas carmaker is setting out to make history twice, raising $1 billion in an initial fundraising round as the latest homegrown electric vehicle startup to challenge Tesla Motors Inc.
Freeman Shen left Volvo Cars owner Zhejiang Geely Holding Group Co. in 2014 and last year founded WM Motor, which he says has secured funding from both domestic and overseas investors. WM plans to introduce its first model in 2018 and boost production to more than 100,000 units annually within the following three years, he said Tuesday.
“We have profound experience in the industry, which distinguishes us from other startup companies, even Tesla,” Shen, who’s worked in the auto industry for 22 years, said in an interview in Shanghai. “We don’t want to make toy-like luxury cars for the minority. We will target the mass market.”
Secure Trust Bank PLC is engaged in providing banking and financial services. The Companys principal activity is banking, including deposit taking, and secured and unsecured lending. The Companys segments include Business finance, including Real Estate Finance, which offers buy-to-let and development loans secured by the United Kingdom real estate; Asset Finance, which offers loans to small and medium sized enterprises to acquire commercial assets, and Commercial Finance, which includes invoice discounting and invoice financing; Consumer finance, including Personal lending, which provides unsecured consumer loans sold to customers through brokers and affinity partners; Motor finance, which hires purchase agreements secured against the vehicle being financed, and Retail finance, which includes point of sale unsecured finance for in-store and online retailers, and Other, including Current account, OneBill, Pay4later, Rentsmart and debt collection.