Tuesday, February 8, 2011

RBS CEO Sees Transparency As Necessary Part of Return to "Good Grace"

The Wall Street Journal published an article describing how UK banks are going to provide more transparency in their financial reporting. [emphasis added]
Investors in U.K. banks are about to get an added dose of transparency. 
...The planned change, likely to take place late this year or in early 2012, will end the longstanding practice of the banks disclosing results only twice a year, supplemented with nonnumerical updates in the spring and fall. 
The shift comes amid a Europewide push toward greater bank transparency. Lack of clarity about the contents of many European banks' balance sheets has fueled the Continent's recent financial turmoil. 
Quarterly reporting does not address the lack of clarity about the contents of a bank's balance sheet.  That can only be addressed by providing current asset-level data.  It is only this data that analysts can use to analyze the risk a bank is taking to generate its earnings.
While London is Europe's undisputed financial hub, and its banks are relatively healthy, their disclosure practices aren't in line with most peers. 
Most major European banks offer investors comprehensive breakdowns of their financial statements and balance sheets every three months. (Ireland's banks are the exception.)
All publicly traded U.S. companies, including banks, are required to make similar quarterly disclosures. 
But the U.K. has lagged behind, to the frustration of investors, analysts and some bank executives. Until 2009, the four big British banks were disclosing detailed financial data only after the second and fourth quarters. 
In the heat of the financial crisis in spring 2009, Royal Bank of Scotland Group PLC and Barclays PLC broke ranks and began publicly reporting first-quarter results and have been doing so since. 
Stephen Hester, CEO of bailed-out RBS, joked to analysts on a May 2009 conference call that the bank's 51-page financial statement "was done deliberately to torture you, which we enjoy doing. But it also was done because I believe very strongly that part of our route back to good grace can be achieved through transparency.
Your humble blogger agrees with Mr. Hester that the route back to good grace can be achieved through transparency.  Where transparency is providing market participants with access to all useful, relevant information in an appropriate, timely manner.

Your humble blogger does not feel that Mr. Hester goes nearly far enough with quarterly reporting.

The Financial Crisis Inquiry Commission report documented how quarterly reporting for financial institutions was inadequate and how current asset-level disclosure was needed.  From page 256 of the report:
Furthermore, when the crisis began, uncertainty (suggested by the sizable revi- sions in the IMF estimates) and leverage would promote contagion. Investors would realize they did not know as much as they wanted to know about the mortgage assets that banks, investment banks, and other firms held or to which they were exposed. To an extent not understood by many before the crisis, financial institutions had lever- aged themselves with commercial paper, with derivatives, and in the short-term repo markets, in part by using mortgage-backed securities and CDOs as collateral. Lenders would question the value of the assets that those companies had posted as collateral at the same time that they were questioning the value of those companies’ balance sheets.
Given the investment by the English taxpayers in RBS, it would be appropriate for Mr. Hester and RBS to adopt the gold standard for current asset-level disclosure so that English taxpayers will never again have to bail out RBS.

Naturally, the WSJ article documents the fact that global financial institutions are going to fight disclosing current asset-level information.
HSBC and Lloyds, however, stuck with their previous policies of semiannual financial reports. In the intervening periods, the banks provide "interim management statements" that offer a glimpse of their first- and third-quarter finances without actually divulging any numbers. Instead, the banks generally hint at how they are performing relative to market expectations and past periods. 
Last November, HSBC said its third-quarter profits were "well ahead" of the same period in 2009, which the bank hadn't actually disclosed, "although the run rate achieved was lower than in the first half of 2010." 
...Executives at Lloyds previously have defended limited disclosures. 
"I've got no intention to move to full quarterly reporting," Lloyds finance chief Tim Tookey said on an April 2010 conference call, when an investor pressed him on the dearth of hard data. "For us it doesn't actually reflect how the majority of the business is run and…I think it would be quite difficult to potentially confusing." 
Actually, providing current asset-level disclosure is neither difficult nor is it confusing.  There are many market participants, including competitors, who are perfectly capable of analyzing all this data and drawing useful conclusions from it.
... Analysts said they would welcome the shift. 
"It's clearly useful to investors to have some information, more than just being provided with tea leaves," said Joseph Dickerson, with London brokerage Execution Noble.
The current practice "looks very quaint and old-fashioned, this nod-and-a-wink management statement," said Simon Adamson of CreditSights Inc. "It's really out of tune with the prevailing mood at the moment."

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