Banking profits face Vickers hit

BRITAIN’S banks could see earnings slashed by nearly a third due to reforms proposed by John Vickers and his Independent Commission on Banking (ICB), analysts have said.

But they will at least have several years to implement the reforms. An aide to Nick Clegg has told City A.M. that despite fiery rhetoric from Vince Cable, the Liberal Democrats are willing to accept a long transition period.

“It’s fair to say that Vince rose to the bait,” said the aide. “What we want is a commitment to implement the legislation. We appreciate it will take a very long time [for banks] to implement.”

The changeover period will be welcome because the industry is already struggling under an avalanche of international regulation that experts say will destroy the viability of many banks.

But analysts say the ICB rules, coming on top of global initiatives, will put the City’s banks at a disadvantage compared to their foreign peers. They could also raise the cost of credit in the UK, even in the run up to implementation.

JP Morgan Cazenove’s Kian Abouhossein has estimated that Barclays and RBS would see their 2012 profits drop by 29 and 28 per cent respectively if they had to operate under Vickers’ regime. Lloyds would see earnings plunge by a quarter while HSBC would see four per cent sliced off its bottom line.

Vickers wants lenders to ringfence their retail operations into a subsidiary, capitalised separately from their investment banking operations. But the City is waiting on tenterhooks to hear exactly how the plan will work when the ICB’s final report is published on 12 September.

Chancellor George Osborne has already endorsed the policy, despite not knowing what any of the key details will be, which will make it difficult for the Treasury to change course.

Abouhossein estimates it could raise banks’ cost of funding by 94-113 basis points by making it impossible to transfer capital between certain business lines. Despite the additional cost, however, he says that the policy will not protect the global financial system: “A ringfence of a bank or part of a bank will not actually solve systemic global issues with UK banks having about £1 trillion of derivative fair value counterparty risk.”

Abouhossein’s model assumes that the ringfenced retail bank will need a core tier one capital ratio of ten per cent and an additional two per cent in contingent convertible bonds (cocos). It also assumes a maximum allowable loan-to-deposit ratio of 150 per cent, higher than in the ICB interim report.