Treasury Risk, Cash, Debt, Compliance and Corporate Finance ...

Post-Summer Risk Recommendation

I really think that we are facing a potentially very disruptive period for business in the coming 12-18 months and I would strongly advise more rigorous application of risk management techniques in producing financial and business plans as all of you face into your budgetery processes after the summer break.

This is not meant to be scare-mongering. but the macro-economic scene is volatile, the banking sector is still in crisis internationally and there is a real risk of social unrest with associated political consequences.

It would appear that we may have come to a time of re-definition of many aspects of our lives.

On the banking front, the relationship between state and the sector has not been sorted. Bailouts (at the cost of taxpayers) were required but the quid pro quo of support for industry and individuals has not yet arisen (Ireland is not unique in that regard).

Worse than that, the mantra of ?owe a little, it?s your problem, owe a lot, it?s the banks? seems to hold true here. The ability of those owing tens and hundreds of millions running to the UK and having a clean slate within 12 months while ordinary folks struggle to meet their commitments will eventually lead to problems.

We have also seen a suggestion in the media of increased protectionism ? ref. the hard stance taken in the US on non-US banks which is raising hackles in the UK (will the $1bn fine of Samsung in the US courts be similarly viewed?). All in all, I think that the period to the end of next year will be significant. Please push risk management to the top of the agenda ? remember, risk also brings rewards to those who are ready: avoiding risks that hit competitors IS a competitive advantage.

I respectfully suggest that you all should undertake a risk healthcheck as part of the 2013 budgetary process.

Banking and Finance

Busy week on the banking front again.

The main news in Ireland was the Central Bank report that suggested that the rejection rate by Irish banks was the second highest in the Eurozone despite the fact that they are also likely to face higher collateral requirements and higher interest rates.

New lending to the SME sector was only ?407m in Q1 2012. Credit outstanding to non-financial, non-property companies is now back to 2005 levels.

What is quite remarkable is the relatively low level of lending to the SME sector compared to the level of employment in the sector.

For example, the most recent interim statement presentation from Bank of Ireland shows ROI SME lending at ?11bn out of a total loan book of ?105bn. Corporate (non-SME, non-property) accounts for ?10bn in total although only ?2bn of that is in ROI. In fact of their total SME and Corporate loan book of ?25bn, just over 50% of it (?13bn) is in ROI.

It is also notable that they have used ?1.5bn of the funds borrowed in the LTRO to invest in Irish government bonds (something that was flagged here at the time of the LTRO). It is further notable that they appear to have borrowed ?12.3bn in the LTRO at 1% for 3 years which should allow them to reduce their cost of funds.

Difficult to square these circles.

Is it likely to get better in the short-term? Doubtful.

The increase in mortgages that are in trouble is both evident and not surprising ? it has been well marked here and elsewhere going back 2-3 years as the next logical problem. The probability of this getting worse is high as

1. Europe looks like remaining in negative GDP growth in Q3
2. Further tax increases in the next Budget have been flagged this week. As these taxes are related to property rather than income, then it will hit disposable income as it is not something that will be paid from earnings ? it must be paid regardless (the principle at this point is ludicrous), and?
3. Interest rates are at historic lows. With a large % of mortgages on trackers, they will eventually increase and, coming off a low base, the proportionate effect will be large. The inability to fix rates (or at market rates) will only make it worse.

We all know in business that if you have a problem, it?s best to make a big provision in one year, clear the decks and move on (as has been the case in the US banking crisis). What is happening here is that the worst case scenario modelled for bank recapitalisation will eventually arise as the problem is not only related to cashflow and repayment capacity but also to property prices and negative equity (as the banks write off the difference).

Again, it would appear that the authorities only deal with one side of the balance sheet ? but the core element of risk management is the related nature of ALL the risks and the requirement to manage them on an integrated basis is the solution.

Market Review

Eurozone. Quiet week in the Eurozone. Composite PMI rose to 46.6 from 46.5 in the previous month indicating that Q3 GDP in the eurozone is also likely to be negative. Consumer confidence also fell again in August.

UK. Q2 GDP was revised to a decline of (0.5%) compared to a first estimate of (0.7%) but retail sales (distributive trades) were worse in August. Public sector finances showed a deficit of almost ?0.6bn in July compared to a surplus of ?2.8bn in July 2011as tax revenues unexpectedly fell. Finally industrial orders fell to their lowest level since December 2011.

USA. The minutes of the last meeting of the Fed indicated further monetary stimulus was being considered. Durable goods rose by 4.2% in July. Manufacturing PMI rose by 0.5 to 51.9 in August. Existing home sales rose by 2.3% in July.

Foreign Exchange

The EUR weakened again last week against GBP and USD. End of week rates were EUR/GBP0.7845 and EUR/USD1.2295. The focus continues on political issues in the financial markets and the currencies are subject to significant influence from these rather than economic matters.

Interest Rates

3-year Euro interest rates were back 5 bp to 0.63%.

UK 3-year rates were unchanged at 0.87%. Finally US 3-year rates were also unchanged at 0.56%.

Training INTRODUCTION ? Treasury Risk ? Thursday September 27th 2012
Training ADVANCED ? Treasury Risk ? November 2012

Source: http://www.treasurysolutions.ie/market-watch-270812/

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