Thursday, February 28, 2013

RBS Reports £5.2BN Loss

RBS, the bank 81% owned by the taxpayer, has reported its fifth year of losses. This year the loss comes in at £5.2BN (the previous year the loss stood at £0.8BN).

Despite the loss, RBS has paid out £679M in bonuses.

RBS has taken a £5BN charge for loan impairments, which are write-offs to cover loans that are unlikely to be repaid. However, with the bank preparing itself for privatisation the size of the provisions and general atmosphere of "clearing the decks" should not come as too much of a surprise. RBS, by getting the bad news out of the way now, will be able to trumpet its achievements and progress when it is ready to return to the private sector.

Wednesday, February 27, 2013

Barclays Fines Staff For LIBOR Fraud

Barclays will impose £450M of financial penalties on its staff for rigging LIBOR.

Sky News reports that Barclays will disclose details in its forthcoming annual report. The "fines" will be levied against the "variable pay", ie bonuses and deferred share awards of the staff.

However, it should be noted that Barclays will still award £1.8BN in bonuses to its staff.

Tuesday, February 26, 2013

The £50M Rail Fare

Thanks to the West Coast rails shambles, akin to a Whitehall farce, the hapless taxpayers will be saddled with with a bill of at least £50M.

The £5BN contract, which was originally awarded to FirstGroup, had to be scrapped following complaints by Virgin Trains about the process; Virgin have been allowed to continue operating the service until November 2014.

The Public Accounts Committee (PAC) have published a report today that castigates the whole shoddy process. Margaret Hodge, chairman, in fact warned that the final cost “will be very much larger” after taking into account investment delays and the knock-on effect on other rail franchise operators.

She is quoted by the Telegraph:
The franchising process was littered with basic errors. Senior management did not have proper oversight of the project. Cuts in staffing and in consultancy budgets contributed to a lack of key skills.”
PAC accused the Transport Department of having a “blinkered and rushed approach meant the competition was not run properly”.

The question is, will the Transport Department learn from these mistakes and do better next time?

Monday, February 25, 2013

Study Plan For CFA Level 1

I have registered for the CFA Level 1 exam scheduled on 7 December and the much anticipated books arrived last week. I was quite astonished as I didn't expect level 1 to have as many as 6 books. On the first few pages of Volume 1, there is a part in the "Designing Your Personal Study Program" section which says:

"Successful candidates report an average of over 300 hours preparing for each exam. Your preparation time will vary based on your education and experience. For each level of the curriculum, there are 18 study sessions, so a good plan is to devote 15 to 20 hours per week, for 18 weeks, to studying the material."

The recommended plan requires me to study 15-20 hours per week, translating to 2-3 hours a day. As I will be working full time during that period, I don't think the recommended study plan stated in the book is feasible. 1.5 hours per day will sound more reasonable. However, by studying just 1.5 hours a day, I will need about 28 weeks in order to clock the recommended 300 hours. This means I have to start preparing for the CFA exam 28 weeks (7 months) in advance, which is at the start of May 2013.

The last paper for my university final exam is at the end of April and I have to start studying for CFA at the start of May. Moreover, I will be starting work full time in June 2013.

2013 is going to be a really hectic year!

BBA Blames The Weather For Savings/Lending Imbalance

The British Bankers' Association (BBA) reports that personal deposits rose by 6.2% over the year to January. However, net mortgage borrowing from the banks grew by a mere 0.2% in the year to January.

The reason for such an imbalance (despite pressure from the government for the banks to lend more)?

The BBA blame the weather!
BBA statistics director, David Dooks said:
January’s severe weather impacted adversely on what was already a subdued picture of borrowing demand from households and businesses. While general economic growth stalls, low consumer and business confidence generates a natural tendency to restrain borrowing appetite, repay borrowing where possible and to build up cash and savings as a buffer.”
Weasel words!

The reality is that banks are doing all they can to shore up their balance sheets, lest another self inflicted financial storm rocks their boat.

Friday, February 22, 2013

Eurozone To Remain In Recession

Despite, at the end of last, year claiming (albeit improbably) that the Eurozone would return to growth this year the European Commission  has finally been forced to face reality and has announced that in the return to growth will not occur until next year.

No surprises there then!

The European Commission has stated in its report, optimistically/foolishly entitled "Winter forecast 2013 - The EU economy: gradually overcoming headwinds", that the Eurozone will contract by 0.3% this year, but will grow by 1.4% next year.

Amusingly it predicts growth for 2014 within the European Union as whole as being 1.6%, ie 0.2% better than within the Eurozone!

That estimate is of course subject to revision!

Thursday, February 21, 2013

Wednesday, February 20, 2013

How Do I Choose Between a Fixed and a Floating (Variable) Rate Home Loan?

The following is a guest post by Property Buyer

People are almost always caught up with the decision of which Singapore home loanis best for them - within themselves, there is always the constant debate of whether one is better than the other. Will choosing a mortgage type depend on the person’s intelligence, instinct, bookkeeping skills, or attitude on sound money management? How does a buyer’s situation affect his or her decision to use either a fixed or a floating home loan?

Fixed-rate mortgage

Mortgage packages offering a fixed home loan rate provide a specific constant rate for a certain period of the loan.

For example, if you are buying a house now with a fixed rate home loan at 2.3% per annum, then the 2.3% per annum would be the interest rate for the fixed period which could vary between 3 to 5 years, depending on your package and its terms.

After the fixed period ends, the interest will convert to a 1) variable loan package rate, or 2) rate pegged at a discount below the bank's board rate.

The following illustrates an example of the rate structure for a fixed rate package.

Bank Y Fixed-rate Loan
Interest Rate (p.a.)
First Year
Second Year
Third Year
Fourth Year Onwards
0.50 % below the Board Rate

During this fixed period, if there are changes in the interest rate environment to a lower rate, the borrower will have a higher opportunity cost as he may be able to enjoy lower loan rates with a variable rate loan instead.

Floating (variable) rate mortgage

The interest rate for this loan type is dependent on the base rate and the spread or margin being used by the bank or lender. Borrowers who are savvy about interest rate movements often choose the floating home loan rate to obtain cost savings, especially those who are financially secure and in total control of their wealth as they will be able to afford the higher interest payments shall rates suddenly soar.

Most of the floating (variable) rate mortgages use a interest rate that is benchmarked against SOR (Singapore Swap Offer Rate) or SIBOR (Singapore Inter-bank Offered Rate), which is the variable component of the interest rate.

The bank will add a spread or margin to SIBOR or SOR. Together, the two will form the interest rate. For instance, the rate could be 3-Month SIBOR + 1% , where the 1% is the spread.
The spread is usually adjusted upwards after the first few years of the loan. An example of an interest rate structure for a floating rate loan follows.

Bank X SIBOR Loan
Interest Rate (p.a.)
First Year
0.75% + 1-Month SIBOR
Second Year
0.75% + 1-Month SIBOR
Third Year
0.75% + 1-Month SIBOR
Fourth Year
1.00% + 1-Month SIBOR
1.25% + 1-Month SIBOR

What are the factors you should consider when deciding which loan type to use?

1. Understands market interest rate trend
Accuracy is very important in forecasting and tracking interest rate trend. If you are able to do so, you can derive significant interest payment savings from a floating (variable) rate loan during a low interest rate environment.

2. Financial and health uncertainties
If you are unsure about your financial capacity and health a few years from now, then the fixed home loan rate is best for you. You can lock in and secure the rate for the fixed duration.

3. Cash repayments
Paying your loan in cash every month with a fixed home loan rate makes financial planning easier. Use iCompareLoan home loan comparison system to learn the rates for the different loan packages to help you find the ideal mortgage package.

4. Tolerance for risk
Each type of home loan rate has its own benefits. The question is how far can you tolerate a higher rate?

Of course, no one will be sad to accept a lower rate, but, considering your financial capacity, can you afford  paying a higher rate for a certain period of time? If yes, you can consider a variable rate loan because with it you can have reduced interest payment when interest rates are low, but you will have to incur greater payment if rates climb.

Given the many factors you have to take into account when deciding between the two types of loans, you may prefer some professional help. Turn to the friendly and experienced mortgage brokers at www.iCompareLoan.comtoday.

For more related articles, please visit the following websites:

About Property Buyer
We are a research-focused Singapore mortgage consultancy which helps you compare Singapore home loans either for new loans or refinancing. We use loan reports from Singapore's best loan analysis system (exclusive to us) at serve our customers.
Our services are completely FREE to you as the banks pay us a referral fee upon loan disbursement.
SMS: (65) 9782 8606

Greece On Strike and Ready To Explode

Despite the fact that the media's attention had temporarily moved away from Greece over the past few weeks, the fundamental problems blighting the Greek economy (and by definition the Eurozone) have not gone away.

Today Greece is at a standstill as there is a general strike, called in protest against the ongoing austerity forced upon the people by the Eurozone and the criminal irresponsibility of earlier Greek administrations.

Reuters reports that 60,000 Greeks took to the streets of Athens today beating drums and chanting "Robbers, robbers!", they marched to parliament in the biggest anti-austerity protest so far this year.

Much of Greece has been brought to a standstill.

President Karolos Papoulias is quoted by Greek Reporter:

We are faced with a societal explosion if any more pressure is put on society.”
The tipping point will be when the government finally runs out of money, and is unable to pay the workers. That point is approaching fast, as local media reports that 2.5 million tax payers will be sent notices next month demanding overdue payments which indicates that tax revenues are falling far short of collection targets.

Unemployment Down?

According to the Office for National Statistics (ONS) unemployment ahs fallen:
"The unemployment rate was 7.8% of the economically active population, down 0.1 percentage points on July to September 2012 and down 0.6 on a year earlier. There were 2.50 million unemployed people, down 14,000 on July to September 2012 and down 156,000 on a year earlier."
Yet the job market seems to be extremely tight. According to the Guardian, over 1,700 people have applied for eight jobs at a new branch of Costa in Mapperley.

It seems that the apparent fall in those officially unemployed may in fact represent a shift "off balance sheet".

Monday, February 18, 2013

FSA Faces Legal Action

Two weeks ago I berated the toothless and useless FSA for kowtowing to the banks and giving them a "get out of jail card" for the rate swap mis-selling scandal, in the form of a £10M ceiling on the size of swaps for which compensation can be claimed.

The government, fearing that it will be associated with the failure of the FSA, has finally woken up to this mess. Greg Clark, Financial Secretary to the Treasury, has told the FSA that banks must allow businesses that could have been mis-sold an interest rate swaps to cease making premium payments.

The Telegraph reports that Clark privately told the FSA that its finding that more than 90% of interest rate hedging products had likely been mis-sold to SMEs was a “game changer”.

By way of "coincidence" the FSA faces legal action over its compensation scheme.

Law firm Manches is preparing to launch a judicial review against the FSA, which it claims “acted unreasonably in establishing and changing the criteria for businesses to be within the review”.

In particular, Manches will challenge the introduction of the £10M cap. Rich Eldridge, a partner at Manches, said the FSA had used its powers “improperly”:
The cap is illogical. An indicator of mis-selling is a swap for more than the loan. If a business with a loan of £9m is sold a swap of £9m it can be within the review. If the same business is sold a swap of £11m it cannot. The £11m swap is worse as the swap is more than the debt, but the £10m cap allows the bank to escape the review procedure for this swap.” 
The sooner we are rid of the ineffective and useless FSA the better!

Friday, February 15, 2013

Whitbread Tests Positive For Horsemeat

Despite admitting that some of its lasagne and burger products have tested positive for horsemeat, Whitbread shares are currently showing a modest 0.24% rise (as at the time of writing).

Tuesday, February 12, 2013

Project Transform - Barclays Faces An Uphill Struggle

Barclays has announced that it will cut 3,700 jobs (1,800 of them in its investment banking division) and £1.7BN of costs, as part of Project Transform which is designed to restore confidence in both its finances and its tattered reputation.

As Barclays fully realises a good brand and reputation takes years to build but days to destroy, the uphill struggle to restore confidence will take many years.

Monday, February 11, 2013

BBC Berates Barclays

Barclays and the BBC have fallen out over claims in a Panorama programme entitled "Inside Barclays: Banking on Bonuses", to be broadcast tonight, that Barclays misled shareholders.

As per the BBC:
"After a series of controversies, bosses at Barclays say they're changing the culture of the bank. But what went wrong? Reporter Richard Bilton investigates the bonus culture that drove one of our biggest banks."
Panorama will accuse Barclays wrongly naming Manchester City owner Sheikh Mansour as the source of £3BN of bail-out money received during the banking crisis in 2008. The money helped Barclays stave off a government rescue akin to the ones used to prop up RBS and Lloyds TSB.

Panorama will state that the money came from the Abu Dhabi government, and that this was not properly disclosed in its 2008 accounts.

However, Barclays contest that it re-drafted all financial documentation “overnight” once the change had been identified except for one mention in the accounts, which it blames on a “simple drafting error”.

Barclays are quoted by the Evening Standard:
We have repeatedly demonstrated to Panorama why the allegations which they plan to make in their programme are completely unjustified. 

Barclays is satisfied that the steps taken to disclose the change in ownership of the companies which were investing in the bank in 2008 were entirely appropriate. The change in ownership of the investing companies had no bearing on the transaction or required approvals.”
Professor Alistair Milne, an expert on financial regulation in the City, said banks are expected to release accurate information about major deals.
"Any discrepancy of that kind is serious because it raises questions in the minds of investors. Every bank is well aware the annual report is a critical document and a huge amount of time and attention is put in to trying to get all the details correct."

For good measure, the programme also claims that Barclays helped clients avoid tax on an “industrial” scale.

Friday, February 8, 2013

EU Budget Fudge Cake

It appears that the leaders of the EU may be within a whisker of agreeing the EU budget for the next seven years.

According to the BBC the next seven year EU budget (estimated at being Euro 908BN/£774BN) is more than 30BN Euros (£25.5BN) lower than the one it will replace.

There is of a course an irony for the UK, as thanks to Blair, our contributions to the EU budget are rising; it is in fact possible for UK's cash contribution to increase by between 1.3% - 1.6%.

Thursday, February 7, 2013

EU Budget Round II

The EU budget negotiations resume today in Brussels, having failed last November to reach an agreement EU leaders will attempt to cobble something together that won't result in them being lynched by their voters when they return home to their respective countries.

The FT reports that Herman Van Rompuy, the European Council president, will unveil a compromise proposal somewhere around €960BN a reduction from the €972BN proposal that failed last November.

Given that Europe is wallowing in recession, thanks in no small part to the Euro crisis and the inept handling of that crisis by Eurozone finance ministers, even if a deal is agreed by the leaders of the EU the hapless citizens of the EU are the ones who will pay for it and are increasingly resentful of having to do so.

Wednesday, February 6, 2013

RBS Does A Deal With The DoJ

The Royal Bank of Scotland (RBS) has done a deal with the US Department of Justice (DoJ) over its involvement in the LIBOR scandal.

Sky reports that RBS' UK subsidiary has signed a two-year deferred prosecution agreement with the DoJ, as part of a package of measures that will include almost £400M in fines.

This means that if RBS commits any form of criminal offence during the two-year period, it could find itself excluded from the US market.

Additionally, 21 RBS employees have either left or have been disciplined as a result of Libor-related misconduct.

John Hourican, head of RBS's investment bank, will step down and forfeit about £4M in deferred share awards despite having had no involvement in or knowledge of the malpractice.

RBS will make a statement on the matter at 13:00 today.

Tuesday, February 5, 2013

Barclays Ups Mis-selling Provisions By £1BN

Barclays, the bank with a finger in every pie, has announced that it will increase its mis-selling provisions by another £1BN. The provision for mis-selling of payment protection insurance (PPI) will be increased up by £600M and the provision for the interest rate swaps by £400M.

Total provisions for mis-selling now stand at £2.6BN.

Give a man a gun and he can rob a bank, give a man a bank and he can rob everyone.

Barclays - The Bank With a Finger In Every Pie

As per Louise Armitstead:
"Tyrie to Walker and Jenkins: “Doesn’t matter what the scandal is, Barclays seems to have its finger in every pie… can you change this?"

Monday, February 4, 2013

FSA Kowtows To The Banks

Last week the FSA stated that banks had mis-sold around 90% of rate swaps. Martin Wheatley, chief executive designate of the Financial Conduct Authority stated:
"We believe that our work will ensure a fair and reasonable outcome for small and unsophisticated businesses."
Was this statement an indication of a new tough approach by the FSA against mis-selling by the banks?

Unfortunately, for the hapless SME's who were sold these products, the answer is no.

The Independent reports that banks have been given a "get out of jail card" by the FSA, in the form of a ceiling on the size of swaps for which compensation can be claimed. What the FSA chose to hide in their statement last week was the fact that swaps of £10M and above will be excluded from the review that it has ordered banks to undertake, this exclusion will mean that banks will be exempted from compensating companies that took swaps of £10M or more out.

Aside from the fact that the FSA has yet again proved that it is weak and toothless when pressured by the banks, this exemption is a clear indication that banks are in a weak financial position (ie the industry cannot afford to take another £10BN hit akin to the PPI scandal).

The sooner the FSA is expunged from history, the better!

Sunday, February 3, 2013

Avoid Cash Top-Up For HDB Monthly Mortgage Instalment

According to HDB's website, 

"Buyers must use all the available savings in their CPF Ordinary Accounts for the purchase of or taking over the flat before any housing loan is granted by HDB."

This means that you have to deplete your CPF Ordinary Account (CPF OA) before a HDB loan can be granted. Your subsequent monthly CPF contribution will then be used to service the HDB monthly mortgage instalment. If your monthly contribution to the CPF ordinary account (23% of gross income) is insufficient to cover the monthly mortgage instalment, you have to top up the shortfall in cash. 

Assuming you bought a HDB BTO flat for $400,000, the 10% down payment, stamp fees and other fees will to approximately $50,000. You and your partner have accumulated $70,000 in your CPF OAs. According to HDB regulation, you have to deplete this $70,000 before any housing loan is granted by HDB.  However, the required amount you have to pay is only $50,000. This excess $20,000 is used to offset the purchase price, thereby reducing the loan you need. This sounds like a good idea but in the event that either you or partner gets retrenched, a substantial amount of cash-top up will be needed every month and this can put a huge strain on your finances. What you need is a buffer in your CPF OA for any unexpected circumstances. 

So how do you build a buffer when HDB requires you to deplete your CPF OA before a loan can be granted? With reference to the example above, all you need to do is to transfer the excess $20,000 into a CPF Investment Account by buying some investment products before you pay the down payment. After the HDB loan is granted, you can liquidate the investments and transfer the money back to your CPF OA. This excess $20,000 should be enough to cover at least a few months of mortgage instalments. Also, if your monthly contribution to the CPF OA is insufficient to cover the mortgage instalment, the $20,000 buffer can cover the shortfall and no cash top-ups will be needed. However, do note that the first $20,000 in your CPF OA cannot be used for investments in the CPF Investment Scheme. 

While paying a higher down payment can reduce the amount of the mortgage loan and monthly instalment, a buffer in the CPF OA provides more security and acts as an insurance to safeguard your finances against any unforeseen circumstances. At the end of the day, it all boils down to personal preference and balancing the trade-offs.