NatWest, Lloyds Post Mixed FX Results After Poor Markets In 1994 First Half
BANKS
Foreign exchange results were mixed at National Westminster Bank and Lloyds, the first two U.K. banks to report interim earnings. While neither showed any improvement over the first half of 1993 or over last year's second half, market-maker NatWest was clearly much harder hit by this year's turbulent markets than the smaller, conservative Lloyds.
FX income for the first half of 1994 dropped 25 per cent at NatWest to £91 million from £122 million for the same period in 1993, the bank reported last week. Gains were also down compared with the second half of 1993, when they were £117 million.
NatWest resumed breaking out its FX income this year (largely, officials admit, after pressure from "analysts and certain journalists" - i.e. FX Week) after a year's hiatus in 1993. The bank has made a change in the basis for the figures since 1992; it no longer includes any earnings translation in the FX number, according to investor relations officials, who say the figure includes FX options as well as spot and forwards.
Underestimated Gains
Income from the NatWest branch network, as well as from the NatWest Markets dealing rooms, is also included, officials say. Consequently, FX Week slightly underestimated the bank's 1993 FX income, suggesting a too-high first half figure, £128 million, and a too-low second-half figure, £103 million - overall, off by £8 million on the actual year-end number .
On overall trading, NatWest did better than many U.S. banks in the first half, actually improving its performance over the 1993 period from £242 million to £251 million. But trading income dropped from the second half of last year, when it was £266 million. The main gain was in swaps trading, according to the report, which more than doubled from £44 million in the 1993 first half to £93 million this year - flat against the £94 million earned in the second half of last year.
Bank officials attribute the fall in FX gains to "reduced volatility and narrower spreads," even though, according to chief financial officer Richard Goeltz, customer business increased during the period by some 50 per cent - or at least what he called "the notional principal of customer business outstanding" on June 30 this year did compared with the amount last year. He said that during the first half this year, volatility in cable, NatWest's most important currency pair, was "half what it was" during the same period last year, resulting in narrower bid-asked spreads for NatWest's primarily customer-driven market-making business.
Paul Winchester, NatWest's U.K. and Europe treasurer, says the bank is "satisfied with customer business, which is still increasing," despite the lack of volatility. "It hasn't been a good market, which is true for our competitors as well." However, he is optimistic about the second half of the year - market conditions continued to improve throughout June and July, he says.
Winchester says the bank has seen a certain amount of staff turnover during the period, but has not increased numbers much overall - however the marketing teams, particularly, have been strengthened. Currency options has been a strong performer this year, he adds.
Since Michael Cornford's departure last month (FX Week, August 1), a committee chaired by global treasurer Stephan Harris has run the FX group. Winchester, Singapore treasurer Frank Wong and New York treasurer Cian McHugh also sit on the committee, says Winchester. However, he says, McHugh is slated to return to London in the near future and is not yet clear who will replace him in New York.
Lloyds Results
Foreign exchange income was flat at Lloyds for the first half of this year compared to the same period in 1993, but slightly down on the second half of last year, officials reported on July 29. The bank posted a £57 million interim gain, the same figure as last year's first half, while the 1993 second-half number was £59 million.
FX was the bright spot in an otherwise dismal performance in dealing - the bank lost £5 million in securities trading for the period, resulting in an overall dealing income figure of £52 million. Last year, the first-half dealing result was £86 million, reflecting a £29 million securities trading gain.
Nonetheless, Lloyds' securities hit was "tiny" compared with the massive losses shown by some U.S. houses during the turbulent bond markets earlier this year, said Lloyds chief executive Sir Brian Pitman, who added that the bank's losses were almost entirely outside the U.K. According to bank officials, Lloyds kept FX performance up and escaped fairly lightly from the bond market meltdown because of its conservative risk-taking policies.
'Steady as she goes' is again the message about Lloyds' foreign exchange trading group from treasury and capital markets director Alan Moore . "We trade consistently and successfully around the world," he says. However, Moore says, Lloyds has no plans for additional overseas expansion beyond its current presence in London, New York, Tokyo, a few European centres, South America and Australia.
He says the bank's customer flow, the cornerstone of its FX business, has remained fairly stable. "We're looking for quality of earnings" - rather than spectacular, but erratic profits, he says.
Unlike the other British clearing banks, which have seen major staff changes during the period, Lloyds has not lost any senior staff or made any significant staff additions, says Moore. He says the group is "growing organically" particularly in areas such as forward rate agreements and swaps.
However, the bank still prefers to maintain what he calls "a low profile" in currency options, which Moore considers a potentially dangerous product. "We want to be careful that we don't sell corporate customers structures they may not understand," he says.
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