Pension and Investment Research Consultants, global independent research provider, disclosed that the British sizable banks have undisclosed losses of up to 31.8 bn pounds; HSBC tops list with 10.4 bn pounds in undisclosed losses

(5) HSBC:
Pension and Investment Research Consultants, global independent research provider, disclosed that the British sizable banks have undisclosed losses of up to 31.8 bn pounds. In particular, HSBC HOLDINGS (00005.HK) accounted for 10.4 bn pounds, topping the list
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British banks may have £30bn hidden losses

British banks may be harbouring a black hole of as much as £50bn in undeclared losses that do not show up in their accounts but hamper their efforts to lend, a shareholder group has warned.

By Louise Armitstead, Chief Business Correspondent

6:20AM GMT 12 Mar 2013

PIRC has calculated the amount of bad debts the banks may have to write off in coming years but have yet to subtract from profits, together with other items such as deferred bonuses not booked.

HSBC, which is the biggest bank by assets, was shown to have £10.4bn of hidden losses, the Royal Bank of Scotland has £9.4bn, and Barclays has £7.3bn. Lloyds Banking Group has £2.5bn and Standard Chartered £2.2bn. Together the undeclared losses total £31.8bn.

The research shows the distorting impact the accounting rules, which allow bad loans to remain hidden, have on bank results. PIRC applied old-style UK GAAP accounting rules, which applied for 100 years until 2005, to the figures released in the 2012 banks’ accounts.

Apart from Basel rules that require banks to declare half the expected losses over a year, bad loans and expected losses do not appear in the banks’ accounts under International Financial Reporting Standards (IFRS).

Last week the London-based IASB, which sets accounting rules for all listed companies in a raft of countries, agreed to address criticism of IFRS with plans for tougher capital requirements against expected losses. However, the provisions only have to be for losses expect over 12 months. The US Financial Accounting Standards Board (FASB) changed its rules in December to demand provisions for the life of the loan, as UK GAAP did too.

Tim Bush, head of financial analysis at PIRC and long-term critic of IFRS, said: “The 12 months expected loss is neither here nor there. It is clear that bad loans in RBS and HBOS on lending in 2006 and 2007 took four or five years to come through, the 12 month view can still make unprofitable lending appear profitable. The FASB model is the model that is preferred by the Fed and already explains why the US banking system is now functioning properly, whereas the IASB banking world is not.”

The warning follows regulatory pressure to force the UK’s banks and building societies to disclose their hidden losses, which supervisors at the Bank of England have suggested could total as much as £60bn. Lenders have just weeks left to clarify present the regulators with plans to fill the holes.

The Parliamentary Commission on Banking Standards used its second report to argue that the banks capital levels were “too low”. The report urged the Government to force the banks to raise their “leverage ratio” claiming the arguments against a stricter cap were “extremely weak.”

Efforts to make banks shore up their capital buffers have been led by the Bank of England’s Financial Policy Committee (FPC), which indicated at the end of last year that hidden losses could total £60bn. An announcement on the industry’s response is expected before the end of the month to coincide either with the FPC’s meeting on March 19 or a statement scheduled for March 27.

Outright recapitalisations are unlikely, though. Banks are expected to restructure and set out plans to raise their capital levels over the next couple of years.

Barclays has already committed to increasing its total capital level from £66bn to £75bn by 2015, including new contingent capital (coco) issuance of as much as £7bn. Royal Bank of Scotland has set out plans to float part of its US retail bank, shrink the investment bank, and raise cocos. Nationwide Building Society is also considering plans to issue £500m of new capital bonds. However, the regulator may demand that lenders go even further than their current plans.

Meanwhile, HSBC said it’s moving towards Basel 3 regulations which have higher capital requirements. In its results, the bank said its capital position had strengthened so much it was able to increase its dividend.

Barclays has committed to increasing its total capital level from £66bn to £75bn by 2015. HSBC said its capital position is strong enough for the bank to increase its dividend.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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