Large profits,dividends and rights issues

Banks and oil companies are the corporations many people – and governments – love to hate.
In a way it in unfair on them. Both industries find it best to organise through very large companies. Because the companies need to employ huge sums of capital, they will tend to make profits that look large. You need to have lots of shareholders and substantial resources to build the large refineries, or to have the branches and balance sheet strength to handle the transactions of millions of customers. When you split the large profits up amongst all the shareholders it looks rather different.

The oil companies carry an additional burden – the government. Two thirds of what they charge people at the pumps goes to the UK Treasury, yet so often the oil companies get it in the neck for the high prices the high tax requires.
In the good times for the companies when the oil price is high they make good profits, but these are paid out in dividends to millions of small savers, pension fund members and the like, or go to reinvest in the business so capacity keeps up with demand.

The Banks must be wondering what has hit them with the tidal wave of criticism that has washed over them in recent months. Much of it is pointing in two different directions. On the one hand their critics say they made too many incautious loans and are having to write off too much lost capital, so they should lend less and at higher profit margins to rebuild their financial strength. On the other hand, if the banks start to do that then critics say the banks are profiteering by raising their margins, and are being unfair on the less well off who cannot get a loan any more.
Being a banker must be a hit like being a politician – you can’t win!

Banks were reporting very good profits in the 2003-6 period, and paid out good dividends. Now they are having to report substantial losses, writing down the value of assets they hold which turn out in these conditions to be worth less than they thought last year. At the same time as they announce these losses and write-offs, the regulator is demanding that they keep more money at the Bank of England and as a cash reserve, compounding the pressures on the banks to lend less and be more cautious. This is the mechanism by which the credit crunch is tightening.
Some banks have decided that to provide the extra cash the Regulators want them to have, and to pay for the losses they are announcing in their write-offs, they will raise more money from their shareholders. In effect the shareholders will be paying their own dividends for a bit, as the regulators want the cash generated from the profits to improve the solvency and liquidity.

Ws there a better way? Yes, of course. If the Regulators had demanded more capital in the good times, rather than in the bad times, we could have avoided some of the boom and bust. If there was a better way of assessing the worth of loans and other assets on the balance sheets, they could smoothed, to avoid big changes when markets change dramatically. Getting shareholders effectively to pay their own dividends by putting up more capital is not a great idea, but once a bank has paid out a good dividend it fears for its reputation if it were ever to cut it in a following year. Dividends turn out to be have been too high in the good years, because the high profits they were then making turned out to be unsustainable on some of the business they were writing. The regulators, as so often, are now making it worse by tightening conditions when the market has already tightened it substantially for them. Bolting doors after the horse has gone is so often what regulators

This entry was posted in Blog. Bookmark the permalink. Both comments and trackbacks are currently closed.

9 Comments

  1. Posted April 29, 2008 at 4:53 pm | Permalink

    The Oil Companies as John rightly points out get taxed heavily and have to spend much money on getting the oil out of the ground or from under the sea . The investment needs to be high as a result . Regulators did take their eye off the ball during the good times .

    But like them or loathe them the economy needs banks & oil companies to keep going . The economy needs borrowing & saving and requires energy so that goods & services can be produced and sold . To change Britain for the better one must be conservative and frame policy so that financial regulation is clear cut & kept to a minimum so that responsiblity is clear and that either another Northern Rock is avoided or it can be dealt with a la Bear Sterns . BP is already going green by calling itself BP – beyond petroleum ( they are looking at eco -friendly energy these days ) and is a major contributer to employment levels & tax revenue .

    I laugh at Dallas as much as the next person but after it has finished & the credits have rolled I know that oil is essential and that banks are also important . They where mocked in Dallas – but the consequances of the oil companies not pumping or the banks failing are too dire to think about . We need them – why can the left not have the sense to see this !

  2. Posted April 29, 2008 at 4:53 pm | Permalink

    The Oil Companies as John rightly points out get taxed heavily and have to spend much money on getting the oil out of the ground or from under the sea . The investment needs to be high as a result . Regulators did take their eye off the ball during the good times .

    But like them or loathe them the economy needs banks & oil companies to keep going . The economy needs borrowing & saving and requires energy so that goods & services can be produced and sold . To change Britain for the better one must be conservative and frame policy so that financial regulation is clear cut & kept to a minimum so that responsiblity is clear and that either another Northern Rock is avoided or it can be dealt with a la Bear Sterns . BP is already going green by calling itself BP – beyond petroleum ( they are looking at eco -friendly energy these days ) and is a major contributer to employment levels & tax revenue .

    I laugh at Dallas as much as the next person but after it has finished & the credits have rolled I know that oil is essential and that banks are also important . They where mocked in Dallas – but the consequances of the oil companies not pumping or the banks failing are too dire to think about . We need them – why can the left not have the sense to see this !

  3. Posted April 29, 2008 at 5:49 pm | Permalink

    John
    Please see this wiki article:- http://en.wikipedia.org/wiki/Reserve_requirement

    I have read elsewhere that changing "cash reserve ratios" is/was considered to be a sledgehammer tool to control the amount of money supply in an economy. The article is saying that the BoE does not have a required ratio of reserves, is this true? And, that the actual UK ratio, has dropped from twenty percent to 3.1 percent in the forty years to 1998!

    Meanwhile, last week, India upped its rate to eight percent and appears to use this mechanism frequently as a market operating control. Which is getting it right?
    Reply: UK banking regulation includes solvency and capital ratios requiring banks to keep so much cash and near cash. Nor has the ration fallen as much as you suggest!

  4. Posted April 29, 2008 at 8:54 pm | Permalink

    Was it the Telegraph or the BBC that mentioned, quite casually yesterday that £100,000,000 was going to be pumped into the banking system by the government? The figure used to be just half that.
    So where did this behemoth come from then? Or did I mishear?

    Reply: Up to £100 billion was the figure, to be done by swapping government debt for some of the banks' assets

  5. Posted April 29, 2008 at 10:02 pm | Permalink

    It's all easy to say when you are not getting made even more poor by all these companies with their precious directors who's share performance has been abysmal of late.
    When was the last time the head of a privatised UK utility was lured off to run Microsoft, Mitsubishi, Mercedes, Honda or Toyota?
    Never! It's all a con….and worst of all you know it.

  6. Posted May 1, 2008 at 3:11 am | Permalink

    The one I'm finding amusing at the moment is the HBOS rights issue. A few weeks ago they were complaining that rumours regarding their funding problems were malicious, now they are cap in hand to their shareholders for more funding. I note that the HBOS share price closed today, after the market had a chance to react to the rights issue, at a similar level to the bottom it hit after the 'rumours'.

  7. Posted May 1, 2008 at 4:40 am | Permalink

    I think it would concentrate a lot of minds if petrol retailers took to itemising on receipts (or even better, at the pumps) how much was being paid for the fuel itself, fuel duty and VAT.

    Imagine the shock when people are reminded every time they fill up they are being charged approx £20 in tax for every £10 of fuel they've boughtl.

  8. Posted May 17, 2008 at 1:01 am | Permalink

    What I find quite interesting is that the majority of the members in the Rockefeller family have recently announced publicly that they would like to find a cheaper and cleaner source of fuel. I don't know quite what to make of it. What do you all think?

    Reply: they are sensibly moving with the times – of course we need new fuels.

  9. Posted November 15, 2008 at 3:11 pm | Permalink

    Q1.
    A regional division of a water company is upgrading its water filteration & purification plant, the new systerm us expected to last 20 yeras & to cost £ 40M. The parent company has had a fully listing on the London Stock exchange for monay a years
    Q2.
    An iol exporation company with four years track record has had encouraging result inits drilling programme in the gobi desert but now need an extra 10m to finance further exploration activities. current market capitalisation ogf this AIM listed company
    Q3.
    A long estabilshed family owend distribution company wishes to replace its fleet of vehicles over the next 3 years and are considering its finance option. the cost of each vehicle varies from £20000 to £10000 with an expected life of 5-10 years
    Q4.
    A retailer of long standing need finance to stock up for the expected seasonal increas in sales, this year he plans a 75% uncrease in stock hels over previous years eich had beed at stable level to fill a newly acqiured high street premises.
    Q5.
    A blue chip quoted conglomerate has seen its share price consistenly underperform over the bull market of mid 2000's and plan to creat share holder value by a staged process of unbundling a number of its subsidiaries & operating division. at present a grop of senior managers of a health care divion are seekin finance for an MBO.

    Please kindly advice source of finance:

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page