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Switch from Bank Pref to Equity

Posted: November 12th, 2020, 10:55 am
by Humpty
Hi

What are peoples views on when (if at all) to switch out of fixed income banks securities and into bank ordinary shares.

Is the time ripe to take advantage of potential increase returns from ords over fixed income:

- bank equities potentially under valued
- re-instatement of bank divs
- inflationary outlook: will it increase in the next 12-24 months, potentially adversly affecting FI prices

or stay in FI:
- Bank income and bad debts will supress ords
- inflation to stay low for medium term +24m months
- Divs on bank ords to be relativly low
- Impact from BREXIT
- Covid
- Tax rises

thanks

Re: Switch from Bank Pref to Equity

Posted: November 12th, 2020, 11:02 am
by johnhemming
I switched a while ago before Covid once prefs had got back to normalish levels. Brexit and covid have held this back. Today's news on GDP is helpful and even if the vaccine is useless seasonal infection have now peaked for this winter. There looks to be a lot of cash around so bad debts that are not underwritten by the government should be as low as estimated by the banks.

Re: Switch from Bank Pref to Equity

Posted: November 13th, 2020, 9:46 am
by 88V8
As a pure income investor I like the certainty of Prefs, all of which have continued paying through the panpanic.
However, when they cease to count towards bank regulatory capital - 2026 - bank Prefs will become a threatened species. Will banks retire them in an orderly fashion and offer a switch into some other form of FI... or seek to withdraw them at par, in which case there will be a price collapse.
I am overweigh bank Prefs so I really need to make some sort of decision, but .....

There are of course other options in the Prefs line - BWRA, BP.A etc most of which I hold, and there have been discussions of the many Canadian Prefs offerings which I have yet to pursue.

As to bank ords, for me they have no particular attraction as compared to other divi ords. I hold some but will not be loading up to any special degree.
For me, like the utilities, banks are now overly subject to Govt interference and if another Labour Govt looks likely, I shall be out.

Reverting to FI, as a means of passing the decision buck, Shires Income Trust SHRS holds a good deal of FI and currently yields about 6%.

V8

Re: Switch from Bank Pref to Equity

Posted: November 13th, 2020, 10:03 am
by johnhemming
Its a good issue to raise with the FCA. Logically withdrawal at par would be thought to not be appropriate. Hence they may need to offer improved terms as did Lloyds some time ago.

Re: Switch from Bank Pref to Equity

Posted: November 13th, 2020, 10:38 am
by GoSeigen
johnhemming wrote:Its a good issue to raise with the FCA. Logically withdrawal at par would be thought to not be appropriate. Hence they may need to offer improved terms as did Lloyds some time ago.


Sorry none of this means anything to me. Could you be a bit clearer please, especially about the Lloyds preference share offer you are referring to.


GS

Re: Switch from Bank Pref to Equity

Posted: November 13th, 2020, 10:47 am
by johnhemming
Without looking it up Lloyds did a generalised offer of a swap for non compliant preference shares with an increased interest rate in perhaps 2011 or 2012. These did have terms in them which allowed a call which there was a saga about in maybe 2018 or so. However, that was how they got over the old problem with things like LLP*

It would be good to pre-emptively raise the question with the FCA in good time to give them a chance of coming to a view and expressing it.

I may write a letter.

It might be worth opening up another thread about this. I wonder if Mark Taber is into these issues still. I think his websites went down. I have just looked him up and he has a linked in account, but it seems pretty dormant.

Re: Switch from Bank Pref to Equity

Posted: November 13th, 2020, 2:44 pm
by Laughton
He's on Twitter (I'm not, so can't ask him) - https://twitter.com/MarkTaber_FII

Re: Switch from Bank Pref to Equity

Posted: November 13th, 2020, 2:53 pm
by GoSeigen
It's worth noting that Mark didn't concern himself with the legal situation of the prefs (and quite openly admitted that). He was driven by the optics of the Aviva situation and protecting his usual constituency. As surely no-one can be ignorant of this particular wrinkle I can't see that he'd want to get himself involved.

Frankly, if investors here are buying these preference shares despite what they know in the expectation that Mark or someone else will bail them out when the risk materialises they should be ashamed of themselves.


GS

Re: Switch from Bank Pref to Equity

Posted: November 14th, 2020, 11:53 am
by everhopeful
When you say "these prefs" GS are you referring only to Lloyds? I have significant amounts in NWBD and ELLA and remember the discussions on the Fixed Income website which suggested that these prefs were relatively safe from cancellation at par by virtue of the need to have a vote of the pref holders (NWBD) or by virtue of statements by the Board (ELLA). Do you think this is still the case.

Re: Switch from Bank Pref to Equity

Posted: November 14th, 2020, 3:11 pm
by GoSeigen
everhopeful wrote:When you say "these prefs" GS are you referring only to Lloyds? I have significant amounts in NWBD and ELLA and remember the discussions on the Fixed Income website which suggested that these prefs were relatively safe from cancellation at par by virtue of the need to have a vote of the pref holders (NWBD) or by virtue of statements by the Board (ELLA). Do you think this is still the case.


I was referring to any preference shares investors are buying where there is no protection but they think someone will come to their rescue (as "vulnerable pensioners" or "retail investors") if they become the target of a capital reduction.

Personally I don't rate the likelihood of capital reductions of bank preference shares very highly; at the same time I recognise preference shares are not bonds and carry significant extra risk for a variety of reasons. Their price must be low enough to mitigate those risks else I am not interested. I remember selling Lloyds ECNs after the bondholder court win for 127p thinking that even with yield available the risk of imminent loss of 20% of my capital did not justify holding them. It was a relief not to be one of the holders when the bad thing happened.

NWBD are solid I believe. I happily hold a few even at current prices. The ELLA board (perhaps foolishly) bound themselves with their announcement; in the end though the shareholders call the shots so I'd not want to go too mad. It's a general fact that banks will have large amounts of excess capital to return over coming years. In that environment preference shares are an annoyance to ordinary shareholders, eating up the first share of profits and not really contributing to the capital structure. Some preference shares as you say are protected from capital reduction by their terms. I'd favour those over the others in the absence of a healthy premium.

GS

Re: Switch from Bank Pref to Equity

Posted: November 14th, 2020, 5:58 pm
by johnhemming
GoSeigen wrote:The ELLA board (perhaps foolishly) bound themselves with their announcement; in the end though the shareholders call the shots so I'd not want to go too mad.

There is a markets protection here where if Shareholders lose out by relying on the board statement they can sue for damages. That is normally sufficient.

Re: Switch from Bank Pref to Equity

Posted: November 14th, 2020, 6:19 pm
by RockRabbit
GoSeigen wrote:The ELLA board (perhaps foolishly) bound themselves with their announcement; in the end though the shareholders call the shots so I'd not want to go too mad.
GS


But who are the shareholders for ELLA? My understanding is that ELLA is ultimately owned by a charitable trust so perhaps a rather different 'setup' to your usual finance company.

Re: Switch from Bank Pref to Equity

Posted: November 14th, 2020, 8:12 pm
by johnhemming
I have just checked the short list and Lloyds has been closed out. Barclays and Natwest were not there previously (about a month ago)

Re: Switch from Bank Pref to Equity

Posted: December 9th, 2020, 9:01 am
by rippleog
... or seek to withdraw them at par, in which case there will be a price collapse....


...so assuming STAB get "redeemed" at 100 in 2026 your yield to maturity would be 3.15%
compare that to 6 year gilts @ 0.014%
or a Barclays subordinated retail bond @ 1.6%

so in the most extreme and highly unlikely scenario Bank prefs are very very good value...

Re: Switch from Bank Pref to Equity

Posted: December 9th, 2020, 9:13 am
by dealtn
rippleog wrote:... so in the most extreme and highly unlikely scenario Bank prefs are very very good value...


Maybe relatively good value. "Very, very good value" is a high hurdle, and for me not satisfied by a 3.15% return.

Re: Switch from Bank Pref to Equity

Posted: December 9th, 2020, 11:14 am
by GoSeigen
rippleog wrote:
so in the most extreme and highly unlikely scenario


..like gilt yields not rising to 10% but falling to less than 1%, eh?


LOL. Our old friend rippleog!


GS

Re: Switch from Bank Pref to Equity

Posted: December 9th, 2020, 6:02 pm
by rippleog
dealtn wrote:
rippleog wrote:... so in the most extreme and highly unlikely scenario Bank prefs are very very good value...


Maybe relatively good value. "Very, very good value" is a high hurdle, and for me not satisfied by a 3.15% return.




agreed..relatively good value.
and of course still a relatively poor return

Re: Switch from Bank Pref to Equity

Posted: December 9th, 2020, 6:27 pm
by johnhemming
There are plenty more good returns. DGOC is interesting because in some ways it is more like fixed interest than equity.

Re: Switch from Bank Pref to Equity

Posted: December 24th, 2020, 11:26 pm
by ElectronicFur
I think it all hinges on the likelihood of withdrawal at par.

Before this crisis I had intended to switch some of my preference shares elsewhere due to that risk.

But as V8 says, they have all continued paying through the panpanic, unlike bank ordinaries. And without that income I would have been in a pretty dire situation, as the rest of my income has been decimated since March. So for the moment I'm just thanking my lucky stars that I didn't switch any yet.

Re: Switch from Bank Pref to Equity

Posted: December 29th, 2020, 10:44 pm
by 88V8
ElectronicFur wrote:.. as V8 says, they have all continued paying through the panpanic, .... So for the moment I'm just thanking my lucky stars that I didn't switch any yet.


Ahh, but if you look here viewtopic.php?f=52&t=11253&start=440 at #361824 you'll see that I sold most of my Prefs at the beginning of December.
I switched, from my Prefs that kept on paying, into ITs that will keep on paying. Without the par risk.
It's been good, but all things must end.

V8