UK banks' pension liabilities exceed market cap, Citi says
EUROPE - UK banks are reporting pension liabilities that in some cases exceed the institutions' total market capitalisation, with three of Britain's largest banks significantly worse off than mainland European rivals, a study by Citibank has found.
Examining FTSE 100 companies at the end of last December, the study noted that former public companies reported the highest pension liabilities when viewed as a percentage of the market cap, with British Airways and telecommunications provider BT cited as examples.
However, it found that financial institutions, being labour-intensive companies, also ranked high when examined - with Lloyds Banking Group reporting pension liabilities of 115% of total market cap.
Rival Barclays, which ranks five below Lloyds as the 10th largest FTSE 100 company, saw its market cap exceed pension liabilities by £1bn (€1.1bn), meaning liabilities accounted for 96% of company value.
The Royal Bank of Scotland, a further five steps down the FTSE 100 ranking, meanwhile reported its liabilities as £25bn, or 85% of market cap.
Of the top five UK banks examined, only Standard Chartered saw its liabilities account for less than 5% of market cap, while the larger HSBC reported £32.6bn in liabilities versus a cap of £160bn - by far the best of the four large banks.
However, HSBC's share price in the period examined stood at 547p, compared with 183p for Barclays, while partially state-owned banks Lloyds and RBS reported a share price of 33p and 26p, respectively.
The report noted that none of the major European banks examined had pension liabilities to market-cap ratio similar to the three biggest UK institutions.
It said: "Taking into consideration only banks with above €10bn market capitalisation, and using end-2010 pension fund data, only a small number have pension liabilities over 50% of their current market capitalisation: ING (69%), Credit Suisse (58%), UBS (57%) and Commerzbank (54%)."
Three of the above institutions received state support during the financial crisis, while Credit Suisse sought assistance from a number of private backers including the Qatar Investment Authority, the Middle Eastern country's sovereign wealth fund.
Examining the investment strategy of the UK banks' pension schemes, Citibank also noted that Lloyds had by far the highest exposure to equity at 45% and therefore also had the highest exposure to the stock market relative to its market cap of more than 51%.
"The ratio is close to immaterial for the UK international banks: HSBC (4%) and Standard Chartered (1%)," it noted, while both banks also had the lowest equity holdings of 20% and 29%, respectively.
It added: "The pension deficit relative to market capitalisation is relatively small for most UK banks. Barclays is the highest at 13% if we use the 2010 annual report figure for pension deficits. Lloyds, given its higher equity gearing and larger pension liabilities overall, may have experienced the largest increase in pension fund deficit [year to date]."
Standard Chartered, with a deficit of only £137m, reported the lowest ratio of 0.002%, while the high market cap for HSBC again came in its favour, meaning its £2.8bn deficit - the same as Barclays - only accounted for 2% of market cap.