Banking isn’t working
Many of the world’s leading banks are struggling to cross a key threshold in their business – where their return on equity exceeds their cost of equity. That’s only likely to get worse as their capital requirements rise. The hopes of the industry are based on an improvement in market conditions. Right now, it’s struggling to make a convincing case for itself. Peter Lee reports.
Banks reduce profitability targets
Stress mounts for poor bank performers
Confusion grows about ROE targets
Lessons not heeded from historical returns
Return on assets would need to double
Why 11% return is the key target
Banks shy away from ramping up risk
"We’ve been asking the banks how fully they are factoring in their own rising cost of wholesale senior unsecured funding to these loan-pricing decisions," the banker tells Euromoney. "Some are. But most still justify them on the basis of returns from other business to be done with these corporates at some unspecified time in the future. We’ve also gone on to ask which banks are thinking about margins on five-year loans they are extending today on a fully costed basis against capital they will consume under Basle III." That sounds sensible, Euromoney agrees. So, how many banks are doing this? "Not more than half a dozen as far as we can tell," comes the reply.
"But they’ll have to start thinking about it soon," the banker says. "Because when they are borrowing three-year money at 150bp over and lending it out for five years at 40bp over to corporates with similar credit ratings to their own, then banking has simply stopped making sense."
Will it ever make sense again?
Now that many banks appear to have managed down their credit risk exposures to acceptable levels and raised capital, the single biggest question confronting them is whether they can, from here on, earn a return on it above the cost of capital. If they can, then the banking system has been stabilized to a point where it can be self-sustaining. If they can’t, then why would any sensible investor waste any more money and time on the banks?
Ossie Grübel, chief executive of UBS, complains that under the new capital rules his bank will struggle to make a return on equity of more than 10%. When the average cost of capital for banks in Europe is 11%, that’s not an encouraging position to be in. Jamie Dimon, chief executive of JPMorgan, says that a 7% capital ratio is sufficient and that if international regulators demand much more, it will be a "nail in the coffin" of big American banks.
And can the world’s biggest banks, with all the huge infrastructure costs of having global operations, actually make an economic return on capital without the ability to generate bumper profits through their proprietary desks, which until the crash helped to subsidize big operations but at the cost of only a few star traders?
Data from LCH Investments published at the beginning of March suggested that the world’s top 10 hedge funds made $28 billion for clients in the second half of 2010, $2 billion more than the net profits of Barclays, Citigroup, Goldman Sachs, HSBC, JPMorgan and Morgan Stanley combined.
That’s money made in difficult markets – conditions in which investment banks, with their new client-focused models, are finding it tough to generate revenues.
Of course, it’s those difficult markets that bankers say are the problem, as much as the new costs and burdens of capital. "The outlook for banks should improve once the markets return to normal," says a bank analyst. "Unless these markets are the new normal..."
At the start of 2011, the banking industry is struggling to make a convincing case for itself.
Banks reduce profitability targets
As regulators ratchet up the amount of capital banks are required to operate with, so it becomes more difficult to earn a return on it comparable to the inflated levels reported in the era of excessive bank leverage. One common theme of the 2010 earnings season on both sides of the Atlantic was that even those banks that came through the systemic crisis relatively well are now reducing profitability targets.
HSBC is one of the strongest banks in the business: well funded, with an 80% advances-to-deposits ratio that gives it the chance to increase earnings from deploying that excess funding when rates rise, and with 40% of its risk-weighted assets in the growth markets of non-Japan Asia. It reported strong revenues for 2010, with pre-tax profits of $19 billion almost doubled from 2009 and underlying operating profit up 33%. But it still cut its medium-term return on equity target from between 15% and 19% down to between 12% and 15%.
Credit Suisse is one of the best-capitalized large banks, with a tier 1 ratio of 17% in old money, or 12% of the new common tier 1. It produced decent earnings for 2010 in line with analysts’ projections, continued to attract new money into the private bank, and its trading revenue held up well even in the tough fourth quarter. But when it cut its return on equity target for the second time in two years, this time to greater than 15%, down from greater than 18%, the stock sold off almost as if Credit Suisse had published a mini profits warning.
Barclays has offered a convincing example to UK regulators of the benefits of the universal banking model, having been sustained by strong earnings at its investment bank in 2009 and then from its retail bank last year, allowing it to raise private capital throughout the crisis and not resort to government injections. At its 2010 results, it reported pre-tax profit of £6 billion ($9.6 billion), 33% ahead of the £4.6 billion result in 2009. Its investment bank even managed to increase revenue in the difficult fourth quarter of 2010 compared with the third, while many of its competitors suffered. But Barclays still cut its target return on equity to be achieved in 2013 down from at least 15% to at least 13%.
And other banks too, including some that do not offer formal return on equity targets, have reduced their profitability guidance, as far as it can be determined from net income targets and their discussion of likely capital ratios.
All this looks like a simple consequence of higher regulatory capital requirements. HSBC is carrying some 1.5 times the amount of capital it was before the crisis and so it’s quite reasonable that it, and other banks across the industry, should be cutting their return projections. The much more tricky question is whether the banks will achieve even these reduced targets. Making that question all the more pressing is a feature of banks’ 2010 results that the eye-grabbing announcements of reduced medium-term return on equity targets somehow overshadowed: the abysmal returns that even successful banks managed in 2010.
HSBC might be targeting at least a 12% return on equity but in 2010 it delivered only 9.5%, and new chief executive Stuart Gulliver had to admit, while announcing improved results, that: "We still have some way to go to achieve satisfactory levels of profitability." In future, Gulliver says, the bank will be more discriminating over which businesses it allocates capital to and more disciplined on costs. "Our cost-efficiency ratio was outside our range [for 2010], which is totally unacceptable."
The ever upbeat Bob Diamond, speaking at the announcement of 2010 underlying profits of £5.5 billion for Barclays, 11% ahead of the 2009 figure, resorted to the same description of the bank’s 8.7% return on tangible equity. "Our current return on equity is unacceptable so we’re working to improve this and to deliver sustainable returns above the cost of equity."
How will Barclays do this? According to Diamond, by examining every separate business at the bank, and jettisoning those that can’t. This process is already under way and explains why Barclays recently abandoned its branch-based financial planning offering to UK retail customers, exited the retail business in Russia and is closing down in Indonesia. It will gather pace from here and Diamond promises that every individual business will have to justify itself by return rather than nominal net income: "There will be no sacred cows". The overall business model is not up for review – at least not inside the bank – but every individual business within the overall portfolio is.
Stress mounts for poor bank performers
For the less well-performing European banks, the stress is mounting. Federico Ghizzoni, chief executive of UniCredit, was clearly troubled by this at the bank’s results announcement late last month: "The cost of capital for European commercial banks is about 11%. Our return on equity is between 3% and 4%." Investors might accept lower returns on equity from less-risky banks. To become less risky requires them to raise capital. That return is not a promising base from which to try. It’s a vicious cycle.
At least Brady Dougan, chief executive of Credit Suisse, was able to sound confident of meeting or exceeding its new target of 15% return on equity in the next three to five years, after delivering 14.1% in 2010. "We are out in front of the rest of the industry in transitioning to the new regulatory environment," he claims, while suggesting that the onerous capital requirements of the Swiss regulators have at least removed many of the uncertainties still hanging over other banks’ balance sheets. "We believe consistently meeting and beating this industry-leading return on equity target will lead to significant and material book value per share accretion of around 10% per annum," he told analysts at the bank’s results. But even as Dougan spoke, Credit Suisse shares sold off.
Confusion grows about ROE targets
There are some analysts that share Dougan’s view that investors’ reaction to the reduced ROE target was misguided. Derek De Vries and Marc Brehm, analysts at Bank of America Merrill Lynch, say: "We remain convinced that Credit Suisse can achieve a 17% to 18% ROE over the next several years. Our view is predicated on the fact that, with a fully phased in core tier 1 ratio of greater than 8% on January 1 2013 and an extremely capital generative business model, Credit Suisse would not need to raise capital."
The same cannot be said for the rest of the industry. It still remains to be seen whether regulators will insist on additional capital buffers for so-called systemically important financial institutions – in other words, big banks. Barclays, for example, has produced its new return targets on the basis that running with a Basle III core tier 1 ratio of 9% will put it among the better-capitalized banks at a time when some in Europe are talking about running at 8%, against a Basle III minimum of 7%.
This is all rather confusing, given that for 2010 Barclays was beating its chest about a core tier 1 ratio of 10.8% and saying this is likely to rise to 11% by the end of 2013. Running instead at 9%, as per its target calculation, would allow the bank to put on an additional £140 billion of risk-weighted assets. Diamond says: "To give you a sense of the magnitude, £140 billion of risk-weighted assets is equivalent to one-third of our current balance sheet."
But it seems to be making a big assumption that regulators, equity investors and debt providers will all be happy for the bank to reduce capital, having only just de-risked the balance sheet since 2008. Diamond acknowledges: "Of course we don’t yet know the outcome of the Independent Commission on Banking in the UK or of the Financial Stability Board’s decisions on systemically important financial institutions but we’re confident that whatever those outcomes, we’ll be able to manage our capital accordingly."
He’s putting his credibility on the line at a moment when regulatory requirements are far from settled and the earnings outlook for the whole banking sector remains unclear. Banks have been bleating for so long about the difficulty of reinvesting surplus deposits at a decent margin in a low-interest-rate environment that it’s been easy to overlook just how benign conditions were in 2010 when many were delivering only single-digit returns on equity.
Low interest rates have kept default rates in check and low impairment charges boosted earnings in 2010. If central banks raise short-term rates quickly in the next few months in response to signs of rising inflation expectations, then, even though the transmission to borrowers is uncertain, the outcome won’t be pretty. Corporates and individuals will be more likely to default. Higher rates do not benefit most banks: rather it is a steep yield curve that helps them to fund short and cheap and lend long. Rising short-term rates won’t benefit most banks. Many large banks do not enjoy a surplus of deposits waiting to go into higher-yielding, supposedly risk-free assets. Rather, they remain worryingly dependent on wholesale funding, much of it relatively short-term, which is going up in cost as banks seek to refinance in the middle of a heated debate over bailing in senior unsecured creditors – bondholders – and requiring them to take capital losses in future bank failures.
Rising margins for bank credit, coupled with higher underlying base rates, will hurt net interest margin and also raise the banks’ weighted average cost of capital and the cost of equity over and above which they must generate a return.
What’s worrying investors in bank stocks is not that the banks are now coming out with lower return on equity targets: it’s rather that these targets simply don’t look achievable when set against last year’s performance, the outlook for this year, or against the longer-run historical averages.
Lessons not heeded from historical returns
Credit Suisse is a well-managed bank. But it is now targeting a 19% return on tangible equity. (Most banks are publishing return on reported equity targets, but this clouds historical comparisons because of the goodwill component in the equity of banks that have conducted acquisitions. Stripping goodwill out and looking at returns on tangible equity is the market’s preferred method for drawing such comparisons, and this tends to add a couple of percentage points to the target return on reported equity figures.)
Across the whole period from 1980 to 2007, Credit Suisse averaged a 9% return on tangible equity, according to analysts at Barclays Capital. In a note in March, banks analyst Simon Samuels ran the historical analysis on 11 European and UK banks that either published explicit return targets during the recent earnings season, or have provided them in conversation or given guidance on net income and capital targets that allow them to be deduced. The 11 include UBS, Standard Chartered, Credit Suisse, Société Générale, Swedbank, Deutsche Bank, Lloyds, HSBC, BNP Paribas, RBS and Barclays. He found that the average new target for these banks is 17.5% return on tangible equity. That is slightly down on the returns of 21% they contrived to report in the era of uncontrolled leverage from 2000 to 2007. But it is above the 14% average across the whole period from 1980 to 2007, the 11% average in the 1990s and 10% in the 1980s and also ahead of the 13.6% Barclays Capital itself forecasts for 2013.
ROE target by bank
The market’s difficulty with the banks’ new forecast returns is not that they are too low but rather they are too high. The market doesn’t give them much credibility. Barclays Capital also seeks to draw investors’ expected returns from prevailing share prices, after making some modest revenue growth assumptions. It finds that stock market investors are even more sceptical than the Barclays Capital analysts themselves and are expecting just 11% returns on tangible equity.
Is the market wrong?
Maybe. Dan Davies, German bank analyst at Credit Suisse, looks at trading businesses inside the banks and says: "If you look at the regulatory capital employed in trading businesses, it’s an ex-post calculation dependent on risk taken. The real issue is not the amount of capital consumed but rather its velocity: the speed with which it is turned over. A given amount of capital turned over 100 times a day in FX trading can serve you much better than the same amount of capital held against an illiquid security or a loan for much longer. Low returns in many businesses last year were a function of customers not turning over large volumes. The problem wasn’t with business models but with the markets periodically closing down on sovereign concerns. If you get markets that are choppy but continuous within certain ranges this year, then ROEs could swing back up even to pre-crisis levels and certainly meet or exceed these new targets."
So the targets look reasonable then, for trading businesses? "Yes, but you can’t forecast them with any certainty more than a quarter out," says Davies.
Return on assets would need to double
And what about traditional banking business, where profit is driven by net interest margin and cost of bad debts?
"It may be that banks feel they can somehow boost returns on assets, which they were less focused on in the years before the systemic crisis when they levered up as a way to boost returns on equity," concedes Samuels. "And I can see that returns on assets may well expand. But they won’t double, which is near enough what they would have to do to match these new return on equity targets, given that banks’ leverage has come down from around 48 times in 2008 and will be around 25 times by 2013."
Why, then, have bank managements come out with these ambitious-looking targets? One possible explanation is that they are simply stretch targets, designed to galvanize their organizations. The banks will be able to argue that they have done well even if they fall short by a couple of percentage points and managements may be able to explain away any such miss on the basis of being compelled to hold more capital by regulators and investors than they reasonably expected to.
Banks including UBS, Credit Suisse, Barclays, Lloyds, RBS, HSBC, and Société Générale are all operating under new chief executives brought in after the crisis hit in 2008 or appointed more recently. They may feel that if they can point to returns on equity at least heading in the right direction in the next three to five years, they will be deemed successful. That’s a gamble though. There is a lot of grumbling about Lloyds Banking Group, which was quite explicit in its guidance on earnings, returns, margins, and loss rates in recent years but which has suggested that it might now revisit this guidance under a new chief executive. It’s news that raises concerns about the reliability of the management information systems supporting the old chief executive and his replacement. Ambitious targets are all well and good, but they can also look foolish.
Perhaps there is an element of herd behaviour here and banks feel compelled to come out with targets in line with their peer group, even if these seem ambitious, rather than below. It’s not just a European phenomenon. At its investor day on March 8 2011, Bank of America announced a return on tangible equity target of 15%. This compares with a 17-year average return of 15%. And 15% also happens to be the return on tangible common equity that JPMorgan produced in 2010, up from 10% in 2009.
Another possible explanation for ambitious ROE targets is that banks genuinely do expect to hold less capital and to avoid further impositions from national regulators worried about the resultant constraints on the supply and heightened cost of credit to the real economy.
Stefan Krause, chief financial officer of Deutsche Bank, tells Euromoney: "Some of our US competitors are already starting to reduce capital through increased dividend payments or even share buybacks, which seems to suggest that they are overcapitalized." He adds: "There is certainly an argument that returns on equity have been depressed recently in part by what were in some cases forced injections of public capital and the subsequent need to repay government funding while maintaining high capital ratios".
But it’s a big call to say that banks will be allowed to operate with lower capital ratios in future. "The market expectation is that banks don’t want to reduce capital right now with some uncertainty still around new regulatory requirements. Some definitions remain to be finalized and Basle III rules still have to be enacted into laws. Meanwhile there is a big effort under way by national regulators to reserve more scope for interpretation of the rules," Krause says.
The implication is that countries whose banking systems did not suffer badly in the crisis – maybe even some that did – won’t accept high capital requirements that unduly constrain banks. Dimon of JPMorgan is pressing US regulators on this. Even regulators in countries whose banks were hit, such as France and Germany, might seek to draw the line at 8% core tier 1 capital, rather than the higher levels being demanded in countries where large banks came closer to systemic failure, such as Switzerland and the UK.
"If we applied Basle III on January 1 2011 we would be compliant eight years early. So I don’t think we need to raise further capital to sustain our business," Ghizzoni at UniCredit says. "The market is talking about 9% [as opposed to Basle III’s threshold of 7%] but when? The market wants to see a certain level of capital but the point is when and the level has to be tailor made for each bank."
Well-placed caution or political posturing?
While many banks are now publishing return on equity targets before capital rules are even finalized, a few prefer to wait and see. "It’s not the right time to put out explicit return targets," agrees Krause. He adds: "Right now for 2011 we are in a window where none of the new rules apply and a lot of initial analysis is being done trying to apply Basle 2.5 and Basle III to banks’ existing models rather than reworked balance sheets. Such profitability calculations may be rather premature."
Other bankers suggest that there may be some political posturing behind the publication of reduced profitability targets. Many of the banks now producing these have already raised capital from the markets in 2009 and 2010. They are not cynically coming up with rosy forecasts to condition the market for future sales of equity. But they might wish to tease investors with the prospect of higher returns than are now being priced in, in an effort to boost their share prices and drive weak valuations up to above book value. And the message could perhaps be pitched over the heads of investors at regulators. Banks might be signalling that they have curtailed excessive ambitions while warning that higher additional capital requirements from now on will reduce returns further, might bring them down towards cost of equity and so call into question the sustainability of banks on which fragile economies depend.
"The problem is that, for now, that 17.5% return on tangible equity looks to be way above the current cost of equity, which we calculate at around 10%," says Samuels at Barclays Capital. But the margin between more realistic return forecasts and notoriously difficult to estimate cost of equity might be much narrower.
Like Samuels at Barclays Capital, Andrew Garthwaite, banks analyst at Credit Suisse, shares the general market scepticism about these profitability targets. He looks across a wider universe of banks. "Continental European banks are trading on 1.25 times tangible book, which is effectively discounting a return on tangible equity of 12%, whereas between 1960 and 1990 the banks made an average return on tangible equity of 11%. In 2011, our banks team forecasts a ROTE of 11% for European banks under coverage." He adds: "Crucially, our analysis does not assume any dilution. To the extent that banks will be required to raise further capital on the back of the renewed stress test or systematically important financial institutions (SIFIs) concerns, this would negatively impact valuations."
Why 11% return is the key target
Hitting at least 11% to 12% is important if the banks are to show themselves to be businesses worthy of equity investors’ consideration. Garthwaite points out: "European banks’ tier 1 debt is currently yielding 7.5%. If we assume that the cost of tier 1 equity is three percentage points above that (to reflect the fact that equity sits lower in the capital structure), then the cost of tangible equity for banks is 10.5%."
Where is that cost of equity likely to go? In its 2010 results presentation, Barclays forecast a declining cost of equity for the bank, coming down from 12.5% in both 2009 and 2010 to 11.5%, under a nice downward pointing arrow bearing the legend "direction of travel". But why should banks’ cost of equity go down? Will it fall simply because they have more capital and are therefore inherently safer and sounder institutions?
That’s open to debate. Just carrying more insurance doesn’t make you a better risk manager. Providers of debt don’t appear to be hugely comforted by higher capital cushions. The cost of senior debt is going up, in large part because of the prospect of bondholder bail-ins and the questionable value of implicit government support at a time when several European sovereigns’ own credit risk is in doubt. And why would equity risk premia for banks decline less than three years after equity investors lost heavily in the systemic crisis and while – in an awful negative feedback loop – banks are now heavily exposed to sovereign risk through investments in their liquidity buffers, trading portfolios and hold-to-maturity banking books?
One banker admits: "There is a perception that all the leverage risk is between banks and sovereigns, but there is still substantial private-sector indebtedness among households and companies that may turn out to be very sensitive to rising short-term rates." There is a widespread expectation that credit losses will continue to decline in 2011 from 110bp of loan books last year. If they rise instead, watch out.
The core existential question won’t go away. Can banks earn a return on equity above their cost of equity? "I am confident that this is possible," says Krause at Deutsche, "but for example some banks will have to adjust their business model and others need to get more efficient."
If the cost of equity goes up, then the pressure to boost returns increases even more. We all know how banks have traditionally boosted returns... and it didn’t end well. Taking more leverage is a route now closed off. There are other ways of dialling up risk though, for example with less leveraged positioning of riskier instruments. How will they do this? "The trouble is that we’re all so politically correct about risk now, that no bank is going to come out and say publicly that it’s taking on more," one banker tells Euromoney. "They’ll all be thinking about it though."
Bridget Gandy, European banks analyst at Fitch Ratings, tells Euromoney: "There are lots of uncertainties over the stability of bank earnings given the uncertainties around the economy. If banks continue to promise high returns on equity in their trading businesses, we will certainly have concerns about what risks they propose to take on in order to deliver those returns."
In March, the UK Financial Services Authority felt moved to warn shareholders not to press banks too hard on returns. "Although major UK banks continue to target returns on equity of 12 to 15%, those may not be achievable in future, even if economic growth remains on track," the FSA says in its Prudential risk outlook. The UK regulator might be concerned that banks are still promising returns that they have only ever delivered over the past 30 years in the immediate run-up to the near collapse of the UK financial system. "Banks that seek to maintain unchanged return-on-equity targets will only be able to achieve these if they can increase return on risk-weighted assets, and may be tempted to do so by taking increased risk or by underestimating risk. Supervisors need to remain vigilant to ensure that banks do not take excessive risks in an attempt to maintain return on equity in this way." The FSA also throws responsibility onto the providers of capital to the industry. "Management and shareholders should review the appropriateness of target returns on equity. Too-high targets should not drive firms to imprudent risk taking."
Banks shy away from ramping up risk
The whole thrust of new regulatory initiatives is to limit injudicious risk taking and apply high capital charges where it occurs. That’s the theory anyway. How is it working in practice?
Krause at Deutsche Bank is sympathetic to regulators that must not be seen to have been captured by the banks and persuaded to water down constraints on the industry. For all that, he is concerned about the impact of increased risk-weighted asset charges against securitizations and counterparty credit risk on derivatives transactions. One way for banks to reduce RWAs and therefore capital requirements is to take off some of their macro hedges. That looks good. Does it make them less risky or more risky?
The bank has discussed recently efforts to sell down exposures that attract high-risk capital charges. One would think that these must be riskier assets with little demand from other buyers. In fact it appears that hedge funds are hoovering them up. Krause says: "On ABS, new rules will have the effect that if just one of the underlyings in a structure with 100 or 200 reference entities becomes illiquid then the whole structure will be judged illiquid and subject to full capital charges. These charges could be quite volatile, if structures switch between being deemed liquid and illiquid, with uncertain consequences for volatility of returns."
On macro hedging, Krause has worries too. "We have put on macro hedges against series of ABS positions designed to reduce our value at risk basically to zero, so that we have virtually no economic exposure to rising or falling valuations of the underlyings," he says. But applying the new rules, these hedges will not be recognized as hedges and banks will have to take capital charges against the counterparty credit risk."
So the rational course for many banks will be to start taking these hedges off.
It’s an example of how reducing balance-sheet size and leverage is working in practice at a large European bank in ways that might not produce the desired outcome. Krause explains: "The way Deutsche Bank used to work was to make loans and then hedge the credit risk, so making nothing in the way of net interest margin, but taking profits from various small fees as part of the loan agreements. That became a €2 trillion balance sheet on €30 billion of tier 1 capital but it carried risk-weighted assets of no more than €300 billion. In the future we might have to take care for the leverage ratios and need to take counterparty credit charges where we are in and out of the money to the same counterpart with no real exposure. The result is that our balance sheet will decline in size as it becomes more expensive to hedge all our underlying assets."
That doesn’t sound good. If it becomes smaller by reducing its hedges, the balance sheet will surely be more risky, not less.
For bulls of the banking sector, all the hope of higher returns is for the long term. The next stage of the industry’s history will be dominated by large-scale removal of excess capacity, the disappearance of the losers, hopefully in ways that don’t produce another systemic crisis, and by consolidation among the survivors. The lesson of the widespread bank failures in the US at the start of the 1990s was that it paved the way for much improved returns on assets among the survivors and a boost in profitability that then got frittered away in the collective madness of the past decade. There is simply too much banking and not all of it can be sustained. Eventually the survivors should be capable of generating returns high enough and stable enough to satisfy equity providers.
That’s for the long run. In the short run, it won’t be easy. "It’s all very well to be promising returns to providers of equity," says a DCM banker covering financial institutions, "but the immediate worry is the demands of providers of long-term debt." There’s been such a scramble to issue covered bonds in Europe that, before long, the banks will hit limits on eligible collateral and the ratings agencies will be talking about structural subordination of senior unsecured bondholders. The DCM banker suggests that counting the list of European banks that could issue large amounts of term debt today wouldn’t require anyone to go past the fingers of both hands and start taking off their socks. "A lot of what was put on at 15bp over swaps is coming up for refinancing and it’s going to cost a lot more than 100bp over swaps to replace it: in some cases 150bp to 200bp over," he says. Lending it out at 40bp over doesn’t look like a very sustainable business idea.