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Challenger banks remain vulnerable despite successes

Buy-to-let has boosted some post-crisis entrants but reasons for caution persist

Pity the class of post-crisis challenger banks. The final year of the decade was not kind to the likes of Metro Bank and CYBG, now Virgin Money UK.

For a time they seemed poised to capitalise on the taint left by the financial crisis on Britain’s legacy bank brands of Barclays, HSBC, Lloyds and RBS.

Instead, 2019 left Metro with its own capital concerns and the combined Virgin Money-CYBG with a market capitalisation 40 per cent below the companies’ pre-merger levels 17 months earlier.

Other challengers stumbled too. Santander took a €1.5bn writedown on the value of its UK business in September. The supermarkets, no strangers to price wars, conceded defeat in the mortgage market where interest rates for home loans have been under sustained pricing pressure as HSBC and Barclays extended their market share. Tesco Bank sold its mortgage book; Sainsbury’s Bank has stopped new mortgage lending and is in the process of selling its back book too.

The new generation, of Monzo and Revolut, Atom and Tandem, with models built for the branchless age, may yet give the big four UK retail banks a better fight.

But on the public markets, it was a distinctly pre-crisis area of banking that yielded some of 2019’s best challenger banking victories: buy-to-let mortgages.

While net interest margins (a key measure of bank profitability) have been sliding across the high-street banks, specialist lender Paragon Banking Group defied the trend. At rival OneSavings Bank, they were flat, but analysts have found themselves enamoured of its sector-beating return on tangible equity of roughly 25 per cent. Its takeover of rival Charter Court Financial Services, completed in October, has only enhanced their adoration.

“By far the greatest bank the world has ever seen? What more could we have hoped for?,” asked Investec’s Ian Gordon after OneSavings Bank’s latest quarterly results in November.

Both Paragon and OneSavings are products of the government’s post-crisis push to increase competition, even if they are not entirely new to challenger banking. OneSavings was formed out of the Kent Reliance building society after a capital injection by private equity house JC Flowers in 2010; it got its banking licence in 2011.

Buy-to-let booms have fuelled Paragon’s growth before. As the property market collapsed and liquidity evaporated in late 2007 to 2008, banks declined to renew its funding. Collapse was only avoided by a rights issue so deeply discounted that those who did not take up their rights were diluted by 96 per cent. Paragon was granted its licence in 2014.

Supporters of Paragon argue that this time really is different. Tax changes mean the latest buy-to-let boom has already faded, for one thing. Amateur landlords with a property or two are being chased out of the market. In their place are professionals with sizeable portfolios and companies investing in build-to-rent properties.

The sources of funding have also changed, diversifying the risk of another credit crunch. Retail depositors have been lured (much like with the Icelandic banks in 2007-08) by some of the best savings rates on the market. These clock in at a much more prudent 1 to 2 per cent rather than 2008’s 7 per cent rates.

A monoline securitisation-funded buy-to-let mortgage lender in the previous era, Paragon — like OneSavings — is now a fully fledged bank with £6.4bn of retail deposits, and £1.45bn of commercial loans to add to its £10.3bn 2019 mortgage book. The commercial lending book grew 28 per cent in the year to September and retail deposits rose 21 per cent, though the mortgage book shrank slightly. Its share price climbed close to 40 per cent during the year.

Over at OneSavings Bank, loan growth was 15 per cent, and 21 per cent excluding asset sales at newly acquired Charter Court. Shareholders had to make do with a mere 23 per cent increase in the stock.

Reasons for caution in the sector abound, nonetheless. The Bank of England expounded some of them in June, when it warned that unnamed fast-growing lenders may be underestimating the risks to their business models from a downturn. Of the 20 companies the bank reviewed, many counted on ambitious growth to offset rising defaults in old business if the economy faltered. It was over-optimistic to assume significant growth in generally falling markets, the BoE said.

Buy-to-let and small business lending are vulnerable in a downturn. UK-focused banks’ share prices are vulnerable, too, to the domestic political climate. That gave OneSavings a December post-election boost as the Conservative victory eased property price fears, but leaves investors exposed if the Boris bump evaporates as quickly from the housing market as it has from sterling.

Paragon and OneSavings had a good year. But until they have been through another cycle, investors should not underestimate the challenges these challengers face too.

The kickoff to awards season reveals an industry uneasily coping with disruption

The Golden Globes are the unofficial kickoff for Hollywood’s rounds of award ceremonies and are something of a tone-setter for the season. This year’s message: Old Hollywood habits die hard.

As often in the past, most of the movies nominated were by and about men. At the Globes, which will be presented tonight, and other awards fests, Hollywood is grappling with a complicated relationship with streaming giant Netflix. Logistics of the awards shows themselves are also in play.

In an attempt to prevent people’s interest in Hollywood pomp and circumstance from waning before the Oscars telecast arrives, Academy Award organizers moved the show up to its earliest date ever, Feb. 9.

“There’s a panic across Hollywood because of the shortened Oscar schedule,” says Tom O’Neil, editor of the awards prediction site Gold Derby, pointing out that some voters won’t have time to watch lower-profile films before the voting deadline, which could have a ripple effect. “We could see the shortened season have an impact on diversity” in nominations.

When the Hollywood Foreign Press Association announced Globes nominations in early December, they were met with grumbling by many filmmakers, critics and fans because critically acclaimed films by women, including Greta Gerwig’s “Little Women” and Marielle Heller’s “A Beautiful Day in the Neighborhood,” had been mostly passed over. No films directed by women were among the best motion picture nominees (drama or comedy/musical categories). Nor were any women nominated for best director—a field that hasn’t featured a female director in five years. (Only one woman has ever won the award—“Hurt Locker” director Kathryn Bigelow in 2010.)

This absence stands in contrast to women’s strides in the industry last year as makers of box-office hits. Of the 113 directors behind the 100 top-grossing films of 2019, 12 (or 10.6%) were women, according to a new report by the University of Southern California’s Annenberg Inclusion Initiative. That is the highest percentage since the annual study began 13 years ago.

And yet, as far as awards go, female filmmakers still lag and not just at the Globes. Throughout the nine-decade history of the Academy Awards, only five women have been nominated for best director, and only Ms. Bigelow has won.

“When we think of the masters or the auteurs, we most often think of men,” says Kirsten Schaffer, executive director of the advocacy group Women in Film, citing this season’s frontrunners such as Martin Scorsese’s “The Irishman” and Quentin Tarantino’s “Once Upon a Time…In Hollywood.” “This year in particular there are a lot of ‘masters’ who have films in contention,” she said, “so the conversation seems to gravitate toward them.”

To highlight the accomplishments of women on both sides of the camera last year—especially for people within the industry still picking nominees for awards yet to come—Women in Film and its partner groups recently issued a mock ballot featuring only female candidates in categories ranging from writing to cinematography. Among the group’s goals: to shift perceptions of prestige that can drive momentum for certain films and the subconscious thinking of industry voters.

Ms. Schaffer says the auteur factor—along with the awards marketing campaigns that reinforce it—contributes to the challenges facing some of her favorites, including director Lulu Wang’s “The Farewell” (three Golden Globe nods, including best foreign-language film) and Chinonye Chukwu’s “Clemency” (zero nominations).

Ms. Gerwig, who wrote and directed the recent adaptation of “Little Women,” is accumulating more of that Hollywood glow, thanks in part to her quick follow-up to 2018’s Golden Globe-winning and Oscar-nominated film “Lady Bird,” says Matthew Neglia, owner and editor in chief of Next Best Picture, an awards and entertainment site.

“Once you’re in the club, you’re in,” Mr. Neglia says. Though “Little Women” was snubbed by the Globes (aside from an acting nod for Saoirse Ronan), he says the film is likely to pick up key nominations in future races, including the Oscars.

The rising influence of Netflix is causing major waves. On one hand, the tech giant has shaken the movie business by keeping its subscribers couch-bound and giving its own movies only a brief release in theaters before they start streaming. On the other hand, Netflix has lavished meaty budgets and creative freedoms on filmmakers who struggle to find those things at most Hollywood studios today. Their ranks include Mr. Scorsese, a staunch defender of cinema who made his epic “The Irishman” with the streaming company.

Netflix doesn’t participate in traditional box-office competition, so awards are a key battleground for the streamer. Last year Netflix went all out campaigning for “Roma,” Alfonso Cuarón’s black-and-white period portrait of a Mexican family. The movie won best foreign language picture and best director at both the Globes and the Oscars, but failed to land the most prestigious prize, an Academy Award for best picture.

This season, Netflix releases earned three of five nominations for best drama at the Globes (“The Irishman,” “Marriage Story,” “The Two Popes”) and one for best comedy or musical (“Dolemite Is My Name”).

“Now we’re seeing Netflix doubling down, not just on one nominee, but four, and pushing all of them as equally as they pushed ‘Roma’ last year,” Mr. Neglia says.

“The question becomes will they prevail or will there be a backlash?” he adds. In other words, could Netflix’s aggressive and high-spending approach to awards campaigning prompt some voters to support alternative or underdog candidates.

Several of this season’s frontrunners seem to carry commentary about moviemaking itself. Mr. Tarantino’s “Once Upon a Time…In Hollywood,” a revision of the Manson family story, is also a loving portrait of the industry in its title. “The Irishman” is a mob picture framed by critics as a swan song for the aging heavyweights who made it, including Robert De Niro, Al Pacino and Joe Pesci. “Joker,” starring Joaquin Phoenix became the highest-grossing R-rated film ever, and controversial for its portrayal of mental illness, among other themes. And if “Joker” collects top awards this season, it will also bring a new penumbra of gravitas to the comic-book movie genre.

And then there’s “Parasite,” veteran South Korean director Bong Joon Ho’s thriller about a struggling family that insinuates itself into the life of a wealthy family. A consistent winner on the film-festival circuit, and one of the most well-reviewed movies of 2019, “Parasite” was not, as a non-English language film, eligible to compete in the best drama or musical/comedy categories at the Globes. However, a win for best director and other Globes races could boost the chances “Parasite” has for making history at the Oscars, where a foreign-language film has never won the crowning award for best picture.

Support has grown for what “Parasite” represents, both off and on screen—an indie release by an admired foreign filmmaker and a story about a slow-building clash between classes.

“It’s a revenge fantasy that’s irresistible because it’s so well done. Its appeal is to the rebel in all of us, the rage we have with authority,” says Gold Derby’s Mr. O’Neil, who recently moved “Parasite” to the No. 1 slot in his predictions for best picture at the Oscars. “It’s the one movie that actual Oscar voters seem to be evangelical about.”

Putin’s recent defence of the Nazi-Soviet pact is a worrying distortion

In 1987 the Soviet Union and Poland took the unusual step of setting up a commission for the study of “blank spots” in their common history — that is to say, sensitive events banned from public discussion or falsified for ideological purposes. The initiative was kept under the supervision of each country’s communist establishment. Still, it was the first tentative official acknowledgment that not just historical events but also decades of silence and lies surrounding them had undermined trust between the two countries.

More than 30 years on, the manipulation of history for political ends is returning with a vengeance. In the closing days of 2019, Russian president Vladimir Putin defended the Nazi-Soviet pact of August 1939 and blamed the outbreak of the second world war on alleged collusion between Adolf Hitler and European governments, including that of Poland. Mateusz Morawiecki, Poland’s prime minister, accused Mr Putin of telling deliberate lies about Poland “on numerous occasions . . . It usually happens in a situation when the authorities in Moscow feel international pressure caused by their actions.”

In Mr Morawiecki’s view, recent setbacks for the Kremlin include the ban on Russian athletes for state-sponsored doping programmes; the extension of sanctions on Moscow for its 2014 annexation of Crimea; what he called a failed attempt to subordinate Belarus fully to Russian control; and a European Parliament resolution that attributed the start of the second world war to Soviet as well as German actions.

There is, however, a larger context to Mr Putin’s weaponising of history. First off, as the 75th anniversary of the end of the European part of the second world war approaches in May, Mr Putin wants nothing to tarnish celebrations of the Soviet victory. Since his turn to a more authoritarian style of rule and more belligerent foreign policy, the triumph of 1945 has become a cornerstone of his regime’s legitimacy. It is a success Russians remember with pride in a century scarred by the deaths of millions in revolutions, civil war, terror and famines induced by state policies.

Second, Russia is concerned about the impact of historical truth-telling on the stability of political systems, especially those which curb freedom. During the era of Mikhail Gorbachev, the last Soviet leader, and then of Boris Yeltsin, the first president of the reborn Russian state, the Kremlin recognised grim episodes of 20th-century history with an honesty unmatched before or since. Yet Mr Gorbachev’s bravery discredited the ideology that underpinned the Soviet state and it collapsed less than seven years after he assumed power. That is a lesson learnt by today’s Chinese leaders as well as by Mr Putin.

Under Mr Gorbachev, the Soviet leadership condemned the secret protocol of the Nazi-Soviet pact that lay behind Moscow’s invasion of Poland in September 1939 and annexation of the Baltic states. Later, Moscow took responsibility for the executions in 1940 of more than 20,000 Polish army officers, police officers and members of the intelligentsia at Katyn forest and other sites. The Kremlin also acknowledged wrongdoing in the 1968 invasion of Czechoslovakia to suppress the Prague Spring.

By letting the bitter truth come out, Moscow paved the way for the states of central and eastern Europe to reclaim both their national histories and their post-cold war independence. For this reason, these states are understandably concerned at recent efforts by Mr Putin’s propagandists to rewrite the history of the Nazi-Soviet pact, Katyn and the Prague Spring. In May 2014, two months after the seizure of Crimea, Russia passed a law that prohibited the “rehabilitation of Nazism” — a measure used, in practice, to bend historical discussion to the Kremlin’s ends.

A third point is that Russians and their neighbours really do have different readings of 20th-century history. In a 2017 survey conducted by the Levada Center, Russia’s most reputable pollster, some 45 per cent of respondents “fully or somewhat approved” of the Nazi-Soviet pact. Only 17 per cent disapproved of it. In central and eastern Europe, the pact is seen as the prelude to a 50-year nightmare of suffering under Nazi and Soviet totalitarianism.

In an echo of the 1987 blank spot initiative, Polish and Russian scholars in 2002 set up a “group for difficult matters” to take a fresh look at their countries’ 20th-century relations. The gap in perceptions was so wide that, when they published a book under the title White Spots, Black Spots, they decided to let a Polish and Russian historian give separate treatment to each delicate event.

Even that was a worthwhile endeavour because it enabled each side to understand better the other’s point of view. Historical scholarship that serves such a goal deserves applause. But lies and distortions in the name of state power must be exposed, generation after generation, for what they are.

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Vote poses a pivotal test to American forces that have been instrumental in the defeat of Islamic State

BREAKING: Iraqi Parliament votes to expel U.S. troops from the country, after airstrike that killed top Iranian military leader

Iran-backed militias in Iraq demanded lawmakers attend a session of parliament to vote on the possible expulsion of U.S. troops from the country, after the killing of an Iranian general there put the country at the center of an escalating conflict between its two most important allies.

Inside the parliament hall Sunday, lawmakers chanted, “America out! Baghdad remains free!”

The vote poses a pivotal test to an American troop presence that has been instrumental in the defeat of Islamic State, even as powerful Iranian-backed factions have come to dominate the Iraqi government.

One of those militias, Kataib Hezbollah, threatened lawmakers who failed to show up at the session or vote in favor of a law to evict U.S. forces, branding them “traitors.”

A senior state department official earlier this week said the U.S. was working with its Iraqi allies to prevent the vote taking place, characterizing the killing of Maj. Gen. Qassem Soleimani as supporting the sovereignty of Iraq against Iran.

The U.S. strike in Baghdad that killed Gen. Soleimani, and a top Iraqi paramilitary leader, has raised the possibility of direct confrontation between the U.S. and Iran. With its top two allies increasingly at odds, the Iraqi government faces the prospect of deciding whether it remains a partner for the West or ends up firmly in the Iranian camp.

The U.S. strike also cast doubt on the durability of the U.S.-led campaign against Islamic State at a time when the militants are seeking to regroup in Iraq and Syria after being defeated militarily.

Iran has vowed to retaliate for the killing of Gen. Soleimani, raising fears of wider conflict across the region, where the slain commander of the Islamic Revolutionary Guard Corps foreign wing cultivated a network of proxies that could be activated to strike U.S. interests.

“Hard days and nights are awaiting them,” said Yahya Rahim-Safavi, former commander of the Revolutionary Guard and senior adviser to Supreme Leader Ayatollah Ali Khamenei, in a speech quoted by state television. “The Americans must leave West Asia [the Middle East] in disgrace and defeat.”

On Saturday, rockets landed near two Iraqi bases where U.S. forces are stationed, causing no casualties but serving as a reminder of the increasingly hostile climate for American troops.

Kataib Hezbollah has given Iraqi security forces a deadline of Sunday evening to move at least 1 km (0.62 mi) away from bases where American troops are stationed, urging military commanders not to allow their soldiers to serve as human shields for the U.S. Iraqi security forces have been unable to prevent a spate of rocket attacks targeting those bases in recent months, which U.S. officials blame on Kataib Hezbollah.

“We have increased security and defensive measures at the Iraqi bases that host anti-ISIS coalition troops,” read a statement from the U.S.-led coalition, confirming Saturday’s attacks on Baghdad’s Green Zone and Balad air base, located about 40 miles north of the capital.

The U.S. has around 5,000 troops in Iraq as part of an international coalition that was invited by the country’s former prime minister after Islamic State overran around one third of the country in 2014. Two years have passed since Iraq claimed victory over Islamic State but the coalition has remained to help prevent a resurgence of Islamic State and to train Iraqi security forces.

Ahead of the planned parliamentary session, a draft of a resolution circulated among lawmakers. The resolution demands the Iraqi government “cancel the request for help it presented to the international coalition to fight ISIS.”

It wasn’t clear whether a quorum of 166 lawmakers could be reached. Lawmaker Aram Naji said most Kurdish and Sunni factions weren’t attending the session, but that around 150 lawmakers were present so far.

The parliament itself doesn’t have the authority to oust U.S. troops but the law, if passed, would put pressure on the executive branch to do so.

Several dozen lawmakers held prayers for Mr. Mohandes and Gen. Soleimani inside the parliament ahead of the planned vote that, if held, remained too close to call.

Shiite political leaders who control a majority of seats in the Iraqi parliament condemned the U.S. strike as a violation of sovereignty, but some also have misgivings about the growing dominance of Iran-backed factions and see Washington as a necessary counterweight to Tehran’s influence.

Along with many Kurdish and Sunni lawmakers, they worry a withdrawal of U.S. troops would enable a resurgence of Islamic State and lead to Iraq’s isolation, pushing the country decisively into the Iranian camp. The reaction from Kurdish and Sunni politicians to Gen. Soleimani’s killing has been relatively muted, and they were not visible at a funeral procession for him and Mr. Mohandes on Saturday.

On the eve of the vote in parliament, Abu Ali al-Askeri, the head of security for Kataib Hezbollah directly addressed Parliament Speaker Mohammed al-Halbousi, a Sunni: “Tomorrow and afterwards our eyes are on you to observe what your decisions regarding the forces of the Crusader occupation will lead to,” he said.

In another statement, Kataib Hezbollah threatened the Kurds and said it would prevent lawmakers who thwarted efforts to oust U.S. troops from entering Baghdad. Jamal al-Karbouli, a senior Sunni politician, denounced the threats and intimidation.

“We’d certainly be very disappointed if there was some sort of adverse decision by the Iraqi parliament,” said national security adviser Robert O’Brien. “We’ve invested a lot in the future of Iraq and the friendship that we have with the Iraqi people, so we’re looking forward and hopeful that we’ll have a good relationship with Iraq going forward.”