Where to for VUK, page-11

Well, you got me off my derriere to have a bit of a dig around looking at those UK peers for context.

Here's a summary of what I found:


[*] Stripping out insurance-related assets and liabilities


Yes, VUK's leverage is higher than Bank of Irealand (BOI) and Lloyds (LLO), but some meaningful qualifying comments are required.

Firstly, 81% of VUK's loans are for residential mortgages, while BOI and LLO undertake far more corporate lending than VUK, so VUK's book is of a much less risky quality. So that provides some context for VUK's apparent thinner capitalisation.

Secondly - and this is where we get to apples with oranges comparisons between VUK and BOI+LLO - the balance sheets of both BOI and (especially) LLO are distorted by those companies' meaningful insurance activities, of which VUK obviously has none.

Because insurance is of non-lending nature, Loans-to-Equity for insurance operations is effectively zero, which has the effect of significantly reducing the overall group leverage when insurance gets consolidated with banking operations.

I struggled to identify the pure insurance-related assets and liabilities for BOI (they might be detailed in the Annual Reports, but I only looked at their latest interim financials where I couldn't identify them), but for LLO I was able to strip those out, which resulted in a significant reduction in shareholder Equity. As can be seen, the resulting hypothetical leverage, if LLO banking operations were a standalone business, is off the charts.

Even if my numbers aren't 100% correct, which I suspect they aren't, the balance sheet distortions from bolting insurance businesses onto banking ones, is highly material.

Anyway, I learnt a few things from the exercise, and learning is always good, so thanks for the prompt.

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