As discussed in yesterday’s post, the Just Group auditors stated that the final outcome of CP 13/18 could have a materially negative effect on the regulatory capital position and financial condition etc. of the Group, and constitute a material uncertainty that may cast significant doubt on the Group’s ability to continue as a going concern. You might have thought that was clear enough, but lest you should have been misled, Rodney Cook (Group CEO) clarified matters at a presentation. [1:11:00]
“Let me just cover off the word ‘doubt’, that is an auditing and accounting and statutory set of words, and that is why it is in there.”
That makes sense. ‘Material uncertainty’, ‘significant doubt’, ‘going concern’ etc do not have their usual English meaning, but are merely accounting and auditing technical terms, signifying nothing in particular as Mr. Cook notes.
Now I am not versed in accounting terminology but this suggests that ‘significant doubt’ does in fact mean significant doubt, but who can say?
The presentation cast no further light on how the group is earning its money. It revealed that they make a loss if the housing market is flat, but this fact is already implicit in the matching adjustment model: the risky assets must keep earning risky returns just to pay off the creditors. Earning the risk free rate doesn’t cut it. So where does the operating profit come from?
They also claimed that the “NNEG shortfall” on the JRL portfolio would be only £69m after ten years of house prices falling, but such an outcome is only to be expected. An ERM is like a set of bonds with different maturities, with the shorter maturities (less than about 18 years) being high-yielding yet undefaultable credits, but the longer maturities being closer to junk.
We were told again how price falls implied by the PRA paper were highly unlikely and ‘extreme’, but once again this statement confuses valuation with risk. Neither the PRA nor ‘Asleep at the Wheel’ are making any claims about property growth, as we have insisted many times.
No further light was cast on the puzzle I mentioned here, about the inexplicable increase of £1bn in ‘other valuation differences’ from 2016 to 2017. Rather, the puzzle gets more puzzling. According to p.11, the “other valuation differences” item was not £1bn in 2017, but only £902m, so the numbers have been revised. For the interim statement, that number has now fallen to £875m, offset by a fall in transitionals from £2,049m to £1,791m. The net result is to leave regulatory capital unchanged, but where did they make the money to match the fall in transitionals (which are a kind of asset)? The balancing item is the ‘other valuation differences’, but my requests for clarification from the firm have been met by stonewalling and obfuscation.
Significant doubts remain.