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Abigail Hofman: Bank opprobrium index will break the mercury in 2012

Who’d be a bank chief executive? Most fear that 2012 will make a tough 2011 seem like a cake-walk; and it could be the year of the chop at the top of the industry

Abigail Hofman

Job cuts and compensation issues give bank chiefs pre-Xmas headache

Which business lines are actually making money? 

Why 2012 could be the year of the chop for many CEOs 

Horta-Osório didn’t sleepwalk into his enforced leave 

Bhattal battles back while Nomura battens down the hatches

Job cuts and compensation issues give bank chiefs pre-Xmas headache

In the last two weeks, I have met three bank chief executives. This opening sounds a bit like a line from the carol The 12 days of Christmas. In that case, it would be followed by a yelp of ‘and a partridge in a pear tree.’

I found the chiefs weary after an unexpectedly tough year. One was recovering from flu, another had suffered a nasty bout of pneumonia and the third looked totally shattered.

Moreover their mood was even more downbeat than their physical health. They all expect 2012 to be difficult for the financial services industry. One fearless leader mused: “I can’t understand it Abigail. I have people working for me earning $2 million a year and they still have debt. How are they going to manage next year if they lose their job?”

Job cuts were on all the chiefs’ minds. They virtually admitted to me that the cuts announced this year would be followed by much more savage culls if the good times failed to roll in the next few months.

They were all concerned about compensation, which confusingly was too much and too little at the same time. Chiefs acknowledged that industry pay must decline but insisted that they needed to pay the top producers in case “they cross the street or go to a hedge fund.”

I don’t share this anxiety. I believe things will be so bad in 2012 that good people will want to stick no matter what. Also if equity markets are dire, I’m not sure many hedge funds will excel. Remember, the hedge fund industry sagged in 2008; investors suddenly had to learn new terms such as ‘gates,’ and ‘side-pockets.’

Which business lines are actually making money?

If senior managers are sharing their pessimism with me, how cheery will they be with their underlings? I envisage a burgeoning spiral of moribund morale permeating the building.

The key issue is that few divisions are making money. One chief who is in charge of a global investment bank with nearly 20,000 employees said the only areas that were dependably in the black each month were European credit, foreign exchange and equity derivatives.

In addition, increased regulatory and compliance demands have added layers of non-revenue producing box-tickers. So the industry’s dynamics are flawed at the moment.

And if you add to this more macoro-economic problems resulting in further write-downs on European government debt, we could well see big European banks nationalized. This could cause a nasty case of global contagion for the whole financial industry.

I empathize with these men at the top, but if things deteriorate this year, the crowds might bay for their blood. Don’t let’s forget that last year most investment bank chief executives earned millions of dollars, albeit that some of this was in deferred stock.

In western economies, most people away from ‘planet banker’ have seen their living standards eroded by insidious inflation and limited wage increases. If we do see a severe credit contraction as banks stop lending in order to shrink balance sheets, the opprobrium index might break the mercury!

Why 2012 could be the year of the chop for many CEOs

If banks falter badly, will some bank chief executives face the guillotine as happened in the 2007/08 meltdown?

To some extent, bank chiefs are grudgingly seen to be trying to sort out the mess their forbears inflicted. When Ossie Grübel resigned from UBS last autumn, after Kweku Adoboli’s unauthorized trading loss, many investors and commentators were taken aback. Instead of rage against a senior banker, there were murmurings of sympathy for his dilemma and no certainty that any successor could do a better job.

Of course, Grübel had played his hand well: in 2010 he took no bonus on the ground that UBS’s share price had not increased. This bonus round will be key. If chiefs show restraint, their stakeholders will be more tolerant if there are unexpected explosions in 2012.

However, I note that there are some talented 50-something senior bankers who have the ability to step up and run their own show: think Tom Montag at BAC-Merrill Lynch, John Havens at Citi, Fawzi Kyriakos-Saad at Credit Suisse, Greg Fleming and Colm Kelleher at Morgan Stanley, or Jean Pierre Mustier at UniCredit.

Horta-Osório didn’t sleepwalk into his enforced leave

If you do take over a large financial institution in these difficult times, don’t expect it to be luminosity and largesse. In fact, I have two words for any chief prancing in to his new spacious corner office: The first is ‘hard’, the second is ‘slog’.

This brings me back to a subject I wrote about in my December column – Lloyds Banking Group. It transpires that the chief executive, Antonio Horta-Osório was suffering from an intense interlude of insomnia that left him an apathetic husk rather than his normal ebullient and energetic self.

Antonio has been widely criticized for not delegating sufficiently and thus assuming an overly burdensome workload himself.

Doesn’t this caviling miss the point? As a new chief, it is likely that you will want to hire an inner sanctum of your own people. Most successful chiefs do this when they land on new territory.

It was natural that Antonio should seek to dismantle some of the empire that his predecessor Eric Daniels built. However most target hires were and are at other firms and will probably have a notice period of at least three or even six months. Meanwhile, the old guard realize their time is up and, even if they prostrate themselves oleaginously before the new-overlord, they will forever be associated with the old regime. Such individuals start to think about moving to new pastures.

This was the case with Lloyds finance director (and acting chief executive until Horta-Osório returns in January), Tim Tookey. Last September, Tookey resigned from Lloyds to go to an insurance company. Given the old guard were moving on and the new guard hadn’t quite moved in yet, it was inevitable that the person at the top had to run the shop and take the strain.

I am glad that Horta-Osório returns to work this month. But Lloyds will find 2012 as challenging as 2011: the United Kingdom will grow at a snail’s pace and might well slip into a double-dip. Also, chairman Sir Win Bischoff is no spring chicken at the tender age of 70; there may be more change at the top.

Bhattal battles back while Nomura battens down the hatches

Even though bank chiefs are grappling with the same problems (declining revenues, inflexible bloated cost base, obdurate regulators), each institution faces their own set of problems. For some reason, I am reminded of Tolstoy’s wonderful opening to the novel Anna Karenina: ‘Happy families are all alike; every unhappy family is unhappy in its own way.’‎

As 2012 begins, I wonder how Nomura’s wholesale division will fare. Last October, I criticized Nomura for expanding too aggressively and not cutting costs sufficiently. In short, their strategy since acquiring Lehman’s European and Asian operations in the autumn of 2008 had not been value accretive for shareholders. The Nomura PR machine took umbrage and I received several hectoring phone calls.

So it was interesting to see that in early November when Nomura reported its second quarter results for the fiscal year ending March 31, 2012, the firm announced: “Given that market conditions are expected to remain challenging over the short term, we plan to reduce costs by a combined $1.2 billion, which includes the $400 million in reductions announced last quarter.”

The wholesale division reported a pre-tax loss of $1 billion and wholesale revenues dropped by 51% year on year; European wholesale revenues were down 79% for the same period.

Following these disappointing results, Moody’s put Nomura Holdings on review for possible downgrade from its current Baa2 rating, (two notches above junk). Moody’s review of Nomura will consider: ‘The impact of ongoing losses from the firm’s international capital market activities and the likely effectiveness of the announced cost-cutting programme [as well as the] strategic options facing the firm due to the failure to generate synergies and returns from the Lehman acquisition.’

I’m not sure that in this day and age it is a good thing to find oneself aligned with the ratings agencies on anything. Nevertheless, I will watch like a hawk to see if Moody’s does downgrade the Japanese firm.

In the middle of all this, I went down to the City to meet with Nomura’s current chief executive of wholesale, Jesse Bhattal. Jesse was charming but adamant that Nomura was on the right track.

I asserted robustly that the $1.2 billion of announced cuts would prove insufficient and more drastic action was needed. This year will prove which of us had read the runes correctly. I may be a killjoy but I remain cautious on the Nomura story.

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