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Opinion

Abigail with attitude: Bank results are no tasty brew

The results season means the jury remains out for the likes of Blankfein, Gorman and Dougan

Goldman could come out looking smart on market risk

Second-quarter bank profits released in late July and early August were patchy, with some surprises. I don’t want to drone on about events in the rear-view mirror – but some nuggets caught my eye.

The most startling was the disappointing results from Goldman. The firm reported lower than expected earnings of $1.1 billion and announced 1,000 job cuts. Goldman attributed this under-performance to a reduction in market risk.

 

"It will be fascinating to see how 
Blankfein shuffles the deck of
cards he's inherited" June 2006

FICC revenues were down 53% year on year, at $1.6 billion, although revenues in the investment banking and equities divisions rose. The quarterly return on equity was a measly 6%, yet 44% of revenues were set aside for employee compensation.  It will be interesting to see Goldman’s third quarter results. We now know that low risk was the way you wanted to be positioned for the tempests of July and August when the American markets fell nearly 20% in 3 weeks.

Goldman is no longer the pristine prince it was a few years ago. Its star has sunk dramatically, not faded gracefully. A recent article in New York magazine reveals Lloyd Blankfein, Goldman’s CEO, as an introvert with a wry sense of humour, bemused by the public’s antipathy towards his firm’s ‘vampire squid’ reputation.

Will Gorman be Morgan Stanley’s hero or zero?

 
"Gorman was able to use financial
jujitsu to talk an embarrassed
MUFG management into offering
a good deal on conversion of its
preferred stock holding in Morgan
Stanley" May 2011

Morgan Stanley’s reputation however may be on the up. The firm produced a good set of results even though it announced a loss due to its largest investor, Mitsubishi UFJ Financial converting its preferred stock to common stock. Total revenue rose 16% to $9.3 billion, year on year, while revenue also climbed in the institutional securities business which produced a creditable profit of $1.46 billion.

Chief executive James Gorman is battling to reinvent Morgan Stanley as a turbo charged Rolls-Royce with resilient trading revenues and a market leading, wealth management business.

A source muses mysteriously: “Gorman will either be the last CEO of Morgan Stanley as we know it or a great hero.” Gorman may be doing a good job but the overall environment is tough. On the day of the firm’s second quarter profits’ announcement, the share price rallied some 11% to close above $25. I am writing three weeks later, and the stock is languishing at $17 as bank shares wilt.

Doubts grow over Dougan’s model for Credit Suisse

Another bank where investors must be keeping a wary eye on the stock price is Credit Suisse. In my July column, I wrote that the Credit Suisse share price was wasting away, heading towards its crisis low of SFr24.

My gloom proved timely. During the second week of August, that low was breached. Sources whisper that the low share price is affecting morale at the bank. I am unclear why investors have lost faith although given the strength of the Swiss franc, foreign investors have a layer of protection.

It might be that for a while the shares were simply too highly valued on a price to book basis so they have had to slither into line with their peers. Credit Suisse shares today trade at roughly 1.2 times tangible book value which is better than many other European banks.

In 2009,Credit Suisse adopted a more client driven approach in its investment bank lessening its dependence on proprietary trading. This stance does not seem to have paid off as results from the investment bank were weak. Net income was down, year on year, by 31% to Sfr231 million, (USD 297 million).

 

"Dougan was always very keen," a former colleague remembers. "Volunteering for all-nighters when the rest of us were sloping off to the bar" February 2007

 

And the investment bank’s cost/income ratio was terrible at 90%. Credit Suisse is promising Sfr1 billion of cost reductions and a 4% headcount cull. Credit Suisse’s chief executive, Brady Dougan, needs to prove he has the right strategy in place for this new era. Otherwise the words of a mole might be correct: “Dougan won the war of the 2008 financial crisis, but he may lose the peace.”

I have a premonition that equity markets could get much worse next year. Will bank investors continue to accept their role as second-class citizens for much longer? I suspect that now may be a “shape up or ship out” moment for bank chief executives. They need to cut investment banking compensation savagely. I don’t want to see meagre reductions which amount to little more than a fat man trying to lose weight by cutting his toe-nails.

Riots and bankers’ rewards are a heady mix




Am I being too gloomy as the summer draws to a close? How was your week? Please send news and views to Abigail@euromoney.com

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