Abigail with attitude: Bank blows – BES, Barclays, Deutsche
For those of you who were dozing on the beach this summer, with your smart-phones switched off, a leading Portuguese bank was restructured in August and no one, least of all the regulators, seems to have forewarned us of this impending disaster.
Banco Espírito Santo received a €5 billion capital injection after announcing a big loss from exposure to other family-controlled companies. Surely, this sort of thing wasn’t meant to happen anymore?
The BES blow-up raises the question in my mind: “Are banks now an uninvestable asset class?” No one seems to have an official figure for the amount of fines and damages paid out to date by the banking industry since the sub-prime crisis, but consensus seems to be that the number is north of $200 billion and climbing. The pain never seems to end. In August, Bank of America announced yet another settlement with regulators, and coughed up a whopping $17 billion.
The share prices of the big US financial institutions such as JPMorgan, Bank of America and Goldman Sachs, have gone nowhere this year. Do you recall the applause, a year ago, when investment guru, Neil Woodford bought HSBC shares, claiming he had finally found a bank to back.
Well guess what? Woodford recently sold the shares, citing the “unquantifiable” risk of regulatory fines that could hurt the bank’s ability to raise its dividend. “I have started to become more concerned about one particular risk: that of fine inflation,” Woodford stated. “I am concerned… that these fines are increasingly being sized on a bank’s ability to pay, rather than on the extent of the transgression.”
The Abigail with Attitude column would like to know what the regulators are doing with all the money, which they are prising away from the evil banks? Are they going to reduce our budget deficits, or increase regulators’ compensation (following the traditional investment banking guideline of “you eat what you kill”). Or is it merely being set-aside in a cavernous vault, as a bulwark against future banking meltdowns?
Maybe, each time a financial institution is fined more than £100 million, the public should be told what the regulators are going to do with the money? After all, these are enormous sums, which somehow we have become inured to.
As markets jerk awake after the somnolent August break, some of the same issues lurk below the surface. For example, over at Barclays, what is Saint Antony going to do about his much heralded reformation of the investment banking business?
One investor told me crossly: “Jenkins should be bold and close the investment bank down completely. The share price would probably rally at least 30% on that news.” Investor may be too simplistic.
'Banks have a tendency to buy at the
top and sell at the bottom'
But I did cringe when I saw that Barclays agreed to sell most of its Spanish operations to CaixaBank for some €800 million. Barclays will take a £500 million loss on the sale, although there will be a substantial reduction in its leverage exposure.
I seem to recall former chief executive Bob Diamond becoming terribly excited about the ‘Spanish opportunity’ in 2011. A meeting was apparently held with the then prime minister, José Luis Rodríguez Zapatero and the press was awash with speculation that Barclays could gobble up a troubled Caja. But then, fortunately for shareholders, all went quiet again. “Banks have a tendency to buy at the top and sell at the bottom,” my mole sighed.
Following the crisis, I expected good things of Deutsche Bank. The firm was the leading bank in Europe’s strongest economy and the epitome of a flow monster. But it has disappointed. Although Deutsche did not take government money during the crisis, management credibility has been undermined by several subsequent capital raisings. And the share price performance this year has been dreadful – down over 20%. The bank’s two chief executives, Anshu Jain and Jürgen Fitschen, urgently need to improve profitability and try to conclude the seemingly endless legal issues that the bank faces.
Deutsche posted better-than-expected second-quarter profits but Moody’s nevertheless downgraded the firm’s long term and short-term debt ratings. The bank faces a list of investigations ranging from allegations of manipulating rates to unfairly favouring some investors in ‘dark-pool”, off-market trading venues. Most of these probes originate from historic activities in the investment banking area. And, of course, Jain was in charge of the investment bank, for eight years, before ascending to become co-chief executive of the whole bank in 2012. But when I passed him last month, in a London Street, Jain looked fit and well, as if he didn’t have a care in the world. So perhaps things at Deutsche are actually a lot better than I imagine?