Squeezing the bank balance sheet from both sides
Ever on the look-out for new and lucrative corners of the capital markets, many firms have identified what is often called capital management as a promising niche. At its most respectable, this business consists of advising banks and other companies on how to measure and manage the true economic risks of their activities. More often than not, however, it is about cold-calling bank treasurers and trying to sell them ideas for complex deals. Michael Peterson reports
Lately, European bank treasurers have been receiving a lot of suggestions for deals designed to improve their return on capital.
They should be receptive to these ideas - even if they balk at the fees being asked - because they are under growing pressure to improve return on equity.Of course, banks can do this by cutting costs or improving their lending practices, but a bit of financial jiggery-pokery helps as well. With a collaterallized loan obligation here and a hybrid tier-one deal there, banks have found that they can squeeze an overweight business into a slim-line balance sheet.
Pressure to improve returns is coming from equity investors that have grown tired of accepting single-digit returns on their investments - especially if they now have a whole eurozone full of alternative assets they can buy. "Investors are forcing European banks to improve returns on equity just at the time their cost of funding is rising because they are starting to lose cheap deposits," points out Oldrich Masek, head of financial institutions structured finance at JP Morgan in London.