European banks are locking away value. Alas, this is still not fertile ground for activist investors such as RBR Capital Advisors, which is targeting Credit Suisse.
Firstly, there are too many other stakeholders – not least the regulators. Secondly, activists must spin a simple yarn to gain widespread support, and big banks are far from simple.
From a regulatory standpoint, the possible downsides are much greater than the upsides. If activism goes well, it will release value for shareholders. If it goes wrong at a big bank, on the other hand, it could have repercussions for the entire economy.
The European Central Bank is pushing for improvements to European banks’ corporate governance standards. This is a goal an activist could appreciate. However, regulators often prefer capital set aside than paid out, so their priorities clash.
Consider the typical demands. An activist might campaign for a firm to sell an underperforming division, or the whole group, to drive economies of scale. For a bank like Credit Suisse, while the latter might spark concerns for systemic risk, the former is also an uncertain course. Splitting up Credit Suisse would not be easy, operationally.
There is the unfathomable, although arguably crucial, importance of wealth-management clients to the investment bank, and vice versa.
Activist demands for domestic consolidation could better sync with supervisory concerns.
This is especially so in Europe, where many small and mid-tier banks are struggling because of their size. In the US, activists have gained traction with community bank mergers. The problem in Europe is that many smaller banks are unlisted, as in Germany for example, while in Italy bad debt is so endemic in the mid-tier that merging might only turn two smaller problems into a bigger one.
There is no easy fix.
The other reason why US-style vocal activists will not have much influence in banking in Europe is the memory of episodes like the ABN Amro/RBS merger and the enormous state bail-outs that followed. Activist hedge funds will always struggle to occupy any moral high ground in public debate after those events.
Davide Serra, one of Europe’s biggest bank investors, is therefore wise to favour a more cooperative approach to activism through his company, Algebris. Serra, after all, was associated with activist hedge fund TCI’s push for a break up of ABN Amro and its sale to the RBS consortium.
Algebris partly grew out of TCI.
A firm like Algebris, which now has a non-performing loans business in addition to bank equity and debt funds, is better off having the odd quiet word with bank management or government insiders. Or perhaps the ECB might appreciate another voice on its latest ideas for reducing NPLs. Influential contacts add weight to free advice.
There is, similarly, something to be said for not starting a nasty confrontation in the media, as other activists do. This is a close-knit industry and it is important to have the banks on your side.