Well, that was great, wasn’t it? Yes, there was the geopolitics – trade and protectionism, Brexit, Italy, Russia, China, France (a late addition that one and somewhat surprisingly, perhaps, as it turned out that an investment banker would not seek to govern as a man of the people) – and every region and every time zone had its own events driving markets and sentiment.
And always in the frame, tiny-handed Trump and his Twitter-finger.
But no matter. The US was in growth mode. Employment looked rosy. The dollar repatriation amnesty was adding another cylinder to the engine. Equity markets were robust, companies and lenders were flush with liquidity.
Boardrooms – the savvy ones – knew that with great share price strength came great responsibility, to show growth organically or through acquisitions. If not, your equity was liable to be rerated before too long.
Sponsors, finding themselves head-to-head with the strategic bid more often than not, had to catch up. Activism, continuing to jump the Atlantic to rise in Europe as never before, added another frisson.
And so it played out in the data: global announced M&A at record levels. Acquisition financing as an asset class was surely the biggest driver of corporate finance activity.
And how we banks loved it all – but mustn’t say so! Our executives probed by analysts at every earnings call for signs of complacency. Any regulatory easing was surely a dream come true? No, it’s very early days, it’s not clear what the impact will be, we maintain a cautious outlook, rivals might be pushing the boundaries when it comes to pricing and leverage, but not us. No, not us.
But what’s this? A softening of equity prices? A return to a yield curve? Pah, scoff the capital markets bankers. Clients must accelerate financings to lock in rates. Bring it on. After all, everything up! Assets, profits, returns: returns on equity of above 15%, imagine that! And what a denominator!
Er yes, on that – and I’m sorry I know it’s dull and excuse me for mentioning it, ordinarily I wouldn’t – but capital, as measured by common equity tier-1 ratios, actually down a tad year-on-year at lots of shops. But we know there’s far too much of it sloshing about now anyway. The pendulum too far the other way. Let us give it back or use it, something other than holding it.
After all, we banks are not the risk now – no fear! It’s the funds that have all the fun. Oh yes, there’s danger there – the probability of random outcomes cannot be discounted, you see. Late cycle? Yes, I should say so, perhaps a year to run, but no matter. Flight to quality. Certainty of execution – no, not that sort, don’t be morbid.
We are a strong bear market house.”
|2019: Beyond prudence?|
It’s outlook time, and one might be tempted to look at European banks and think pleasant thoughts as we head into 2019. Capital looks healthy, and certainly not significantly lagging the US institutions. And many firms are putting their efforts into expanding lower-risk activities such as corporate and transaction banking.
But not so fast. Prudential indicators look decent, but according to a new warning from Scope Ratings, they may no longer be what matters most. As Scope’s Sam Theodore notes, the problem is that risks from cyber and misconduct are tough to capture within prudential metrics, which therefore “can no longer fully reassure”.
Cyber is “close to the top of the risk pyramid”, says Theodore, not least because it cannot be quantified. And most importantly for the sector, it’s an area where competitive advantage is hard to profit from. Yes, a bank may get a reputation for having better defences than rivals, but Theodore says this would be “quickly drowned” by a massive cyberattack on a competitor that shook investors’ trust in digital banking altogether. The answer, in his view, must be sector-wide cooperation.
While conceding that European banks ought to remain “in decent shape” for 2019, Theodore has other warnings. Profitability struggles will remain amid continued low rates. And while some banks have been able to post profit gains on cost-cutting rather than revenue strength, this is going to be increasingly difficult to achieve.
Geopolitics will be an ongoing worry for the sector, but mostly because of its impact on revenues rather than asset quality. Cross-border big-bank M&A remains unappealing, in Theodore’s view, with digital expansion a much more palatable way of growing footprint – both from a cost and legacy risk perspective.
What with cyber and misconduct, there are already enough unknown risks in running your own business. Why buy the chance of more?