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2015-06-16 06:03:21
Restructuring continues at two of the world s universal banks
Jun 13th 2015
ALL houseguests are said to bring pleasure: some when they arrive, others when they leave. The same could be said of banking bosses and the strategies they champion. The surprise ousting on June 6th of Deutsche Bank s embattled co-bosses, Anshu Jain and J rgen Fitschen (who will leave the bank this month and in May 2016 respectively), caused its share price to jump by 8%. Meanwhile, a new strategy at HSBC, hemming in its investment bank and expanding in Asia, was greeted by investors with the enthusiasm usually reserved for visiting in-laws (shares dropped by 1%).
The travails of Deutsche and HSBC are distinct but related: international jack-of-all-trade banks are out of fashion. The cost of running them has spiralled. Regulators who fret they will one day have to bail out these horribly complex global institutions demand that banks finance themselves with more equity (cash from shareholders) rather than cheaper funds borrowed from depositors or in money markets. Compliance costs have ballooned, alongside multi-billion-dollar fines for fiddling currency markets and interest rates or facilitating money-laundering and tax-dodging, among many other trespasses.
Bosses such as HSBC s Stuart Gulliver (and Jamie Dimon of JPMorgan Chase before him) have sought to reassure investors that the benefits of running a global giant still outweigh the hassle. But estimates of the revenue generated by being global, and of the savings reaped by different bits of the firm sharing the same infrastructure, often appear to be plucked out of thin air. In contrast, the fines and capital-raisings are all too tangible for frustrated shareholders.
Many wonder whether the big banks parts might not be worth more than the whole. Returns on equity at universal banks typically languish in the single digits just 2.6% for Deutsche and 7.3% for HSBC in 2014 well below the 10% or more shareholders are assumed to expect. Investors value Deutsche at just 0.6 times the value of its tangible net assets (ie, excluding woolly things such as the value of its brand); in theory it would be better off winding itself up and returning the proceeds from the sale of its investments to aggrieved shareholders. HSBC is valued at just over tangible net assets, but it still lags behind most rivals (see chart).
Assuming bosses ignore the calls to dismember banks, they still have to decide what the right mix of businesses should be. That is no easy task given ever-changing regulations, which have hampered bond-trading giants such as Deutsche in particular. Regulators in effect squashed a plan preferred by Mr Jain to split Deutsche into a red-blooded investment bank, probably based in London, and a staid German lender headquartered in Frankfurt.
The more timid alternative that was ultimately plumped for, which involves reversing the recent acquisition of Postbank, a German retail lender, only frustrated all parties. Investors wondered whether Deutsche s bosses were ready to take the sort of decisive actions some rivals had. Only 61% of shareholders backed management in a non-binding vote on the plan last month. Analysts were bewildered by the lack of detail around promised cost cuts. Unions demanded change at the top.
The workers may soon rue that. The incoming boss, John Cryan, was once the chief financial officer at UBS, a Swiss rival that all but shut down its markets arm. He brings with him a cost-slashing expertise that Deutsche has sorely lacked. Unlike Mr Jain, however, he speaks fluent German, which should earn him points in Frankfurt. German newspapers from the left-leaning S ddeutsche Zeitung to the business-minded Handelsblatt are urging Mr Cryan to return to a boring model of lending to German families and firms.
Mr Cryan s strategic options look limited. Cuts at what will remain of the German retail bank are clearly a priority costs guzzle a whopping 80% of revenue. He may be less sentimental than Mr Jain when it comes to lopping off bits of the investment bank, which is one way to strengthen Deutsche s balance-sheet without tapping shareholders for more money. But investors originally elated by the change of guard now wonder if there won t be more of the same under Mr Cryan. After all, he has been on Deutsche s board since 2013, so had a hand in the underwhelming new strategy. The leap in the share price that followed news of Mr Jain s departure over the weekend had largely subsided by Tuesday.
HSBC has more room for manoeuvre. Like Deutsche, it is depriving its investment bank of capital, cutting risk-weighted assets by $140 billion so as to shrink it from 40% to less than 33% of the group. Unlike Deutsche, it has plenty of lucrative places to invest the freed-up money. Its new strategy is to refocus on Hong Kong. It will leave Brazil and Turkey, and shrink its staff of 266,000 by almost a fifth.
HSBC is in effect gingerly reversing a 20-year policy of diversifying away from Asia, where 39% of its revenues but 82% of its profits are generated. That carries risks, most obviously of a further slowdown in China or other upheaval in emerging markets. But the return on equity at its main Asian subsidiary is 16-17%. Even so, the management is only aiming for an overall return on equity of 10% by 2017 one reason for the lukewarm response from investors. Nor will they know for months if it plans to relocate from London to Hong Kong, as it has sporadically threatened.
Yet HSBC s strategy at least has the virtue of being clear. Deutsche by contrast still doesn t know what it wants to be. Like HSBC, it weathered the financial crisis better than some (both at least avoided a bail-out) but lost focus afterwards. Mr Jain was unable to paint a clear picture of its future, and has paid the price.