P&M Notebook: Losing large amounts of money is the new flat
The banking industry has progressed from the sort of soft, will-they-won’t-they mediocre revenue performance which characterised 2014 and 2015 to hardcore, unambiguous bottom line losses.
Royal Bank of Soctland lost money for the eighth year in a row, but it is no longer a laughing stock. Lloyds and Standard Chartered also lost money. Deutsche Bank and Credit Suisse lost spectacular amounts of money. Even HSBC lost money.
Ian Gordon, banks analyst at Investec, summarised the situation: “The fact that Standard Chartered reported a loss in Q4 2015 is not particularly newsworthy — so did HSBC (Buy), and so (we think) will Lloyds (Buy), RBS (Buy) and Barclays (Buy).”
An industry which can attract a string of buy recommendations while reporting a string of losses is clearly in a strange place. The big question is, how plausible are the various excuses for 2015’s abysmal performances?
One-off charges for litigation and conduct seem to have simmered down a little bit in the latest round of reporting; even Deutsche Bank had some good news here, with the announcement that BaFin is no longer conducting a “special audit” of the bank’s IBOR-setting practices, precious metals trading, and certain actions related to Monte dei Paschi di Siena. The German regulator “does not see the need to take further action against the bank or former and current members of the management board with respect to the closed special audit”.
Happy news indeed for Anshu Jain, who has just got a new job — advisor to marketplace lender Sofi. All very disruptive, very on-trend — but there are reasons to be sceptical about just how new or different the online lenders are from traditional banks.
Anyway, the bad news for 2015 seems to be mostly driven by good old fashioned poor market conditions and surging impairments in oil and gas lending, with a certain amount of new chief executive kitchen-sinking of bad news. Some banks are sitting on hung bridges as well.
While the year’s P&L looks mostly grim, the quality of capital is arguably improving, with better coverage of possible loan losses, and the clear-out of goodwill.
Banks have lined up to tell the market that their oil lending is good quality, investment grade, collateralised, and safe. But surely someone must have exposure to the riskier end of energy financing?
There are a few other scattered excuses, of varied plausibility. The UK banks all complained about the bank levy in their reporting, though it looks like it will be subject to an “HSBC amendment”, restricting its application to global balance sheets. Intra-group funding might count, but “loss absorbing instruments” that pass TLAC debt around the group shouldn’t.
Moving around TLAC will be a particular challenge for HSBC, present in 71 countries, with more than 60 different regulatory regimes to comply with, and a planned “multiple point of entry” solution to resolution. The rules aren’t finished yet, and may not even be fit for purpose. But nonetheless, they come in from 2019, so HSBC might have an extra $10bn per year to issue, and it might as well get started.
Other oddities include an unusually large credit valuation adjustment/funding valuation adjustment (CVA/FVA) charge for the quarter at Standard Chartered. Most banks have already taken the pain of switching to FVA accounting for their derivatives (incorporating their own funding into the positions they are running), but Stan Chart’s €863m accounting loss in CVA/FVA seems to be down to properly measuring the book for the first time — specifically, moving from “bank internal funding rates to market-based rates”.
HSBC’s quarterly loss, however was quickly followed by some good news, in the shape of the hire of Matthew Westerman from Goldman Sachs. Westerman had been chairman of EMEA investment banking division at Goldman. He returned from Asia, where he had been chief executive of Asia Pacific investment banking, last year.
Goldman is corporate broker to HSBC, and doubtless the bank’s strategic discussions and study of where it should locate its headquarters have kept Westerman occupied, before he decided to go in-house.
He will be co-head of an expanded global banking unit, which will fold in all of the businesses in Spencer Lake’s capital financing division, plus a swathe of clients from the larger end of commercial banking.
Lake himself was kicked upstairs to a vice-chairman role, with a brief to carry on working on some of the projects he took a particular personal interest in — infrastructure, renminbi internationalisation and green finance.
Westerman’s appointment, combined with Stuart Gulliver’s signal that he will be stepping down as group chief executive in 2017, is exactly what is needed to kick-start some succession speculation.
Does Samir Assaf take over, with Westerman stepping in to his job running global banking and markets? Perhaps the whole division will be rebranded, and become a 'CIB' — placing the investment bank at the core of HSBC, rather than playing second fiddle to commercial lending. Will Assaf and Gulliver go together, when they go?
GlobalCapital’s David Rothnie parses what this means for HSBC in this week’s Southpaw column, and he’s very supportive — HSBC might, finally, make the leap to big time investment banking. The bank’s rivals have never been weaker but HSBC’s historic heartlands of trade financing and greater China aren’t looking too hot.
Meanwhile, in other British-banks-hiring-hotshot-bankers-from-successful-US-firms news, a reader points out this week that Barclays is looking awfully light on management right now.
Jes Staley took over as chief executive on December 1. He should have his feet under the table by now, but Barclays is not a simple organisation.
There has been a lot of change in the C-suite. Jonathan Moulds, who was leading the creation of the ring-fenced bank as group chief operating officer, is leaving, while Paul Compton, his ex-JP Morgan replacement, does not join until May.
The bank’s new chief risk officer, CS Venkatakrishnan, also does not start until May, though his predecessor, Robert LeBlanc, is sticking around as chairman.
Throw in Tom King, the chief executive of the CIB, who is planning to retire, heads of syndicate and DCM heading upstairs or out, and one starts to wonder who exactly is driving the bus. CFO, Tushar Mozaria, and chairman, John McFarlane (who spent much of last year as executive chairman) are still knocking about but it does not look like queues are likely outside the executive bathroom these days.
Last week’s P&M notebook spent a bit of time on the joys of matrix structures, so we won’t dig into syndicate too much. The main difference to GlobalCapital’s eyes seems to be the reporting lines.
Debt syndicate at Barclays is now a purely banking activity, with its own separate risk reporting line and risk budget. It goes up only through John Langley, who is effectively head of capital markets and private side derivatives, rather than through fixed income markets.
We theorised that this was a way of protecting syndicate from further savage cuts to fixed income trading, preserving the “origination-led” model Barclays has been trying to push since its big restructuring announcement in May 2014.
The theory was promptly shot down by a source with knowledge of the situation, but we note that equity syndicate is still in equity markets with no plans to move. ECM execution seems further from equity secondary markets than DCM execution is from bond trading, so, if anything, is a stronger candidate to join banking purely on the merits of the reorg, but there we have it.
There is more Barclays restructuring to come on Tuesday, with a whole new strategy expected alongside the annual results (quick work from Staley).
We understand the bonus pool across the bank was down a piffling 12% (against numbers like 25%-40% elsewhere). One can see this as a parting success from Tom King in protecting his staff’s compensation, or a signal that Barclays is incorrigible when it comes to paying out too much to its bankers and not enough to its long-suffering shareholders.
Other things we spent time on this week include the LSE-Deutsche Börse tie-up — doubtless a powerhouse of clearing, exchanging and trading, with “synergies” aplenty, but will it fall foul of regulators?
Clearing house regulations and resolution plans are so fresh the paint is still wet, so there’s a fair bit of uncertainty about how they treat two big beasts merging.
But for every piece of collateral that isn’t posted to a clearing house, there’s some cheer in the market, and cross-margining interest rate swaps (at LCH.Clearnet) and government bond futures (at Eurex) has obvious benefits for rates and macro traders.
Hot on the heels of the LSE-DB possible merger, the Singapore Exchange put in a bid for the Baltic Exchange — expect more exchange M&A to come.