P&M Notebook: Keep smiling
After what feels like forever, investment banks are starting to report numbers that look a little less dreadful. Except Deutsche Bank, obviously.
Partly it’s the Brexit effect, partly it’s the ECB-inspired rally in corporates, but there’s certainly been something in the air for the banks that have reported so far. Last week saw Deutsche, BNP Paribas, Credit Suisse, UBS, Barclays, Nomura, Natixis and Santander turn in their report cards, and for the most part, things looked ok.
Deutsche Bank was a notable exception, making a flat €0 (or €18m or €22m, depending how you count). And Nomura’s European business is still resolutely loss-making when you fold in own credit movements. But a few more quarters like the last one, and the gloomy predictions about the collapse of the industry will start to recede.
As ever, business models matter. Rates and FX seemed to stand out for many banks, not only in Brexit-related positioning and two-way reaction flows afterwards, but in other fields such as US munis. At the other end of the business spectrum, new issue equity volumes were down more than 40%.
That tends to flatter banks like Nomura, which shut down its primary European equities franchise, but maintains a thriving rates business. Equally, banks which jumped the other way, like Credit Suisse, saw less of a benefit.
Last week also juxtaposed the restructuring progress of Credit Suisse and Deutsche Bank. Both firms had new chief executives last year, and are in the throes of intense restructuring, with swingeing cuts to balance sheet use and headcount in progress (rather awkwardly, Credit Suisse’s IB and markets headcount actually grew over the year, but the intention is certainly there).
Credit Suisse had the best of the headlines — the Street seemed to detect some “green shoots” among the gloom — but actually, both banks are making progress. Credit Suisse non-core shifted some 54k of CDS trades, while Deutsche’s non-core unwound its biggest single trade. Both banks should be well on the way to closing the back book by the end of the year.
But seen in another light, neither institution made the best of the investment banking environment. Credit Suisse’s pivot to advisory and ECM came at just the wrong time, while Deutsche seemed incapable of capitalising on the apparently benign bond trading environment most banks experienced in the quarter, with fixed income down 20%.
Deutsche said that a big chunk of the revenue decline in debt trading, the bank’s biggest business, came from the rationalisation of its EM franchise and from closing certain business lines entirely. That’s….a good thing, basically.
It’s a tangible example of the “take the pain now” rhetoric which chief executive John Cryan has made a habit of since taking over the bank last year. The promise, though, is that when it’s all over, the bank will be profitable again. Perhaps, if there’s anything left of it.
One man who seems confident in the firm’s future is Alasdair Warren, who joined Deutsche from Goldman Sachs in May to run EMEA corporate and investment banking. Speaking to David Rothnie for the Southpaw column, he’s frank about the desire to seek a challenge, and about the due diligence he did before taking the gig. There’s undoubtedly a lot of talent at Deutsche, a fantastic reach and top level relationships. But by cultural reputation it’s the polar opposite of collegiate Goldman.
A double departure from Deutsche’s securitization team may be a sign of the times. ABS syndicate head Bilal Husain and originator Simon Jones have headed off together to BNP Paribas (which also just hired a head of ABS trading).
In the not-too-distant past, Deutsche was the bank to beat in structured finance, with a massive structured finance vertical running all the way up the investment bank, and a willingness to take plenty of principal risk in real estate, derivatives, longevity, infrastructure and other areas (the sort of risk-taking trade which made Goldman a ton of money last quarter).
BNPP, meanwhile, mainly traded IG product, and most of its lead mandates were for lower risk RMBS and ABS products. More complex and innovative deals occasionally came out, but it never seemed as dynamic as the US banks, Credit Suisse, or Deutsche.
Three hires won’t change that overnight, but it’s quite the statement of intent. Overall, though, the structured finance market has seen far more cuts than aggressive hires, so let’s hope it’s turning a corner.
Meanwhile, JP Morgan sucked up a shock departure at the very top of its corporate finance business — Jake Donavan, widely held up as a possible success to Viswas Raghavan running EMEA banking, has left the firm to become European president of boutique shop LionTree.
Plenty of bankers have left the bulge bracket to join boutiques in the past few years (and a few have come back, either through acquisition or rehiring). Ultimately, though, jumping to a boutique has to be less of a threat than going to a financing-capable competitor. Donavan may still be a JP Morgan man at heart.
UniCredit has yet to report (and may yet be dragged down by the evolving Italian bail-in-out situation), but its new chief executive has certainly had an energetic start. There’s supposed to be a strategic review finishing in September, but it looks like Jean Pierre Mustier already has a good idea of what he wants to achieve.
Key personnel have been switched around as appropriate, the management structure has been reordered, and he’s getting stuck into to some strategic choices. The sale of 10% in its Italian brokerage and Polish subsidiary was one example; the fall of the Pioneer Asset Management deal with Santander another.
In the new Mustier management lineup, though, it’s interesting that Gianna Franco Papa gets responsibility for all of the “business-related matters” at the bank. That suggests Mustier feels the basic direction of travel at the core business is sorted; the chief executive will get to spend time on operations, systems, strategy and the like instead. Oh, and the small matter of a possible capital increase...
At least the €5bn+ that UniCredit may want to take out of the market has a story behind it though — great franchise in CEE, top bank in Italy, which surely has to start growing again at some point — and an energetic new boss who can make things happen.
The story for Monte dei Paschi, however, is harder to see. Equities, even in the oldest bank in the world, have little antique value, and it’s hard to see where big upside would come from, but extremely easy to spot the downsides.
Now, existing shareholders, just over a year after the last rights issue, are being asked for another €5bn, plus €1.6bn to subscribe for junior notes in a gigantic non-performing loan securitization. Like Monte dei Paschi shares? You’ll love equity in the worst portion of its balance sheet!
The firm has underwriting banks on board — JP Morgan and Mediobanca are glocos for the new rights issue and arrangers for the securitization, with a string of other banks are involved too — but ominously, the underwriting agreement includes “certain specific conditions related to the positive outcome of the deconsolidation of the bad loan portfolio and of the marketing activities”. In other words, it’s definitely not a done deal. Securitization bankers, meanwhile, are sceptical about how the monster NPL trade gets done.