Bank business models and regulation. 2 October 2013 Séminaire IEP-Banque de France Respondant : JB Bellon

Transcription

1 Bank business models and regulation 2 October 2013 Séminaire IEP-Banque de France Respondant : JB Bellon

2 1. Evolution of Bank Business models after regulation 2

3 World is changing again 3

4 and market darlings too Changing mood of investors from mega banks in the late 80 s (HSBC, Citigroup, ) to specialized one s in the late 90 s (Lloyds TSB, GS, ). Investors hated commercial bank moving to investment bank, e.g. Deutsche Bank (quantity over quality?). Up to the crisis, growth plus was the key attribute for bank preference, including growth through acquisition (RBoS, Santander, ). Following the crisis old banking style revaluated with RBC or SHB as the good bank favorite names. 4

5 Irlande Espagne GB Danemark Portugal Grèce Belgique Pays Bas UE Chypre Allemagne France Italie Bank support trauma was different (support as a % of GDP) 35% 106% 30% 25% 22% 22% 20% 19% 19% 19% 17% 15% 12% 11% 11% 10% 8% 5% 0% 2% 2% 5

6 which explains fragmented rules 6

7 and investors uncertainty 7

8 Crisis challenged leverage Leverage and Liquidity crisis Dependence on short term (less than 1 year?) and wholesale funding is dangerous either for Investment banks (what is the market value of non liquid assets?) or for retailers with a low or weak deposit base (N Rock, CIF, ) Trading is using too much liquidity. Loan to Deposit ratio should be much lower, but it seems that low LTD (below 100%) are not an insurance for safe behavior : Benelux banks, JP Morgan London CIO, 8

9 Deleveraging is still an on going process 9

10 and asset reduction will cut revenues Global CIB revenues in bn $ (ex write downs and DVA) revenues REVoA 2,35% 2,30% 2,25% 2,20% 2,15% 2,10% 10

11 on the top of regulatory changes 11

12 reducing high margins in opaque areas 12

13 Banking intermediation is also under scrutiny Banking intermediation is based on a certain balance of maturity and quality. Temptation to increase intermediation margins (i.e. risk) to offset decline of revenues in a more competitive environment (Dexia example less client margins more portfolio revenues) or to increase returns. Carry of A-AAA security (ABS, CDO ) at most of the bank was a nice short term sweetener of revenues until Flexibility of portfolio capex was too large (UBS 100bn CHF, RBoS > 50bn ). 13

14 GDP in EUR M per branch Retail was growing in the wind of credit volume in southern Europe MS 200,0 Bank networks in Europe Buble size proportionated to the number of branches 180,0 NL 160,0 140,0 Sweden 120,0 Finland UK 100,0 DK 80,0 60,0 Belgium France Czech Rep 40,0 Italy Germany 20,0 Spain Portugal Romania Poland Austria Slovakia 0, Staff per branch Bar 14

15 E Creating excess capacity Spain : cumulative changes in branches branches banks cajas 15

16 Networks will be more balanced 170% Retail bank : Loan to Deposit 160% 150% 140% 130% 120% 110% 100% 90% 80% groups BNP Paribas SocGen LCL CR CA 16

17 Pricing is only reflecting rising credit risk 17

18 Questions on Bank Business models Useful, Useless or Utility? Debate on structural issues not over. Reduce the scope of activities allowed? Utility bank an oligopoly regulated at cost plus a margin in order to fund maintenance capex and growth? Even if not facing extreme changes, more transparency and margin could be required to be socially acceptable. Capacity to move out of banking regulation scope, more shadow 18

19 2. Is M&A part of the answer? 19

20 Concentration already increased France Germany UK Spain Italy

21 Expected RoE matching CoE consistent with P/TBV = 1x 21

22 The main driver to increase RoE is cost cutting 22

23 However current valuation does not incorporate any goodwill at P/TBV = 1x 23

24 Goodwill used to be an issue despite regulatory deduction Goodwills chg as a % of Market Cap % market cap in M Santander % 43% Intesa SP % 37% Crédit Agricol % 149% HSBC % 15% RBS % 89% Unicredit % 52% BNP Paribas % 26% Deutsche Ban % 33% UBS % 20% Credit Suisse % 29% SocGen % 37% Barclays % 18% BBVA % 18% Lloyds BG % 19% ING % 11% Top % 30%

25 Management claim on M&A relevance 25

26 Regulators hesitate to back large M&A, afraid from abuse of market power 26

27 but do not bar smaller operations which increase efficiency of the industry 27

28 Jury is not out, but past experience is not too impressive 28

29 Investors are not very supportive of M&A Statement 1 : M&A serves management not shareholders, ABN-Amro bid as a good example Statement 2 : aggressive cross border acquisition strategy is a good recipe for disaster, usually at high entry prices (see exit from Greece, Russia ). Good banks do not need help and bad banks are really bad and difficult to turn around. Statement 3 : acquisitions in downturn (vulture) could create value, thanks to low P/BV. Statement 4 : in-market acquisition are more attractive. Statement 5 : Large banks are nevertheless the product of M&A, good risk culture is key. 29