United Kingdom

Christopher Thompson

Breakingviews - Spluttering SocGen undone by its own complacency

07 Feb 2019

LONDON (Reuters Breakingviews) - Frédéric Oudéa needs a new name for his strategic plan, Transform to Grow. Given the Société Générale chief executive’s admission that the French bank must restructure to stand still on shareholder returns, “transform to woe” may be more appropriate. Planned cuts to SocGen’s misfiring trading hub will only go so far. A capital shortfall is a potentially bigger concern.

Breakingviews - Beatup BNP Paribas puts euro zone banks on notice

06 Feb 2019

LONDON (Reuters Breakingviews) - Bankers in Europe have regularly complained that a steep sector selloff – the benchmark Euro STOXX Banks index is down by a third over the past 12 months – simply isn’t justified by the economic outlook. BNP Paribas, the biggest bank by assets in the euro zone, delivered a convincing rebuttal to that optimism on Wednesday with a one-tenth fall in pre-tax profit. The Parisian bank’s declining top line points to bleaker revenue outlook for the industry.

Breakingviews - Deutsche Bank reprieve is only temporary

04 Feb 2019

LONDON (Reuters Breakingviews) - Deutsche Bank is not dying, judging by its 2018 results. But nor is the lender rising from the sick bed anytime soon. Its first net profit in four years is a welcome tonic for long-suffering shareholders. Chief Executive Christian Sewing’s planned cost cuts will, however, have to be supplemented by revenue growth if the bank is to meet a meagre 4 percent return on tangible equity target this year.

Breakingviews - Cost cuts can help UBS ride market ructions

22 Jan 2019

LONDON (Reuters Breakingviews) - UBS has sounded the end of an era on a bum note. A quarterly pre-tax loss at the lender’s investment bank coincided with the sudden departure of chief rainmaker Andrea Orcel, while market declines saw wealth management profit fall sharply. Still, as long as Chef Executive Sergio Ermotti can stick to his cost-cutting targets the group should be able to manage volatile conditions better than peers.

Breakingviews - SocGen warning boosts investment bank sceptics

17 Jan 2019

LONDON (Reuters Breakingviews) - Frédéric Oudéa remains at the mercy of his misfiring traders. The Société Générale boss on Thursday warned the French lender’s investment banking revenue had fallen by a fifth in the fourth quarter. Keeping the dividend flat and letting investors take it in shares, rather than cash, points to further capital headwinds.

Breakingviews - U.S. will find a way to make Danske Bank suffer

04 Jan 2019

LONDON (Reuters Breakingviews) - Karsten Dybvad is putting on a brave face. Danske Bank’s new chairman recently insisted that the Copenhagen-based lender did not face an “existential crisis”, despite helping clients launder up to 200 billion euros between 2007 and 2015 via a Baltic subsidiary. In 2019 that will be put to the test. Over the past year U.S. lawmakers have ramped up regulatory pressure on foreign lenders that fall foul of anti-money laundering (AML) guidelines and sanctions violations. They have already pushed the closure of two European banks this year, Latvia’s ABLV and Malta’s Pilatus. The fact Danske acknowledges that around 46 billion euros in suspicious funds came from Russia raises the possibility some may have originated from sanctioned individuals, raising the stakes yet further. True, Denmark’s biggest bank by assets would represent a much larger target. Its chief executive and chairman have already stepped down. And certain characteristics complicate Uncle Sam’s scope to throw the book. Firstly, Danske has no U.S. banking licence. Secondly, its U.S. dollar transactions were cleared by correspondent banks, including Deutsche Bank. The obvious objection is: but Trump. The fact that the Nordic lender hardly registers in the United States gives Maxine Waters, Financial Services Committee chair of the House of Representatives, wide latitude to make an example of it. Using powers under “Section 311”, the U.S. Treasury can order American-licenced banks to sever their correspondent relationships, cutting off lenders from U.S. dollar funding. Deutsche Bank itself may not make a sufficient fall guy: correspondent banks are not required to perform substantial customer due diligence on the clients of their respondent institutions, according to guidance from the Paris-based Financial Action Task Force, an intergovernmental organisation which sets industry standards. With a robust common equity Tier 1 capital ratio of 16.4 percent, Danske shareholders arguably have a lot of protection. Assuming current risk-weighted assets of 738 billion Danish crowns ($113 billion), the bank could afford a financial hit of around $5.3 billion before breaching its regulatory minimum of 11.9 percent. That would be an unusually large fine for AML violations. But if Danske is judged to have skirted U.S. sanctions too, it would justify a stiffer than normal response. Dybvad may have spoken too soon.

Breakingviews - EU investment banks face the regulatory microscope

28 Dec 2018

LONDON (Reuters Breakingviews) - Europe’s careworn investment banks have something new to worry about in 2019: a close-up examination by regulators. As five years of benign credit and abundant liquidity comes to an end, watchdogs are probing lenders’ internal models to test their resilience to turbulent markets. For banks which hitherto relied on their own guesstimates, that could eat into capital. The Single Supervisory Mechanism – the European Central Bank’s top bank cop - has spent much of its short life focusing on the bad debts that were the legacy of the euro zone crisis. In 2019, however, it is expected to shift its focus to scrutinising investment bank balance sheets. One component is finalising its “targeted review of internal models” (TRIM), which began in 2017. Lenders such as BNP Paribas, Deutsche Bank and Société Générale are all heavy users of bespoke models to help calculate risk-weighted assets (RWAs) and, by extension, their common equity Tier 1 capital ratio (CET1) requirements. Regulators have long suspected that this approach allows big banks to shrink the amount of capital they would otherwise have to hold compared with standardised models mostly used by smaller lenders. They are now phasing in new rules which requires the outputs of banks’ own calculations to be no lower than 72.5 percent of the standardised version. Yet ECB supervisors are still concerned by what they say are large inconsistencies in the way banks measure similar RWAs – with some lenders relying on overly “optimistic” assumptions, according to a person familiar with the discussions. The ECB’s other priority will be examining the assets on bank balance sheets - including credit default swaps, long-dated derivatives and private equity investments – whose value cannot be determined by market prices and thus relies on banks’ internal assumptions. For European Union banks these “Level 3” assets have collectively shrunk from 188 billion euros to 132 billion euros over the past three years, according to ECB data, and account for less than 1 percent of total bank assets. Yet their significance is substantial for a few investment banks. At Deutsche Bank, BNP and SocGen, Level 3 assets are equivalent to 47 percent, 14 percent and 18 percent of CET1 capital respectively. A small change in valuation assumptions could therefore have large consequences. Following years of poor returns, rising rates and increased market volatility could boost investment banks’ trading revenue, while the effects of past cost-cutting should also begin to pay off. But a spell under the regulatory microscope will dent that enthusiasm.

Breakingviews - Deutsche Bank will be unlikely 2019 trading star

27 Dec 2018

LONDON (Reuters Breakingviews) - Whisper it gently: Deutsche Bank shareholders might finally have something to cheer about. The German lender has in recent years seen seemingly irreversible declines in trading revenue that have outpaced cost-cuts. In 2019 its business mix, and the potential for currency volatility and rising European rates, should make it a relative winner. Ever since the financial crisis Europe’s investment banks have resembled a car crash in slow motion. The region’s lenders have seen their overall investment banking revenue decline by 27 percent since 2010, according to UBS, compared to an 18 percent decline globally. Deutsche has been even worse — at its bedrock fixed-income trading division, which in 2017 accounted for 17 percent of group net revenue, turnover has dropped by 28 percent over the last two financial years alone. Its shares trade at a pitiful, Greek bank-style valuation of just 0.3 times tangible book. Deutsche Bank executives have had to repeatedly deny reports that a defensive merger with Commerzbank is in the offing. Fixed-income traders tend to thrive when there is a trend. The last time this occurred in Europe was when European Central Bank President Mario Draghi introduced quantitative easing in 2015 and guided steadily lower interest rates. Consequently, asset managers increased buying and selling and companies purchased more hedging products. As the ECB prepares to scale down its asset purchases, the next trend is rising yields. Given that Deutsche has the biggest market share in European rates apart from JPMorgan, its top line should benefit disproportionately from heightened client demand. Political volatility could add some additional gloss in currencies. Continued geopolitical uncertainty in Europe — think Brexit and Italy — and elsewhere should lead to wider currency spreads and, all else being equal, greater profits. Chief Executive Christian Sewing has zero room for complacency. A boost in European trading income will be somewhat offset by falling U.S. revenue due to cutbacks in Deutsche’s U.S. rates and equities business. At the same time, Sewing must find another billion euros in cost savings, and firefight Deutsche getting dragged into questions over money-laundering controls. Analysts only forecast a 3 percent return on tangible equity for Deutsche in 2019. But the bank’s increasingly diverse shareholder register — which encompasses Qatari, Chinese and U.S. hedge fund investors — doesn’t need rising European rates to lead to a miraculous resurgence. Just a transition from terrible to merely bad.

Breakingviews - EU Brexit safety net still means trauma for London   

20 Dec 2018

LONDON (Reuters Breakingviews) - Card players can bluff by raising the stakes to induce their opponents to fold. The European Commission played a similar hand on Thursday when it released plans to manage the fallout if the UK can’t agree a Brexit deal with the EU. The proposal looks unrealistic, but it still gives the bloc negotiating leverage and could damage London.

Breakingviews - Deutsche Bank’s new dark clouds have silver lining

29 Nov 2018

LONDON (Reuters Breakingviews) - There’s bad days at most companies, and then there’s a typical 24 hours at Deutsche Bank. Even by the German lender’s low standards, November 29 will stick out as a dies horribilis: a police raid on its Frankfurt HQ followed by an achingly defensive press release, media speculation that the head of its investment bank is under pressure to go, and further dips in its share price. Even so, there are still reasons to believe Deutsche can bounce back.

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