J. Christopher Flowers, the private-equity investor who in September called Europe’s economies “deeply troubling,” said 2012 will be a “good time” to invest in financial companies unless the euro zone splinters.
Flowers’s firm, J.C. Flowers & Co. LLC, will keep “a lot of cash” on hand as Europe’s sovereign debt crisis unfolds, he said at a conference in Hong Kong today.
“If the euro survives, 2012, more or less, will probably turn out to be a very good time to be investing in financial services,” Flowers said. “The best thing for us would be for the euro zone to hang together, because even in that scenario, there is going to be all kinds of stuff for sale, lots of opportunities.”
Flowers said at the Bloomberg Dealmakers Summit in September that Europe faces larger problems than the U.S. did after the 2008 bankruptcy of Lehman Brothers Holdings Inc. Since then, rising bond yields have threatened to spread the credit crisis that started in Greece two years ago to Italy and beyond.
The deadlines European banks face to raise funds and meet tighter capital rules have added momentum to assets disposals by financial-services firms worldwide, Flowers said.
“I was looking at a list recently of 165 divestitures by 65 European banks in 19 countries,” Flowers said. “That’s a big list, that’s a lot of stuff. These assets are all over the world and a lot of them are here in Asia.”
The MSCI Europe Banks Index of 40 lenders has tumbled 31 percent this year, and companies in the index trade at an average 0.59 times book value, according to Bloomberg data. Europe’s banks are scrambling to plug a 106 billion-euro ($146 billion) capital shortfall after regulators ordered them to strengthen balance sheets.
Flowers agrees with the consensus view that the euro zone will be preserved. “But there is a real possibility that’s not how it turns out, and we end up in a series of crises,” he said.
Flowers said the stricter capital rules won’t necessarily lead to lower returns on equity for Europe’s lenders over the longer term. Capital increases will likely get “passed through to the customers” or be mitigated by “business-mix changes,” he said. While Europe presents many opportunities in possible distressed asset sales, the U.S. remains the “No. 1 choice” for financial-services investment, Flowers said.
China financial institutions trade at about 1.4 times book, while those in U.S. and Japan are trading at about 0.9 times and 0.7 times, respectively, Flowers said. Europe is trading about 0.67 times, he noted.
“My guess is sometime within the next five years, we’ll get back to trading at a premium to book in financial services,” he said.