Rainmakers Turn Caretakers
Earnings season for Europe's big banks is over -- and the outlook is dismal.
After posting losses for 2015, the CEOs of Deutsche Bank, Barclays and Credit Suisse asked investors for patience as they slashed dividends to fund long-term revamps of their businesses. Frustrated shareholders feel they've already paid the cost of eight years of restructuring -- and got nothing in return. Their response has been to send already battered bank stocks even lower.
Investors are right to say they've heard this song before: assets have been slashed by a third, but returns have slumped: the three banks' average return on equity has gone from around 6 percent to a loss of almost 5 percent.
You would need nerves of steel and a huge amount of faith in the new faces at the top of these lenders to back their long-term targets for 2018, the ten-year anniversary of Lehman Brothers' collapse. But there's little chance CEOs will risk a change in strategy. That might lead to unintended hits to revenue, a steeper restructuring bill and potentially rob them of the ability to ride improving economic conditions in the long run.
Pleading for time is risky and unpopular with the market -- often dismissed as the promise of "jam tomorrow" -- but banks reckon they are fighting for future profitability, not immediate survival. Taking a caretaker approach by cutting fixed costs, jobs and assets slowly and -- most importantly -- waiting for an upturn in the economic environment will be the strategy of choice unless the economy materially worsens.
We're not in a 2008 situation now. During the financial crisis, banks were on the brink of collapse and facing taxpayer outrage. Today, they are almost pampered by comparison, with cheap central-bank funding and bolstered capital buffers helping to absorb losses.
Deutsche Bank and Credit Suisse shares may have slumped to levels not seen in over 20 years, but the struggle is now for basis points of ROE -- and not for keeping the lights on. Fighting for survival tends to focus the mind; fighting for time, less so.
And time is exactly what the new breed of bank CEO -- from Deutsche Bank's John Cryan to Credit Suisse's Tidjane Thiam -- needs.
Their targets are distant, difficult to achieve and vague. Barclays' Jes Staley spoke of a "reasonable time-frame" to bring costs under control and an aim to deliver "attractive" returns on equity. Thiam wants to more than double pretax profit in two years thanks to a slimmed-down investment bank -- but the diet is costing more than expected.
Cryan's mission is to go from negative returns on tangible equity to 10 percent -- a tall order even just considering the billions in fines and settlements the bank has had to pay since the financial crisis.
Those expecting a strategic "big bang" have been disappointed and will continue to be so. Instead of exiting investment banking, Barclays is slimming it down. Bankers reckon the costs of an exit -- years of restructuring charges and loss of revenue -- would be too great.
The best hope for boosting returns might be to wait for the economy to recover while cutting fixed costs. It's the only strategy Europe's bank CEOs really have left. If fears of regulation and recession prove overstated, patient CEOs -- and investors -- will be rewarded. It makes sense, then, for Staley, Thiam and Cryan to take on the role of caretaker rather than rainmaker.
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