Investors Wary of `Brutal' Truth Skirt Europe's Banks in Fluxby and
Shares of large banks with new CEOs underperforming peers
Investors are concerned profits will stay low for longer
Across European banks, new chief executive officers have rolled out overhauls, pledging to fire thousands, exit businesses and cut assets to boost profit. For now, investors aren’t convinced the plans will pay off soon.
Shares of Deutsche Bank AG, Credit Suisse Group AG and Standard Chartered Plc have dropped more than most peers since the CEOs unveiled their restructuring plans over recent months. Their complex reorganizations are largely trying to make the best of banks’ relative strengths, while working around models that are proving to be broken. At the same time, ever stricter capital rules, cooling emerging markets and record-low interest rates may complicate efforts.
“There’s a lot of skepticism tied to the European banking sector as they go through these restructurings and their ability to execute on the plans as they’ve been outlined,” said Bill Glaser, who helps oversee $65 billion at Fisher Investments in Woodside, California, including shares in Credit Suisse, UBS Group AG and HSBC Holdings Plc. “The devil’s in the details and time will tell as to whether or not they can follow through on the pledges that they’re making. But they have a low bar to hurdle in terms of market expectations.”
The lenders are facing a combination of woes, from the rising cost of doing some business as regulators ask for larger capital buffers, to a slowdown in some of the world’s largest economies including China and India, to fines for rigging benchmarks and aiding money-laundering.
After a share slump that had made the German lender the worst-valued global bank, Deutsche Bank bank replaced Anshu Jain with John Cryan as co-CEO in July. Cryan is pulling out of businesses in 10 countries and eliminating 26,000 jobs. After Jain spent two decades turning the company into a global investment-banking behemoth, Cryan has pledged to cut the client list in half.
“Investors are tired of grand strategic updates where not much happens,” said David Moss, who helps oversee about $237 billion of assets at BMO Global Asset Management in London. “Now we want to see things actually happen. Investment banking has been very poor and a lot of the updates have been about reducing that and reallocating capital elsewhere, which isn’t always that straightforward.”
Deutsche Bank shares hit a four-year low on Dec. 14 and trade at a multiple of about half of its tangible book value. Standard Chartered, which fell to the lowest in more than a decade that same day, has a similar valuation, indicating they’re worth less than investors expect to receive if the firms liquidated their assets. Credit Suisse, also trading at less than its book value, has lost about 40 percent of its value since 2011.
For some investors, banks face more hurdles to making their turnarounds succeed should market conditions not improve. Standard Chartered, which gets most of its revenue from Asia, has already been saddled with bad loans as the slowing of the Chinese economy and the collapse of commodities prices ripple across emerging markets.
Fitch Ratings said Nov. 5 that the lender faces “unfavorable profitability and asset-quality trends” as it downgraded the lender’s credit rating and maintained a negative outlook, days after CEO Bill Winters announced he would sell stock to replenish capital.
“It’s not necessarily that new CEOs’ plans are not backed -- it’s more the brutal realization of the enormities of the challenges that these businesses face,” said Hugh Young, Asia managing director of Aberdeen Asset Management Plc, which is Standard Chartered’s second-largest stakeholder. “Investors do back Bill Winters, but several of its core geographies and businesses are facing strong headwinds.”
Winters, 54, sold about $5.1 billion of shares earlier this month, while Credit Suisse CEO Tidjane Thiam, 53, raised about $6 billion. At Deutsche Bank, Cryan, 55, has scrapped the lender’s dividend for two years.
“Investors are selling shares in these banks because the market environment is deteriorating,” said Christian Sole, a portfolio manager at Candriam Investors Group in Brussels, which manages 90.3 billion euros, including shares in Deutsche Bank, Credit Suisse and Standard Chartered. “They fear that if that continues, banks may have to raise capital again.”
Thiam, who replaced Brady Dougan at Credit Suisse in July, is scaling back from some trading businesses while wagering that the Zurich-based lender will be able to double the amount of money it manages for Asia’s rich by the end of 2018. Yet adding wealth managers will be costly while growth in the region may disappoint, analysts have said.
“With Credit Suisse, the market had huge expectations,” said Candriam’s Sole. “The feeling is they could have gone further too.”