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Tuesday, 16 October 2018

ECB taper talk and a walk down memory lane

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  • Keith Mullin

I didn’t want to pass over early chatter about the chilling subject that has been hanging over the European bond market for months: the dreaded ECB taper. 

Talk that central bank officials are hatching an asset-purchase reversal plan is hardly news, given the purchase programme’s finite lifespan, but it nonetheless caused some market wobbles on Tuesday. Ever since the ECB put its plan into action, it’s been impossible to have a conversation about the near-term prognosis for the European bond market without someone bringing up the subject of the plan’s aftermath while simultaneously sharply drawing in breath with a look of terror. 

An ECB exit, regardless of how much bond market participants hate the hugely distortive impact of its bond purchases, is going to kill the market. All of a sudden, pricing levels will be thrown up in the air and we will need to start thinking once again about fair value amid the process of normalisation. 

Here’s one certainty: it’s going to hurt. I’m imagining hundreds of panic-tinged huddles of buysiders trying to figure out value-preservation strategies for their credit and fixed-income portfolios. I’m also imagining similar huddles among agitated borrowers kicking themselves that they didn’t take better advantage of the dirt-cheap levels available. Not much more I can say at this point on this subject. It’s definitely a wait-and-see moment. 

Sympathy?

Beyond that, a few other things have caught my eye in my travels and travails. I’ve been rather taken with some of the comments that have come out of some bank corner offices in the past few days. I’ve often wondered what bank CEOs think about other banks’ difficulties. Do they smile at the prospect of a competitor being taken out and at the upside of market-share gains amid capacity give-up? Or do their hearts miss a beat in that ‘there but for the grace of God’ sort of way? 

We got a bit of a glimpse the other day on two counts. We had JP Morgan Chase boss Jamie Dimon telling us there’s no reason why Deutsche Bank can’t resolve its issues with the DoJ, And that his friend Wells Fargo CEO John Stumpf is a quality human being. All a bit platitudinous to be sure but kind of cute. 

It’s a grave shame that Stumpf wasn’t able to extend his quality-human-being qualities to running a quality bank. Firing thousands of hourly-paid workers, paying a derisory fine and flinging US$41m of your own unvested stock into the pot in the hope the scandal goes away while you keep your job suggests, perhaps, less than quality-human-being qualities. 

But I digress. We also had Credit Suisse boss Tidjane Thiam the other day saying that Deutsche Bank is a great institution. He wishes them well and hopes the bank comes out of its current predicament. It’s nice to see fellow CEOs coming out with supportive comments about their competitors, even if they were made with fingers firmly crossed behind their backs. Must have made John Cryan feel all gooey inside. 

Of course, Deutsche has pulled itself out of panic mode for the time being, thanks to the interestingly timed rumour last Friday – from a supposedly knowledgeable source – that the DoJ is willing to shrink its US$14bn opening gambit to a US$5.4bn settlement. 

But it’s not just about the fine. Berenberg’s James Chappell was out this morning with a note saying “a [DB] capital raising seems inevitable, but core profitability is weak and it is unclear what return investors could earn on any new capital. Exposed to an industry in structural decline, it is hard to see DBK delivering a ROTE above 5% and is one of many banks to avoid”. Ouch! 

Bank investability

Returning to Thiam, I was fascinated by his darkly negative comments about the banking sector. In the same breath as his comments about DB, he told a Bloomberg conference that European banks are in a very fragile situation. So far, so uncontroversial; that much we already knew. But then he added that European banks are not really investable as a sector, what with uncertainty created by regulatory change and fines for past misdemeanours. 

He talked of fundamental doubts that there is a viable business model for banks that cover their cost of equity. Coming from the mouth of a major bank CEO, that’s pretty incredible. Who on earth advised him to say such things? Or was it another case of Thiam going off-piste and making it up as he went along? 

I wonder what possible upside he figured would come out of such comments a matter of months after his own bank completed its SFr4.7bn right issue and at a time so many others are asking investors to take restructuring and cost-cutting plans on trust while they grapple with future targets against a complex backdrop. Should his peers take that as one of those “speak for yourself” moments? 

Past not always good indicator of future

I wanted to finish with a bit of history. There were outpourings of glee last week and I hear that many a glass was raised in Dirty Dicks in the City in a salute to the past that is now the future as RBS brought the NatWest Markets brand back from the dead as the new name for its corporate and institutional bank, which will sit outside the ring-fenced entity. 

“My work is done” a veteran former NatWest banker told me when the announcement came out. That comment spoke volumes as even now, 16 years after RBS acquired National Westminster Bank, NatWest folk still feel aggrieved about RBS executive hordes leaping over Hadrian’s Wall on the way from Edinburgh to take control in London. 

Dirty Dicks, the historical City pub named after a prosperous Victorian merchant whose story was reportedly the inspiration for Charles Dickens’ Miss Havisham of Great Expectations’ fame, lies just across the road from NatWest Market’s former base at 135 Bishopsgate. It became the unofficial canteen for NatWest bankers and the after-work haunt of choice. It’s still there though less of a destination for RBSers. 

Notwithstanding the fact that the renaissance of NatWest Markets was greeted with euphoria by some, it won’t be remembered with much fondness by others. Sufficient time has now elapsed for most people in the market today to have either forgotten the saga of NatWest Markets or more likely most are too young even to know. 

NatWest Markets constituted pretty much all of what became RBS’s post-2000 investment bank. In the five years from 1992 to 1997 NatWest pursued a driving ambition to become a top five global investment bank. Martin Owen, its chief executive working under group chief Derek Wanless, pulled out all the stops to realise that ambition – not just in Europe but in the US and throughout Asia-Pacific. 

It was an extraordinary journey but a rocky one, too. Unfortunately historians will see the ill-fated journey as being book-ended by scandal. NatWest Investment Bank and NatWest Markets were originally created in 1992 and housed the former businesses of County Bank, NatWest’s investment bank that had expanded through acquisition in the aftermath of the UK’s Big Bang deregulation in 1986. 

In 1987, what had by then become known as County NatWest found infamy as it fraudulently rigged the results of a failed £873m rights issue for employment services firm Blue Arrow, which had been mounted to finance the acquisition of Manpower. NatWest Markets, which housed County NatWest, group treasury and capital markets as well as corporate and institutional finance, was created as something of a new start for the group’s IB ambitions. 

And boy did it take the opportunity with both hands. Owen, who had been head of group treasury and capital markets prior to the re-org, set about a global hiring spree across the full spectrum of investment banking services: M&A advisory, syndicated lending, trade and project finance, corporate banking, debt and equity underwriting, structured and leveraged finance, money markets, fixed income, FX, credit and equity client and proprietary trading, as well as a full suite of futures and options structuring and trading across all asset classes. 

By 1995-96, aggressive hiring and team poaching was accelerated by a serial takeover strategy that saw NatWest acquire in quick succession Gleacher & Co for US M&A advisory, Greenwich Capital for US capital markets and bond and MBS trading, UK fund manager Gartmore, European corporate finance boutique Hambro Magan (now part of Canaccord), as well as an Asian IB joint venture with Wheelock & Co. 

It was an incredible five years. Back to those scandal bookends, the group was rocked in 1997 by an interest-rate options mis-pricing scandal that cost the group £77m and led quickly and ignominiously to the end of the adventure. Questions were anyway already being asked by the board about how and by when Owen was going to stop supercharging the cost base and convert it into solid returns and profits. 

Profits had been slow in coming and in any case were not an immediate priority during the build-out. But with profit warnings becoming reality and the options scandal becoming the subject of a Serious Fraud Office investigation, Owen resigned and within two years, Wanless had followed him out of the door for the failed investment banking experiment. 

The end of the IB came pretty quickly as the group broke the investment bank into parts and offered them for sale at the same time as Barclays was offloading the equities and corporate finance platforms of its similarly ill-fated investment bank BZW, ultimately selling to Credit Suisse. 

NatWest’s businesses attracted interest and fierce competitive bidding. Morgan Grenfell, which had by then been acquired by Deutsche Bank, ended up buying NatWest’s programme trading, index arbitrage, convertibles and equity derivatives business; Bankers Trust (prior to its acquisition by Deutsche Bank) took ECM, equity research, institutional sales and trading, corporate finance as well as commodities consultant Wood Mackenzie; National Australia Bank bought the local investment management business while the US equity business was shut. 

These days, of course, what’s left of RBS’s investment bank are the remnants of the post-financial crisis debacle. It’s a shadow of its former self and we’re not going back any time soon – or probably ever – to the NatWest Markets zenith of 20 years ago. But what a story it was!

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