Banks have finally thrown off their shackles, tapping bond investors for extraordinary amounts of fresh capital, and yet the smell emanating from the industry is that of panic, not power; of frailty, not fortitude.
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Apocalypse movies always display mass panic the same way. Streets are either jammed with honking traffic or tumbleweed-empty. Madding crowds scour supermarket shelves for vacuum-packed food. No one has a clue what they are doing: how can you plan for the future when you’re not sure what it’s in it?
Translating that genre to the white-collar woes of the financial services industry has always been a mug’s game. Leaving aside boiler-room flicks, you’re left with the tediously high-falutin’ Margin Call or the banal-and-flavourless sequel Wall Street: Money Never Sleeps.
Yet if you want to see how such a movie could be scripted and made – and what low-level, directionless panic looks like, when adapted to the world of banking – just look around you.
In recent months, banks have finally thrown off their shackles, tapping bond investors for extraordinary amounts of fresh capital. In May, Deutsche Bank raised €8bn (US$10.9bn), also bringing in Qatar’s royal family as a major new investor. Three days later, Credit Suisse sold US$5bn worth of bonds. JP Morgan, Bank of America Merrill Lynch, Wells Fargo, Bank of Tokyo-Mitsubishi UFJ – few globally scaled lenders have managed to resist the market’s siren call.
And for good reason. Lenders of all stripes have fought the urge to issue fresh bonds, sometimes with impressive stoicism. The previous major debt sale by Credit Suisse took place more than three years ago. The result, notes Christoph Hittmair, global head of FIG DCM at HSBC, has been both “pent-up supply” and “strong demand from investors across currencies and geographies”.
Alexandra Macmahon, head of FIG DCM at Citi, said the market expected an acceleration in additional Tier 1 capital issuance in 2014 as regulatory and tax regimes were finalised, but that the “pace of supply has certainly exceeded expectation”.
Countries, including Germany, have resolved lingering concerns over tax-deductibility issues relating to Tier 1 capital issuance, fuelling further bond sales.
Volumes, while remaining below pre-crisis levels, have ticked up sharply. Tier 1 capital issuance by lenders topped US$16.3bn in the first five months of 2014, according to Thomson Reuters data, against US$3bn in the same period a year ago. Banks know interest rates in the Western world won’t linger at historic lows forever; most are opting, sensibly, to issue debt while rates and market conditions remain amenable.
“The capital funding market is currently as good as we’ve seen,” said Fergus Edwards, head of international syndicate at Mitsubishi UFJ Securities. “It makes good sense for issuers of all shapes and stripes to be issuing long-term debt at this point in time. If you don’t raise capital now, it’s sensible to question when are you expect to fund at these rates again.”
Yet, scratch the surface and forget the headline-grabbing data, and the smell emanating from the industry is that of panic not power, of frailty not fortitude. Banks are under immense, possibly unparalleled, pressure from all sides.
They feel it from lecturing politicians, and from regulators seeking to rein them or, in some cases, to exact punishing fines on those unwise enough to deal with blacklisted sovereigns. They feel it from investors desperate to minimise risk and maximise returns in an often unrewarding and hazard-strewn world. Most pressingly, banks feel the pressure internally, as they struggle to fathom what they want to be in two, five, 10 years’ time.
Take the issue of corporate punishment. Credit Suisse’s landmark May bond sale came just days after it choked down a US$2.6bn fine from US regulators, having pleaded guilty to an “extensive and wide-ranging conspiracy” that involved helping thousands of US citizens to evade tax. Moody’s downgraded the bank’s outlook from stable to negative after it became the first major global bank since Japan’s Daiwa Bank in 1995 to admit to criminal charges.
BNP Paribas appears to be next in the line of fire. France’s leading lender was, as of early June 2014, facing an eye-watering fine that could top US$10bn for breaking international sanctions and trading with Iran, Sudan, and Cuba. French leaders have ranted, raved, and wrung their hands about a fine that would humiliate the sovereign and possibly suspend the bank’s ability to clear US dollar transactions.
Foreign minister Laurent Fabius described a fine on that scale as “unfair and unilateral”, while President Francois Hollande labelled it a “disproportionate” punishment that could derail ongoing US-European trade talks and destabilise the eurozone’s fragile recovery.
BNP’s fine, if imposed and paid in full, would wipe out its 2013 pre-tax income of €8.2bn. Since the start of Barack Obama’s presidency, US regulators have imposed US$4.9bn worth of charges on 21 financial services firms, including HSBC, Standard Chartered, Intesa Sanpaolo and ANZ, for doing business with funds linked to sanctioned countries.
That in turn has limited lenders’ ability to reinforce capital internally by retaining earnings. With fines growing by the month (US regulators appear to have twigged that levies of less than a billion dollars are too trifling to change the way the industry does business) it’s unsurprising that lenders are so eager to raise fresh funds.
Yet is this the right approach to capital-raising? It’s hard to imagine many banks willing to lend to recently admonished retail customers merely seeking to make bail, or to pay for a court summons. A leading London-based financial institutions group banker describes the rush to raise fresh capital as a “beggar-thy-neighbour” attempt to impress regulators and investors, while obliquely discrediting peers.
“Banks want to show regulators that they are able to absorb any lawsuit, any fine, of whatever magnitude, that may come down the path in the future. They’re also saying: ‘I’m well capitalised. If you have a problem with the industry, go after someone else’.”
But perhaps the bigger, systemic issue facing banks is that of who, and what, they want to be. Coming up to six years on from the financial crisis, the industry remains locked in the grip of an identity crisis that for most leading lenders shows no sign of abating. A few institutions, notably UBS, bent on becoming the world’s leading private bank, appear to have given their future a great deal of thought, but too many remain wedded to old-fashioned notions of remaining full-service investment banks.
Deutsche Bank’s recent capital injection will be at least partly reinvested in the US, where it is rolling out a €200m “accelerated growth programme” to fill gaps in a market vacated by the likes of UBS and Barclays. It is brash, bold, and counter-intuitive at a time when global lenders are retrenching, winnowing their product portfolios, or moving away from inherently riskier services such as investment banking. But it doesn’t of itself constitute proof that the bank knows what it’s doing.
“Where will Deutsche be in five years’ time? I’m not sure a bank employee could tell you that,” said the London-based FIG banker. “Some of its parts are fantastic, but I don’t see them working with a common aim in mind.”
This broader sense of the aimless infects both lenders and regulators, notably in Europe. There is a sense that capital-raising banks are simply making hay while the sun shines. Again, there’s nothing wrong with this. Banks, said HBSC’s Hittmair “still need to raise capital to manage their regulatory capital positions” in the face of new leverage ratio requirements, and the impending introduction in Europe of the Recovery and Resolution Directive. Deutsche’s landmark May issuance was successful in boosting its Tier 1 capital ratio to 11.8%.
But capital raising also acts as a convenient smokescreen, a handy diversion for lenders seeking to work out “what the hell it is they need to be trying to be good at over the next decade”, said the London-based FIG banker. “Most bank chiefs don’t know what their end-game is. They know they need to change, to slim their vast institutions in order to make their shareholders happy. And that, when this happens, they need to be well capitalised. But that’s about as far as their thinking has gone.”
Regulators are equally short on inspiration, conflicted about whether to permit banks to remain full-service institutions, to force them to hive off riskier trading operations, or to cajole them into becoming commercial lenders with ancillary merchant-banking operations.
Again, the only answer to emerge from most major lenders has been to raise an awful lot of money. It doesn’t answer any long-term questions on strategy or direction; nor is it particularly far-sighted, wise or thoughtful. Rather, it’s the age-old reversion-to-the-norm of hoarding nuts in preparation for the onset of winter.
Or, for those favouring the apocalypse-movie narrative, it’s the white-collar equivalent of stocking up on canned goods. Either way, it is proof that most major lenders aren’t planning for the future, in part because they don’t know what’s in it.