The banking sector is a notorious flytrap for activist investors. There’s something about big, global universal banks in particular that seems to have a fatal attraction for tidy-minded, value-oriented types who think that everything would work so much better if you spun out this, split off that and, of course, downsized the investment bank.
These people rarely get their way. Big banks are very complicated, with links and synergies between all sorts of businesses arising in unexpected ways, and the public financial accounts often give a very poor set of clues to where the value is really being generated. As investors like Edward Bramson, Eric Vinke and Luqman Arnold have found out over the years, a simple and attractive plan suddenly gets shot down in a hail of show-stopping technicalities. But Ping An, the insurance firm that’s currently lobbying for a breakup of HSBC, isn’t an ordinary activist investor.
For one thing, it’s a Chinese firm, and its breakup thesis is specifically tied to a claim that the Asian operations of HSBC are being held back by the rest of the business. While HSBC management claim that the issues under discussion are commercial rather than political, there seems to be a strong hint in the Ping An thesis that geopolitical relations between China and the West are on a path which will eventually require the company to take sides. That’s the sort of thing that’s not so easy to refute with a set of headcount charts.
And worryingly for the HSBC investment bankers, it seems to be an argument that’s explicitly based on treating things as weaknesses which they might regard as their franchise’s greatest strengths. It’s true that HSBC has a dominant franchise in Hong Kong and China, a solid one in Asia as a whole, and a collection of businesses in other regions which tend to show up considerably lower down the league tables. But leveraging a domestic franchise globally is usually considered to be a good thing.
HSBC’s businesses outside Asia benefit from their connections with the mothership because lots of their clients have links to Asia too. This is particularly important in sales and trading – as HSBC management have pointed out to Ping An, the revenues from dollar clearing and settlement might be booked in Hong Kong, but that doesn’t mean that they are wholly Hong Kong business.
And the benefits of diversification don’t always flow one way, either. At various points in the past, it might have been a legitimate criticism of HSBC’s global management to say that the stream of cash from Asia meant that tough decisions about costs were avoided in the rest of the world. But that stream of cash has never been as steady or constant as people think. Hong Kong is a volatile market, very prone to real estate bubbles, and HSBC’s ability to continue to invest and grow through tough times has also benefited from the fact that it’s a global bank that’s always making money somewhere.
If Ping An were to get its way, the global investment banking operations of HSBC would suffer the most; it would be quite likely that headcounts would have to be sharply reduced. But the Asian commercial and investment banking franchise might find out that it wasn’t as valuable as a standalone as it might have looked in the consolidated accounts. It could be a bad deal for everyone, which is why HSBC bankers ought to hope that the general rule of activists in banking doesn’t have an exception this time.
Elsewhere (but thematically related in as far as it’s another example of people underestimating the complexity of banking businesses), “people familiar with the matter” are once more expressing surprise that Deutsche Bank’s cost cutting program involves spending an additional “several hundreds of millions” on a “multi-year campaign to fill persistent holes in the German lender’s controls”. One might have thought, given the number of years, careers and reputations that Deutsche’s IT systems have fed to the locust, it might no longer be newsworthy that they needed some money spent on them.
As ever, the issue is that in banking, doing things cheaply is the most expensive way to do them. The problems at Deutsche are the consequence of a couple of decades of expansion – both organically and by acquisition – where people didn’t seem to take into account the cost of the control overhead that they were creating. Now, the controls staff are getting significant increases in their budgets and substantially greater headcount. They deserve them.
Harris Associates have been the opposite of an activist investor for Credit Suisse; they’ve consistently (if perhaps not always uncritically) supported management and held onto the stock. Recently they've increased their holding; possibly a vote of confidence in the new CEO, possibly just an attempt at dollar cost averaging (Finews)
Proof if proof be needed that you can make a lot of money at Millennium; bond arb trader Joe Bonello just bought a $34m mansion in the Pacific Palisades outside Los Angeles. (Dirt.com)
Bank of America have hired Joe Valenti from Solomon Partners to be co-head of media and telecom investment banking (Bloomberg)
When Cliff Asness gave an interview on CNBC mocking the meme stock investors, was that the financial equivalent of looking into a mirror and saying “Candyman” five times? (AFR)
Nathan Urquhart, the head of investor relations at Carlyle Group, is leaving to pursue another opportunity. Unclear whether this is a consequence of Kewsong Lee’s departure, an example of the top management turnover that partly caused it, or completely unrelated. (Financial News)
Jan Skarbek has resigned from Citi; nobody is commenting so it is probably a bad idea to speculate, but the investigation into the “love and affection” incident is still ongoing. (Bloomberg)
Former UK prime minister Gordon Brown, with a slight sense that he might not have completely moved on from the world of 2010, has suggested that the way to pay for the cost of living crisis is a tax on that limitless and lavish resource, bankers' bonuses. (Financial News)