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MOVING TOWARDS A SUSTAINABLE BANKING MODEL – THE RISE OF SMALLER RIVALS

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By Max Lami, CEO of Oppenheimer Europe

Mid-market banks have been winning market share from leading firms in recent years. Accelerated by the financial crisis, a new generation of independents is taking hold, many of them helmed by senior rain makers who have left bulge bracket banks. These players also seem to be ahead of the curve when it comes to building a sustainable business model.

The financial crisis, and the wide-spread macroeconomic and regulatory changes that resulted from it, have shaken up the financial services industry. Large investment banks in particular were hit hard, being forced to cut costs, jettison staff and reconsider their operating structures. However, the crisis has not only destroyed value but redefined what financial institutions must do to be able to compete and win. The environment will continue to be challenging, with shrinking volumes, secular decline, structural changes at client base and regulation playing a key role.

Consequentially, mid-market investment banks have been winning talent and significant market share from bulge brackets– a shift that analysts predicted even before the global economy fell into recession.In fact, mid-market firms and boutiques together have advised on 33% of announced global M&A volume in the year up to the end of the first quarter of 2014, up from 31 per cent same time last year, and almost two times the amount of deals in Q1 2009, according to Dealogic figures.Buy-side institutional investors have become more focused on revenue. For example, a large hedge fund pays hundreds of millions in commissions and financing revenues to large banks with prime brokerage, which has made investors reconsider how much value they get from these service providers. After all, there are only so many deals and so much trading capital available in the market,which are yet to reach pre-crisis levels.

The crisis has also played a part in the cultural shift in banking. The industry has been widely criticised for short-termism, believed to have been at the root of the collapse of the financial system. In the past few years, we have seen a growing number of institutions adopt a more sustainable approach to developing the business.Many global mid-market firms are at the forefront of this change, as they are more likely to build their business on a long-term strategy.A new, low capital intensive model has emerged, deriving its strength from a client-centric approach that resembles the pre-bubble merchant banks.

In addition to the need for change driven by commercial interests, the call for a reshaping of the industry has also been driven by regulators all around the world. In an attempt to reduce the systemic risk to the financial system, banks are now faced with more regulation than ever before. The more capital a firm employs and the bigger the business is, the more regulation it must comply with. However, this is another aspect where mid-market firms may have an advantage, as bulge brackets are subject to far more regulation due to the sheer breadth of their products, businesses and regions.This is not to say that regulation does not remain a key focus for smaller players, too. In fact, it is crucial to remain abreast of the regulatory trends and changes that will affect them, as well as their clients.

In the wake of the crisis, independent advisers were perceived as providing  their services free from the conflicts of interest of  their larger rivals, who are often distracted by activities such as proprietary trading, lending and cross-selling pressures, or who use their balance sheets to finance deals. In addition, low capital intensive companies have less overall risk exposure, which makes it easier to achieve sustainable growth and to limit the potential for losses. What institutional clients care about is the four A’s: Assets, Access, Alpha and Anonymity – and these are the key drivers of revenue growth. Excellence matters and clients will pay for it, but it must be branded and sold correctly.

With a deep impact on the corporate culture, the CEO’s role in implementing a long-term strategy is critical. The CEO must provide leadership and vision to ensure effective management, growth and profitability of the corporation, whilst protecting shareholder value and the firm’s employees and other stakeholders.Even though large banks have also started to adopt a more long-term view, successfully executing it across the company can prove difficult.

People remain every organisation’s most important asset – especially in firms where the balance sheet plays less of a role in deals, advice and human capital are the core value, and are provided by each individual relationship banker. Therefore the importance of managing talent at different stages of the economic cycle cannot be stressed too greatly, as firms need to be sure they are getting value from their employees.

The shift in the industry doesn’t mean that the structure or strategic direction of firms will fundamentally change. Bulge brackets will continue to do well, innovate and employ great people. However, there is a place for boutique and global mid-market players in the banking ecosystem, and it is becoming apparent that they will continue to strengthen their foothold. Global firms will remain global and those that follow a more focused approach will continue to do so.Nevertheless, it is evident that financial services firms need to put clients back to the centre of attention, and global mid-market firms with a strong brand have a huge potential in leading this development.

Banking

Commerzbank to lose 1.7 million clients by 2024 – Welt am Sonntag

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Commerzbank to lose 1.7 million clients by 2024 - Welt am Sonntag 1

FRANKFURT (Reuters) – Commerzbank expects to lose 1.7 million customers by 2024 as part of its current restructuring, resulting in a 300 million euro ($364 million) hit to revenue, weekly Welt am Sonntag reported, citing sources close to the bank.

The lender hopes to offset the drop by growing its loan business as well as by expanding its business with corporate and very wealthy clients, the report said, without giving any further detail of why customer numbers were expected to decline.

It also didn’t say if any specific category of client was most likely to be lost.

Commerzbank declined to comment.

According to the bank’s website it serves around 11.6 million private and small-business customers in Germany and more than 70,000 corporate and other institutional clients worldwide, so the reported loss of customers would suggest a drop of around 15%.

The bank earlier this month reported a $3.3 billion fourth-quarter loss, sinking further into the red as it continued a major restructuring and dealt with the fallout of the COVID-19 pandemic.

The bank’s restructuring plan involves cutting 10,000 jobs and closing hundreds of branches in the hope it can remain independent.

($1 = 0.8253 euros)

(Reporting by Christoph Steitz and Tom Sims; Editing by David Holmes)

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Banking

Citigroup considering divestiture of some foreign consumer units – Bloomberg Law

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Citigroup considering divestiture of some foreign consumer units - Bloomberg Law 2

(Reuters) – Citigroup Inc is considering divesting some international consumer units, Bloomberg Law reported on Friday, citing people familiar with the matter.

The discussions are around divesting units across retail banking in the Asia-Pacific region, the report https://bit.ly/3pD57WP said.

“As our incoming CEO Jane Fraser said in January, we are undertaking a dispassionate and thorough review of our strategy,” a Citigroup spokesperson told Reuters.

“Many different options are being considered and we will take the right amount of time before making any decisions.”

The move, part of Fraser’s attempt to simplify the bank, can see units in South Korea, Thailand, the Philippines and Australia being divested, the Bloomberg report said.

However, no decision has been made, according to the report.

Revenue from Citi’s consumer banking business in Asia declined 15% to $1.55 billion in the fourth quarter of 2020.

The divestitures could be spaced out over time or the bank could end up keeping all of its existing units, the Bloomberg report said.

The firm is also reviewing consumer operations in Mexico, though a sale there is less likely, the report said, citing one of the people.

Last month, New York-based Citigroup beat profit estimates but issued a gloomy forecast for expenses. Finance head Mark Mason said the lender’s expenses could rise in 2021 in the range of 2% to 3%, weighing on its operating margins. (https://reut.rs/2ZwXRB1)

(Reporting by Niket Nishant in Bengaluru; Editing by Maju Samuel)

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European shares end higher on strong earnings, positive data

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European shares end higher on strong earnings, positive data 3

By Sagarika Jaisinghani and Ambar Warrick

(Reuters) – Euro zone shares rose on Friday, marking a third week of gains, as data showed factory activity in February jumped to a three-year high, while upbeat quarterly earnings boosted confidence in a broader economic recovery.

The euro zone index was up 0.9%, with strong earnings from companies such as Acciona and Hermes brewing some optimism over an eventual economic recovery.

The pan-European STOXX 600 index rose 0.5%, as regional factory activity was seen reaching a three-year high on strong demand for manufactured goods at home and overseas.

Another reading showed the euro zone’s current account surplus widened in December on a rise in trade surplus and a narrower deficit in secondary income.

Still, the STOXX 600 marked small gains for the week, having dropped for the past three sessions as investor concern grew over rising inflation and a rocky COVID-19 vaccine rollout.

But basic resources stocks outpaced their peers this week with a 7% jump, as improving industrial activity across the globe drove up commodity prices.

“This week’s slightly adverse price action has all the hallmarks of a loss of momentum temporarily and not a structural turn,” said Jeffrey Halley, senior market analyst at OANDA.

“There is not a major central bank in the world thinking about taking their foot off the monetary spigot, except perhaps China. (Markets) will remain awash in zero percent central bank money through all of 2021 (and) a lot of that will head to the equity market.”

Minutes of the European Central Bank’s January meeting, released on Thursday, showed policymakers expressed fresh concerns over the euro’s strength but appeared relaxed over the recent rise in government bond yields.

The bank’s relaxed stance was justified by the euro zone economy requiring continued monetary and fiscal support, as evidenced by a contraction in the bloc’s dominant services industry in February.

The STOXX 600 has rebounded more than 50% since crashing to multi-year lows in March 2020, with hopes of a global economic rebound this year sparking demand for sectors such as energy, mining, banks and industrial goods.

London’s FTSE 100 lagged regional bourses on Friday due to a slump in January retail sales and as the pound jumped to its highest against the dollar in nearly three years. [.L] [GBP/]

French carmaker Renault tumbled more than 4% after posting a record annual loss of 8 billion euros ($9.68 billion), while food group Danone and German insurer Allianz rose following upbeat trading forecasts.

(Reporting by Sagarika Jaisinghani in Bengaluru; Editing by Sriraj Kalluvila and Shailesh Kuber)

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