Tuesday, February 24, 2015

Cost containment, deleveraging, restructuring, rationalization, resizing process, and balance sheet repair – The State of the European Banking Sector

In October 2014, the ECB has published a report on the structure of the European banking sector.

In a nutshell: “Cost containment”, “deleveraging”, “restructuring”, “rationalization”, “resizing process”, “balance sheet repair”, and the like all describe the same finding: The sector is shrinking.

For people working in banks, this is certainly less of good news. The cake is actually getting smaller but the number of invitees to the party remains pretty much the same.

But is this all bad? No. As a matter of fact, the ECB says that the overall efficiency of the system continues to increase.

Number of credit institutions

The total number of credit institutions is down 12 % since 2008. Only Estonia (+ 33 %), Latvia (+ 93 %), Luxembourg (+ 1 %), and Malta (+ 17 %) have seen increases. The highest decreases can be found in Cyprus (- 46 %), Greece (- 42 %), Netherlands (- 23 %), and Spain (- 28 %).

Number of foreign branches

Overall, the number of foreign branches in Eurozone countries has, since 2008, been flat. However, this masks huge differences across the continent:

Highest decreases can be observed in Estonia (- 36 %), Greece (- 33 %), and Portugal (- 14 %), while Belgium (+ 14 %), Cyprus (+ 17 %), Latvia (+ 50 %), Netherlands (+ 22 %), and Slovakia (+ 67 %) show the most important increases in foreign branches.

Total assets of domestic banking groups

In aggregate, total assets of domestic banking groups are down 18 % since 2008.

Most remarkably, Belgian banks loose 61 %, Cyprus banks 53 %, Irish banks 49 %, Luxembourg banks 32 %, and Dutch banks 22 %. Only Finland (+ 29 %) and Malta (+ 63 %) have seen growing markets since 2008. Total assets in the Spanish domestic banking sector are flat.

At the end of 2013, total assets amounted to 23 BEUR. This represented roughly twice the 2013 GDP of all Eurozone countries.

Total assets of foreign subsidiaries and branches

Total assets of foreign subsidiaries and branches in the Eurozone shrank even more. Overall, they are down 29 % since 2008.

The most important downward trend could be observed in Estonia (- 46 %), Germany (- 72 %), Greece (- 87 %), and Ireland (- 53 %). Belgium (+ 124 %) and Netherlands (+ 50 %) experienced a much higher influence of foreign financial institutions on their markets.

Looking at the entire Eurozone, the influence of European banks in other European markets remains very moderate: By the end of 2013, total assets of foreign subsidiaries and branches represented only 14 % of aggregate total assets (including domestic banking groups as well as foreign subsidiaries and branches).

Distribution of banking sector assets by type of institution

Large European economies are very much dominated by local financial institutions. This is especially true for France, Germany, Greece, Italy, Netherlands, and Spain, where assets held by domestic credit institutions are around or exceed 90 % of total banking sector assets.

By contrast, Estonia, Finland, Luxembourg, and Slovakia are all heavily dominated by subsidiaries of EU credit institutions.

Malta is, obviously, a hub for branches of non-EU credit institutions.

Market concentration of European credit institutions

Overall, the markets for credit institutions in Europe are not very concentrated. On average, the Herfindahl index stands at 1,202. Given the index ranges from 0 (fully competitive market) to 10,000 (monopoly) and the fact that only values above 1,800 signal high concentration, Europe is a pretty competitive market.

Austria (405), Germany (266), Italy (406), and Luxembourg (357) are at the lower end of the index, whereas Finland (3,080), Greece (2,136), and Netherlands (2,104) can be found at the upper end of the index.

The findings of the Herfindahl index match the statistics of the share of total banking assets held by the five largest credit institutions.


Thursday, February 12, 2015

Dealogic Trade Finance Review – FY 2014 Data Review

This post is about trade finance data only. Enjoy!

Industry Total

ECA Finance

  • ECA Financing has significantly increased since 2013 (25 %).
  • This goes in hand with higher fragmentation as the share of banks other than the ten largest players has increased by 57 %. 
  • Furthermore, the share of banks other than top 10 players has increased from 54 % to 58 %.
  • Finally, JP Morgan is not among the top players in 2014.

Total Trade Finance

  • In 2014, total trade finance was slightly down (1.6 %, compared to 2013).

Industry Distribution
ECA Finance

  • Market leader in 2014 was Citi (6.27 %).
  • Again the question: What happened to JP Morgan in 2014?

Number of deals of Top 10 Banks


Dealogic Trade Finance Review

Monday, February 2, 2015

Toys R Us and its abandoned IPO – The difference between a research analyst and an investment banker

Research departments of banks are an excellent place to look at if you want to understand conflicts of interest in a bank. A recent example is a FINRA case in which ten banks accepted to pay a total of 43.5 MUSD in fines.

What do securities research analysts do?

First the obvious: They research on securities – How did they perform in the past? How will they perform tomorrow? What are they worth today? The more formal definition says that research departments of banks provide economic research about financial securities to clients and formulate investment recommendations.

For example, Citigroup writes that “the breadth, depth and strength of our sales and trading, distribution and research capabilities span a broad range of asset classes” and that “through our web, mobile and trading applications, clients can find Citi research and commentary and proprietary data and analytics”.

In banks, research departments usually constitute profit centers or, at least, are part of them. For example, Wells Fargo’s economics group is part of the bank’s “Investment Banking / Securities & Markets” unit.

The above description suggests that research analysts are exclusively working for clients to whom the bank wants to sell financial securities.

But what happens if the bank also participates in generating the same securities which are, later on, sold to clients? Let’s be more specific: The investment banking department helps a client listing his shares and the financial markets department then helps selling them to investors. In this case, the bank builds a Chinese Wall (which is, knowingly, so huge that you can see it from the moon) between both departments. On which side sits the research analysts?

A research analyst is not an investment banker.

In the U.S., the situation is, on paper, clear. FINRA (the Financial Industry Regulatory Authority) Rules say:

  • A member of an investment banking department cannot supervise a research analyst (Art. 2711.(b).(1))
  • A member of an investment banking department cannot approve a research analyst report (Art. 2711.(b).(2)).
  • In principle, a research analyst cannot participate in the investment banking business (Art. 2711.(c).(4) to (7). The opposite is also true (Art. 2711.(f)).
  • A bank cannot offer favorable research on a client to induce or compensate for business (Art. 2711.(e).
  • A research analyst is limited in how he can trade shares of a company he covers (Art. 27.11.(g)).
  • A research analyst must disclose conflicts of interest, for example if he holds shares in the covered company, receives remuneration from the company, or participates in the company’s management (Art. 27.11.(h)).

Toys R Us IPO – Playing with the research analyst?

In April 2010, Toys R Us invited several banks to pitch for broker-dealer roles in its planned IPO. In the request to banks, the company asked the banks’ research analysts to make presentations about their view on Toys R Us and its valuation to the company’s management.

“TRU [Toys R Us] would consider each analyst’s views of the company and whether the analyst’s valuation was consistent with the firm’s investment bankers’ valuation.”

In addition, the IPO candidate sent templates to the banks for signature. This was to “prevent TRU [Toys R Us from being “burned” by an analyst’s decision to adopt a negative view of TRU after the company had awarded its investment banking business to the analyst’s firm.”

All pitching investment banks accepted to make their research analyst participate in their pitch. The facts vary slightly. Deutsche Bank can serve as an example:

“By providing TRU [Toys R Us] the unified valuation it sought, DBSI [Deutsche Bank] indicated to TRU that post-IPO research coverage would be positive and aligned with investment banking.”

Goldman Sachs’ analyst, in addition, sold his investment banking experience:

“The analyst told TRU [Toys R Us] and the Sponsors that he was “very excited” to be speaking with them and noted his “extensive transactional experience,” noting that he had “worked on more than a dozen retail IPOs.”

Merryl Lynch’s analyst did not speak but helped investment bankers by his mere presence:

“I am sorry that I was not permitted to speak about many specifics today, but I hope that my enthusiasm surrounding the Toys R Us story was evident.”

It is pretty obvious that the story contradicts the FINRA rules. More surprising are the varying amounts of the fines: The implication and the roles which were offered to the banks varied substantially but seem to be disconnected from the amount of the fines.

Furthermore, I wonder who is at fault here – the banks or Toys R Us, asking banks to make research analysts work.

A final note on the file: Toys R Us ultimately abandoned the IPO…