The Great Debate UK
As your friendly neighbourhood investment bank rarely tells you, something like 80 percent of deals don't pay off. So why do one if you don't have to?
That is the question facing the mighty City of London firm of Cazenove. Five years after Caz poured its investment banking business into a joint venture with the U.S. bank, JP Morgan <JPM.N>, it has to decide whether to go the whole hog and sell the remainder -- or to hang on.
Technically the shares are the subject of a put and call arrangement -- JP Morgan can force Caz's investors to sell and vice versa. But it is hard to imagine the Americans obliging the shareholders to sell if they clearly don't want to.
Which raises the question: why would they want to?
A deal has certain attractions for JP Morgan. The bank's UK business would be simpler if it owned 100 percent of its UK investment banking operations. The current set-up is quite advantageous for Caz. Not least it gives it access to JP Morgan's deep pockets and client list.
The collapse of Lehman Brothers on September 15, 2008, was the largest bankruptcy in U.S. history, sparking a crisis that paralysed the global financial system. But how significant was the bank’s collapse to the UK economy? What about other events such as Northern Rock? Professor Wood argues that the fall of Lehman was just one of many symptoms of the recession in this country.
– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –
Barclays’ and HSBC’s interim results are a study in contrasts. Barclays has used the credit crunch to make a bet-the-farm move into the investment banking big-league, a bet that has so far paid off. HSBC, in comparison, chastened by its flawed move into the U.S. subprime market, has returned to its conservative roots.
John Varley, Barclays’ chief executive, gives the usual guff about “staying close to our customers and clients”. In truth, Barclays’ 3 billion pounds of profit in the first half owes much more to its investment banking division, enlarged by its opportunistic acquisition of Lehman Brothers’ North American unit last autumn, than to its traditional banking businesses.
Barclays Capital (BarCap) more than doubled revenues to 10.5 billion pounds, and doubled pre-tax profits to 1 billion pounds. As with rivals, the star performer was fixed income, currencies and commodities where banks are profiting thanks to their access to very cheap central bank funding.
This is just as well, because Barcap is still carrying plenty of toxic assets left over from the credit boom. These cost it 4.7 billion pounds in gross writedowns and impairments in the first half. Given that it still has other dodgy exposures, including assets worth more than 7 billion pounds guaranteed by ailing monoline insurers, further losses seem likely. Barclays cannot rely on other parts of the bank to come to its rescue: profits in traditional retail and commercial banking businesses all collapsed as impairments soared.
HSBC’s global banking and markets (GBM) division also delivered a record performance, more than doubling its first-half profits, to $6.3 billion. However, HSBC has long resisted the charms of investment banking, and runs GBM as a complement to its existing global commercial banking franchise. Despite the juicy returns currently on offer, this is unlikely to change.
HSBC has its own sizeable bit of historical baggage in the form of Household, the U.S. consumer lender that is now being expunged from the record, though not without considerable additional losses.
Many suspected that HSBC would use its bumper $17.8 billion rights issue this spring to acquire divisions of ailing rival banks at bargain basement prices. So far, it has resisted, instead bolstering its tier 1 capital ratio to 10.1 percent.
Rather, it is building on its position as the world’s leading international bank (especially now with Citi holed under the waterline) organically. While cash-strapped rivals retreat from China, HSBC is investing in its Chinese operations. It has been the first international bank to settle cross-border trade in renminbi (yuan). It is on track to have 100 outlets, including many in rural China, by year end, more than any other international bank. Such loyalty will not go unnoticed in Beijing.
Which bank is better positioned for the new environment? That depends partly on the speed of the recovery. Barclays has so far performed a dazzling high-wire act, avoiding state capital by spreading its losses over a number of years and by selling its Barclays Global Investors arm. But this is hard to sustain if the downturn turns out to be prolonged. Meanwhile, once banking conditions return to normal, central banks will cease to flush investment banks with cheap cash and investment banking profits are bound to tumble. The HSBC tortoise looks set to leave the Barclays hare far behind.