US re­gional banks ben­e­fit in ab­sen­tia

The Pak Banker - - COMPANIES/BOSS -

Euro­peans set­ting out to dis­cover the States head for New York, Bos­ton or San Fran­cisco. But lat­ter- day De Toc­quevilles should visit cities such as Dal­las, Cleve­land or Buf­falo if their cu­rios­ity ex­tends to find­ing out what is deemed best in US bank­ing.

The shares of fi­nan­cial in­sti­tu­tions based in these re­gional cen­tres trade at earn­ings mul­ti­ples that should hum­ble uni­ver­sal and in­vest­ment banks like JPMor­gan and Gold­man Sachs.

How­ever, Wall Streeters' nat­u­rally low lev­els of hu­mil­ity hor­mone will be fur­ther sup­pressed by the top 5 banks win­ning 33.5 per cent of the fee pool in the year to date, com­pared with the fee­ble 17.2 per cent com­manded by their top 5 Euro­pean ri­vals.

This re­flects the shrink­age of the in­vest­ment bank­ing di­vi­sions of Old World banks such as Bar­clays and UBS in an era of higher cap­i­tal buf­fers. Another fac­tor has been a surge in US M&A at a time of low in­ter­est rates and healthy eco­nomic growth. Takeovers by US cor­po­ra­tions have to­talled a record $1.2tn in the year to date.

The only time Euro­pean deals ap­proached that fig­ure was in 2007. US in­vest­ment banks also ben­e­fit from higher lo­cal fees. They are about 7 per cent for small floats com­pared with 2 per cent in the UK. US banks an­a­lyst Guy Moszkowski says: "The view of se­nior cor­po­rate man­age­ment is that ad­vice from in­vest­ment bankers is too crit­i­cal to hag­gle over."

He jokes that in Europe "it is seen as a priv­i­lege to lose money".

Such dis­par­i­ties ex­plain why the uni­ver­sal bank­ing model re­mains ten­able for US ex­em­plars, but not for Euro­peans. Even in the US it is im­paired by opaque earn­ings and ac­cre­tions of con­duct fines. In­vestors pre­fer fast­grow­ing re­gional bank­ing groups such as Utah- head­quar­tered Zions, which trades at a 50 per cent earn­ings pre­mium to Gold­man Sachs. The rea­son? Such in­sti­tu­tions are gen­er­ally ab­sent from the league ta­bles in­vest­ment bankers ob­sess over.

JRR Tolkien de­picted Shire folk as cud­dly lit­tle hob­bits with furry feet. But the boss of Ir­ish drugs group Shire, Flem­ming Orn­skov, must look more like a dark rider to Bax­alta, the US ri­val he as­pires to buy for $30bn.

As for long fund elves, some are likely to quit the bat­tle­field, to be re­placed by the orcs of event-driven hedge fund man­age­ment.

These war­like types are al­ways at­tracted by a scrap, which is what Shire's hos­tile ap­proach has kicked off. Mr Orn­skov, a su­per-am­bi­tious Dane, be­lieves buy­ing Bax­alta will make Shire a world beater in rare dis­ease drugs, while re­duc­ing its de­pen­dence on ma­ture hy­per­ac­tiv­ity treat­ments.

In­vestors are mulling it over. Shire shares have dropped 6 per cent while Bax­alta's have jumped 10 per cent. Will Shire go higher than its $45 per share open­ing shot? Per­haps only if the US hae­mophilia spe­cial­ist lets Mr Orn­skov peek at its books.

Most long funds hold Bax­alta shares be­cause they owned stock in a Bax­ter, a med­i­cal com­pany that de­merged drugs di­vi­sion Bax­alta a month ago.

Those rat­tled by bid un­cer­tainty could lock in a gain by selling their Bax­alta shares to hed­gies with stronger nerves.

Bax­ter could be tempted to fol­low suit. The US com­pany still holds 19 per cent of Bax­alta. US tax author­i­ties would hit the erst­while par­ent with a multi­bil­lion dol­lar tax claim if they de­cided a de­merger fol­lowed by a takeover was an avoid­ance ruse. Selling to the hedgie would be one way for Bax­ter to re­duce that risk.

Spoof rock band Spinal Tap ac­ci­den­tally or­dered a Stone­henge stage prop that was 18 inches rather than 18 feet high. Mud­dling met­rics also re­sult in in­ac­cu­rate risk pric­ing. Shares in Coca-Cola HBC have bounced around this year partly in re­sponse to the pos­si­bil­ity of Grexit.

The pop bot­tler is the big­gest com­pany on the Athens bourse and a FTSE 100 mem­ber.

How­ever, lit­tle of its busi­ness is in its coun­try of ori­gin. Here it is do­ing de­cently, but it was emerg­ing mar­ket strength that prompted an 8.5 per cent share price rise.

The stock of travel group Tui, which has Greek link­age too, was up about the same amount. Tui said a slew of can­cel­la­tions of Greek hol­i­days had been short­lived. The real is­sue was June's Tu­nisian beach mas­sacre. The group rightly stressed that the €35m-€40m over­head was neg­li­gi­ble com­pared with hu­man costs.

Shares rose in re­sponse to a guar­an­tee that group op­er­at­ing prof­its would in­crease 12.5-15 per cent.

If the mar­ket had pre­vi­ously mis­priced the Greek risks of both busi­nesses it was the re­sult of mud­dling po­lit­i­cal met­rics, where Grexit mat­ters hugely, with fi­nan­cial ones, where it mat­ters less. As for Stone­henge, Lom­bard once made the mis­take of telling a vis­it­ing Greek he re­ally ought to see the Ne­olithic site. "The na­tional trea­sures I'm keen­est to see here are the Parthenon friezes," he said, acidly. These, con­tro­ver­sially, are in the Bri­tish Mu­seum.

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