A Barclays-Standard Chartered merger has no strategic rationale
Is a major banking deal brewing in the City of London? The grapevine contends that Barclays chairman John McFarlane is under pressure from activist shareholder Edward Bramson’s Sherborne fund, which has accumulated a 5.4 per cent stake in the 3-century old former Quaker High Street bank that Bob Diamond morphed in the early 2000s into Britain’s only bulge bracket global investment bank Bramson wants Barclays to shrink or even sell Barclays Capital, its investment banking crown jewel, to release $40 billion in dedicated capital to the unit. This is anathema to Jes Staley, the bank’s American, ex J.P. Morgan Master of the Universe CEO.
McFarlane and Staley would prefer to blunt Bramson’s activist thrust by making a takeover bid for Standard Chartered, a bank that never recovered from disastrous lending spree to Indian steel oligarchs and colossal mismanagement by its senior executives in London, Hong Kong, Singapore and the Gulf under former CEO Peter Sands, ultimately ousted by pressure from Temasek, the Singapore sovereign wealth fund that is its largest shareholder. StanChart has not really recovered since Sands’s ouster. Revenues have fallen 20 per cent since 2014 while overhead is still bloated. CEO Bill Winters, another J.P. Morgan alumnus has been unable to boost the bank’s return on equity above its cost of capital or deliver a credible growth strategy.
Barclays would be delighted to get access to StanChart’s $56 billion in Asian deposits and its franchises in some of the hottest banking markets in the Pacific Rim. Yet a $90 billion merger would necessitate a stock swap that might not be palatable to Temasek or other StanChart shareholders since Barclays shares trade well below tangible book value due to its pathetic ROE, multiple legal swords of Damocles and history of boardroom palace coups and CEO regicide. StanChart’s culture is unique in UK finance and there is no real regional overlap with Barclays, now that it has decided to exit Africa and the Middle East to focus on AngloAmerican corporate and investment banking. Barclays shareholders would be hugely diluted by an offer for StanChart at a time when they desperately want management to boost dividends and profits, not engage in self-serving deal making. It is also doubtful if a takeover bid from a bank that faces US Justice Department and FCA charges over the 2008 emergency capital raising scheme, whose four former top executives face criminal charges in the case, whose celebrity CEO Bob Diamond was grilled in the House of Commons and fired by the Bank of England’s diktat after the LIBOR manipulation scandal would send Stan Chart shareholders into paroxysms of delight. Zero plus zero still equals zero. A failed bid for StanChart would mean the axe for McFarlane, Staley and possibly the corporate and investment banking franchises. This is an irony since Staley survived the whistleblower scandal with a mere £640,000 fine from regulators and settled the US mortgage misselling scandal for $2 billion, not the feared $5 billion with Justice. The Crown Court also dropped the Serious Fraud Office (SFO’s) criminal case against Barclays, removing a threat to its UK banking license, though Justice, SEC and FCA probes into the 2008 fund raising in the Gulf remain live. None of this makes me sanguine about the odds of a Barclays cash and share bid for Standard Chartered Bank.
Size matters in global banking, yet a “Godzilla strategy” alone will not solve the myriad problems faced by Britain’s two historic but troubled money center banks. I do not believe these banks will merge in the proximate future. There is no evidence that either bank has engaged advisors, lawyers, white knights or political allies or creditor syndicates for an imminent deal. Yet Edward Bramson’s Sherborne can well goose Barclays share price once it unveils its restructuring (shrinking?) blueprint. Standard Chartered remains they juiciest takeover bait in international banking, a Cinderella waiting from a kiss from a fairy tale prince names Jamie, not Jes.
A blowout May payroll number and the formation of a new Italian government in Rome means the bear market in US Treasury debt resumes with a vengeance. A 3.8 per cent unemployment rate and 0.3 per cent average hourly earnings means the Powell Fed has reached the limits of its dual mandate. This means a certain interest rate hike at the June FOMC, the September FOMC and possibly even the December FOMC. This makes domestic US banks with floating rate notes and excess capital a no brainer. Bank of America rocks.