The collapse of $308-billion-asset Washington Mutual, the largest banking collapse in US history by far, and the subsequent firesale to JPMorgan Chase for $1.9 billion, is the biggest event of a tumultuous, shocking three weeks in the history of the global banking industry – and the bad news keeps coming.
The once-mighty Wachovia has been sold to Citigroup for a paltry $2.2 billion, with Citi taking on an initial $30 billion in bad debt; Fortis has been part-nationalised by three European governments with an €11.2 billion ($16 billion) capital injection; and the UK government has had to broker two desperate deals in two weeks – the nationalisation and part-sale of the county’s eighth-largest bank, Bradford & Bingley, and the £10 billion ($18 billion) sale of Halifax-Bank of Scotland, the country’s largest retail lender with £681 billion in assets, to rival Lloyds TSB.
And in an era where bad news can twist all too easily via media hysteria and consumer panic into a bank run – now, more commonly, online rather than at the branch (see News Digest) – some institutions still look dangerously fragile. Royal Bank of Scotland (RBS), which boasts $3.7 trillion in assets but remains heavily exposed to debt-riddled US and UK markets, is under intense pressure. RBS’s market capitalisation is now around $50 billion, down 50 percent over the past 12 months despite its recent $24 billion rights issue. In the US, a group of huge, mid-tier, regional players are also seen as vulnerable: Regions Financial, Fifth Third, Sovereign (in which Santander has a 24.9 percent stake) and National City.
In the US, the Office of Thrift Supervision (OTS) shut down Washington Mutual (WaMu), once the sixth-largest US retail bank and a group which described itself as “the Wal-Mart of US banking”, after it was worried the bank would run out of cash: around $17 billion of deposits had been withdrawn in a week as the bank’s customers panicked. At closure, the bank had about $308 billion of assets but only $188 billion in deposits. “With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business,” the OTS said in a statement on 26 September.
In Europe, the collapse of bancassurer Fortis – despite repeated denials by its management that there were any problems – is the biggest shock so far, and ridicules the decision of the RBS/Fortis/Santander consortium to buy ABN AMRO last year for $103 billion. Fortis’s market cap was just $19 billion the Friday before its was rescued, 40 percent less than it paid for parts of ABN AMRO last October (Fortis’s contribution was $35 billion at current exchange rates). And, in a farcical turn of events, Fortis is now looking to sell its ABN AMRO assets as part of its rescue deal – estimates have put the price at between €6 billion and €11 billion ($8.6 billion to $15.8 billion).
Intense concerns over the US government’s trillion-dollar bail-out of the wider US financial system – referred by many analysts as “temporary nationalisation” – comes at a time when other economies, predominantly in western Europe, look treacherously poised. Over the past two months, the UK and, to a lesser extent, German banking industries have undergone profound change, while collapsing property markets in Spain and Ireland are beginning to drag banks in these markets into the global quagmire.
Winners and losers
One important point to stress: while there have certainly been many losers in a market polarised by chaos, there have also been some winners – and never before has the world had so many ‘superbanks’. JPMorgan Chase, Barclays, HSBC, Bank of America, Santander, Wells Fargo, BNP Paribas and ING have become the default names bandied around when a bank needs rescuing and each has – so far – managed to ride the volatility relatively well. Even Citigroup, viewed recently as a lame duck with vast underperforming assets, has enjoyed a relative renaissance as the deal with Wachovia illustrates. In total, Citi will now have 6,845 branches in the US (including its CitiFinancial units), putting it ahead of Chase/WaMu’s 5,410 outlets but just behind Bank of America’s 7,213-strong franchise.
Still, the frenzied nature of some recent mergers and acquisitions reveal an industry gripped by panic and, significantly, political parameters. While Barclays and JPMorgan Chase, for instance, come out looking good after their cut-price acquisitions of Lehman Brothers in the US (for $1 billion) and Washington Mutual, respectively, Bank of America’s $50 billion all-share purchase of Merrill Lynch and Lloyds TSB’s all-share $20 billion deal for HBOS in the UK look expensive and value destroying.
Lloyds TSB, in particular, has picked up the UK’s largest savings-and-loans outfit at the start of a UK savings-and-loans crisis. Shareholders have good reason to ditch the deal though the political pressure to push through the merger means the formation of the largest UK retail banking group by customers (40 million), branches (3,042), staff (140,000) and assets (£1.05 trillion – £681 billion from HBOS, £368 billion from Lloyds) will almost definitely complete.
Evaporation of normality
But the past few weeks – since the last RBI went to press – has seen the evaporation of not just billions of dollars worth of assets but also the evaporation of normal market conditions, processes and strategies. In has come sweeping state intervention, the rush to form too-big-to-fail ‘national banking champions’ and a future industry shaped by stiffer regulation, greater transparency and much less appetite for risk.
It is an era where well-run, well-funded retail banks should flourish as banks look to focus on solid funding models – in turn, competition for retail deposits, already spicing up across the world, will accelerate. It has been the retail banking giants that came to the rescue of Wall Street’s Merrill Lynch, Bear Stearns and (parts of) Lehman Brothers, while both Goldman Sachs and Morgan Stanley have changed their legal status to allow them to accept retail deposits.
In June, Stephen Green, chairman of HSBC, told RBI: “We are seeing a profound shift, and this is a secular rather than a cyclical trend. The huge build up of leverage has stretched balance sheets over the last five years. Where profit depended on high and ever increasing leverage, that model is gone – and that is because it is bankrupt.”
He added: “That means success and profitability growth has to come from the basic tenants of the banking profession. Customer relations, operating efficiency and being in emerging markets are going to be key.”
And the focus is certainly shifting, out of the US and the UK, and towards strong developing markets. Perhaps the biggest question, yet unanswered, is whether emerging superpowers such as China, India, Russia and Brazil have the momentum, depth and strength to support the wider global banking industry – or whether the black hole of the US collapse will suck them down too.
China’s banks produced record interim results in August, for instance, though most expressed concerns about the second half of the year (see RBI 598).