February 16, 2008
Banking Monkeys See, Banking Monkeys Dance
John Kay notes that human tendencies when acting in groups, behavior as old as the human race, explains today's malaise in the banking industry:
"So long as the music is playing, you’ve got to keep dancing. We’re still dancing." Chuck Prince, former chairman and chief executive of Citigroup, was interviewed by this paper only a month before the music stopped. A few weeks later he was out of a job. With these comments, he got to the heart of the banking crisis. . . .
Mr Prince’s metaphor is sociological and anthropological not economic. Groups routinely demonstrate behaviour that few if any members would choose to adopt as individuals. Look at teenage gangs, soccer hooligans, religious zealots – or clubbers. Sometimes the group provides a cloak of legitimacy for misbehaviour. The trading floor has a similar effect. You get carried away, explained Jérôme Kerviel, Société Générale’s former trader. The process by which hysterical groups damage themselves and others in assertion of preposterous beliefs is a recurrent theme in human history. We see it in anti-Semitic pogroms or McCarthyite persecution. Before the mysteries of structured credit there were the mysteries of witchcraft; before investment banks used initial public offerings to turn dotcom concepts into billions of dollars alchemists claimed to turn base metals into gold. . . .
Read Kay's full commentary here.
Posted by John at 3:23 AM | Comments (0) | TrackBackJanuary 14, 2008
Who's the Damsel in Distress, and Who's Got the Cash?
Isn't it ironic that there's seemingly a debate among Chinese officials about whether an investment in one America's largest banks--Citigroup--is a sound investment opportunity? (Read more in the Wall Street Journal.)
I've expressed my skepticism about the multiples at which Chinese banks trade, but based on recent track records, it's a lot harder to find evidence that Citigroup is a markedly better managed bank than ICBC, China's largest bank. In fact, as recently as a year ago, most knowledgeable observers would have sooner bet that ICBC would be much more likely to announce a $24 billion write-down in asset values than Citigroup, yet the latter looks poised to not only to post a massive write-down, but to slash the dividend and eliminate thousands of jobs in order to "stabilize its finances", as one press account put it.
Not only is Citigroup the winner of this meltdown derby, but they're apparently getting turned down by the Chinese in their quest for capital to plug the holes.
ICBC and other large Chinese banks could end up in similarly tough straits when the Chinese economy has its own stormy weather. The irony of what's happening now, however, is simply delectable.
Posted by John at 9:53 PM | Comments (0) | TrackBackNovember 28, 2007
A Petrodollar Investment Tsumani
As long as oil prices remain about $70 a barrel, McKinsey Global Institute calculates, roughly $2 billion of new petrodollars will enter financial markets every day. [Source: Financial Times] Even with oil prices at $50 a barrel, McKinsey projects petrodollar foreign assets will grow to $5.9 trillion by 2012. (You can find the McKinsey study here.)
Consequently, it's hardly going on a a limb to expect more deals like the Abu Dhabi Investment Authority's $7.5 billion investment in Citicorp and Dubai International Capital's investment in Sony.
Posted by John at 5:16 AM | Comments (0) | TrackBackNovember 14, 2007
China Giveth, Subprime Taketh Away
Bank of America reported a $3 billion hit due to subprime mortgages, while its paper gain on its 19.9% stake in China Construction Bank is $30 billion.
Posted by John at 5:48 AM | Comments (0) | TrackBackOctober 6, 2007
A Bank Run Caused by IT Problems?
Justin Wolfers at Marginal Revolution predicts it:
Over the past few days, something strange happened to me: My debit card simply stopped working. This caused a sticky situation when I was traveling, and I was lucky that my cabbie took $27 plus a 20 euro note for a $37 cab fare.
My problem turned out to be a widespread problem with my bank's computer system. This is a bank with a large internet presence and no physical branches in my state, so many customers really were stuck with a cash-free few days (which is less fun than being cash-flush, I assure you.)
So what will I do when the computer problems are solved? I plan on withdrawing $500 so that I'm not caught short if these problems recur next week. More generally, if account-holders fear that computer glitches tend to repeat themselves (computer failure is autocorrelated), then we will all be lining up (electronically) to make withdrawals. Some may even be so dismayed by recent events as to close their accounts. . .
Wolfers see computing failures like this one, on a larger scale, engendering a customer panic and a run on a financial institution within the next decade.
Posted by John at 8:32 AM | Comments (0) | TrackBackAugust 3, 2007
China Rocks, Africa Stocks
In an article on "globalization's final frontier", the Economist notes that China's foreign exchange reserves alone exceed the value--about $800 billion--of Africa's entire stock of publicly-traded companies. Further, South Africa's listed companies make up about $600 billion of that total, meaning that the market capitalization rest the remainder of the African continent is exceeded alone by that of China's largest bank.
Posted by John at 7:49 AM | Comments (0) | TrackBackJuly 26, 2007
$50 Billion Added to the Chinese Overseas Investment Pool
Authorities in Beijing have raised the permitted cap on overseas investments by insurance companies, from 5% of assets to 15%. This move, effective immediately, adds potentially $50 billion to the amount of China-domiciled funds available for global investment. Read more in the Financial Times.
Posted by John at 4:30 AM | Comments (0) | TrackBackJuly 25, 2007
ICBC the World's Most Valuable Bank
The Industrial and Commercial Bank of China has surpassed Citigroup to become the world's most valuable bank, as measured by market capitalization.
This development is part of a larger trend: Asia's potential no longer sells at a discount in equity markets, and many cases trades at a premium.
ICBC's valuation is a premium one, to say the least. The bank's market capitalization now exceeds Citigroup's in spite of having only one-third the earnings. In other words, investors are willing to pay three times as much for one dollar of ICBC's earnings as for one dollar of Citigroup's.
It's hard not to think of an earlier time, as the Financial Times's Lex column points out, when another Asian country's banks seemed destined to take over the world:
In the second half of the 1980s, as the market value of the Tokyo Stock Exchange closed in on New York’s, many feared that Japan was going to buy everything in sight. Its banks, in particular, had become enormous. By the end of that decade, the top five global banks by total assets were Japanese, lead by Dai-ichi Kangyo Bank. . .
Today, three of those banks, Dai-ichi Kangyo Bank, Fuji Bank, and Industrial Bank of Japan, have been merged into Mizuho Financial Group. Even so, such a megamerger doesn't even get Mizuho ("abundant rice" in Japanese) a spot in the the top ten financial institutions worldwide, as measured by market cap.
I'm not predicting travails of the same intensity for China's banks as occurred for Japan's a decade ago. The past is not always prologue.
It's hard not to believe, however, that the prospects for Citigroup (and other large U.S. banks) are discounted much too deeply, and that this disparity will correct itself over the next several years.
Posted by John at 3:41 AM | Comments (0) | TrackBackJuly 24, 2007
China Development Bank Takes a Stake in Barclays
"Eight years ago, Asia as a whole was desperate for money but now it is desperate to spend it."
So says one economist quoted in a Financial Times story on China Development Bank's investment, along with Singapore's Temasek, in Barclays. The British bank is piling up additional capital in order to increase its chances of winning its fight to acquire ABN Amro.
China Development Bank has agreed to invest a little over $3 billion of Barclays now, and another $10.5 billion if Barclays succeeds in acquiring ABN Amro.
While this investment is China's largest outbound investment ever, expect more announcements such as this one; these figures are a pittance relative to the roughly $200 billion in reserves earmarked for such investment.
Posted by John at 5:10 AM | Comments (0) | TrackBackJune 14, 2007
China's ICBC Seeks to Enter the U.S. and Russia
It's a development we've been expecting for some time: China's banks seeking to expand to the United States. Sure enough, ICBC has announced that it has applied not only to U.S. banking regulators to expand here, but is seeking to enter Russia as well. (The Financial Times reports here.)
As subject to the political winds as U.S. banking regulators can sometimes be (just ask Wal-Mart), it will be extremely interesting to see how this application will be treated.
Posted by John at 10:28 PM | Comments (0) | TrackBackMarch 20, 2007
Foreign Banks in China Won't Realize Profits for Years
According to a KPMG report, foreign banks seeking to make profits from their investments in credit card and mortgage joint ventures in China are going to have a long wait. Intense competition, consumer, and an aversion to fees may mean that all the money foreign banks will make in China for the foreseeable future is the profit on whatever equity stake they’ve purchased in a bank which has had a public offering:
Posted by John at 11:38 AM | Comments (0) | TrackBackSimon Gleave, KPMG financial services partner for China and Hong Kong, said: “There is a culture of no fees. It could take 10 to 20 years to make profits. China is not the same as other markets that banks might have come across.”
January 8, 2007
The "You Don't Say" Headline of the Day
Front page article in the Wall Street Journal: "Speculators Helped Fuel Florida's Housing Boom".
Posted by John at 4:37 PM | Comments (0) | TrackBackDecember 11, 2006
A Public Company CEO Truly in Sync with His Investors
My friend Sam ("The Bull") Haskell, who does a terrific job from his perch at Sterne Agee following banks around the Southeast, recently led a group of investors visiting banks in the Gulf South region.
The Bull reported the following comment by Rusty Cloutier, CEO of Lafayette, Louisiana-based MidSouth Bancorp: "I can’t give myself a raise, because if you take into account my share ownership, and apply our earnings multiple on the additional expense of the raise, I end up losing money."
I know Rusty, and this comment is not designed for effect; Rusty's the real deal. If all public companies were run with the philosophy underlying this statement, we wouldn't need nearly the number of employees at the Securities and Exchange Commission we have today.
Posted by John at 4:28 AM | Comments (0) | TrackBackDecember 7, 2006
Wal-Mart Can't Open a Bank in the "Free Market" U.S., But It Can In Mexico
While Wal-Mart cannot get approval for a bank charter in the U.S. from regulators protecting a gaggle of bankers fearful of competition, Mexico is much more open to the idea:
. . . The Finance Ministry has given final approval for the bank, said Wal-Mart de México on Wednesday. The bank would begin operating during the second half of 2007. Julio Gómez Martínez, the former chief executive of Bank One in Mexico, will lead the independent unit, to be called Banco Wal-Mart de México Adelante.
One possible reason for the different receptions in the United States and Mexico is that, by most estimates, as many as 80 percent of Mexicans do not have bank accounts. Because Wal-Mart plans to offer such accounts, local groups apparently had difficulty trying to stir up public outrage.
Working-class Mexicans have been largely shut out of traditional banks by high fees, minimum balance requirements and intimidating paperwork. Community banks barely exist.
In this venture, Wal-Mart, the world's largest retailer, still might be the little guy, at least for now. Among Wal-Mart's competitors in the banking business are global banks like Citigroup and HSBC, which have made almost no effort to attract the vast bulk of working-class Mexicans. [emphasis mine]
Shouldn't the United States, as a matter of public policy, be encouraging such business activity on the part of Wal-Mart and others who want to offer similar services to the unbanked? While the numbers of unbanked of the U.S. are much smaller (only about 10% of households vs. just under 80% in Mexico, according to this study.)
Isn't it very clear by now that larger U.S. banks aren't going to addressed the unbanked market? Don't we have enough community banks whose sole purpose seems to be making loans to real estate developers?
Free markets have a fascinating way of attacking problems when allowed to work properly, yet banking in the U.S. is not an entirely free market. While the industry is quite competitive in some respects, regulators use the "safety and soundness" argument to prevent market entrants. Such is particularly the case when the protected class--those banks already chartered and in business--start screaming loud enough about the "threats" posed by entities like Wal-Mart. It's just another example of how regulation seemingly intended to protect the public is in reality used to protect established market players.
Posted by John at 4:30 AM | Comments (0) | TrackBackOctober 8, 2006
Chinese Banks May Be Hunting for Overseas Acquisitions
Some interesting comments from Sandler O'Neill research analyst Jeff Harte in a report on the Chinese banks; he suggests that Chinese banks are much more likely to buyers of foreign banks than what many may believe currently:
Overseas bank purchases are more likely than we expected. We had always thought that Chinese banks would have to use all of their capital to support organic balance sheet growth, making the acquisition of non-Chinese banks unlikely. However, multiple management teams expressed interest in buying overseas banks and we suspect this interest reaches beyond the special administrative region of Hong Kong. We are still not convinced that making an acquisition in a relatively slower growing economy (virtually any other economy would be slower growing than China's) would be the best use of capital for a Chinese bank. Any U.S. efforts would likely be focused on either New York or San Francisco considering their relatively large ethnic Chinese populations.
As we've mentioned repeatedly in Tidbits (in this commentary, for example), we believe that over the next couple of decades a wave of Chinese companies will enter the U.S. market. Just as U.S. banks want to follow their customers to China, it makes sense that Chinese banks would want to follow their customers as well, and maybe even get ahead of them.
Posted by John at 5:20 AM | Comments (0) | TrackBackSeptember 21, 2006
Atlanta's Summit Bank Sold for $175 Million
In previous posts such as this one, we've pointed to the vitality of the Asian-American community in Atlanta and the significant economic benefit it offers to the area.
There are now another 175 million reasons to believe Atlanta's Asian-American community has many years of growth ahead of it.
Summit Bank Corporation, Atlanta's leading independent bank catering to the Asian-American community, agreed to sell to California's UCBH Holdings for $175 million in cash and stock.
As sale prices for banks go, the deal was a very good one for Summit Bank shareholders. According to SNL, the deal value represents 3.6 times tangible book and almost 27 times trailing twelve months earnings. So far this year, other Southeastern banks have sold on average at 2.7 times tangible book and about 26.5 times earnings.
For UCBH to justify such a price, they obviously must believe not only in the management and employees of Summit, but in the long-term attractiveness of the communities Summit serves. While Summit has some small operations in San Jose and Houston, the bulk of its operations are in the Atlanta metro area. Consequently, this deal is a ringing endorsement of the vibrancy of the Asian-American community in Atlanta.
Congratulations to our friends at Summit for realizing the fruits of many years of efforts in building such an attractive institution.
Posted by John at 5:54 PM | Comments (0) | TrackBackAugust 29, 2006
Hispanic Demographic One of the Few Growth Opportunities for Massachusetts Banks
According to the Boston Business Journal, Massachuseet's growing Hispanic population represents "one of the few opportunities for growth" for banks and thrifts "in a state with a stagnant-to-shrinking population."
Posted by John at 7:08 AM | Comments (0) | TrackBackJuly 30, 2006
Bank Mergers Seemingly a Small Factor in Where Small Business Banks
In the same NFIB poll I cited previously, many small businesses do not see bank mergers as a big factor in where they do business:
Since 2002, effectively post 9-11, one in four (26%) small-business owners has experienced a merger or acquisition of its principal bank. Most owners have not greeted this change with enthusiasm. For example, 42 percent of those affected say that it caused minor transition problems, while another 27 percent say that it affected them negatively. However, bank mergers and acquisitions motivated only 8 percent of those experiencing them (or 2% of the entire population) to change banks. Twenty-three (23) percent believe mergers and acquisitions involving their primary bank have either had no effect or had a positive effect on their business.
My guess is that small businesses do not immediately relate bank mergers and the turnover in personnel bank mergers cause. In the same poll, 64% of those small businesses who changed banks in the past three years did so for service quality reasons. Service quality is often related directly to personnel.
That said, this poll indicates that only 10% of small businesses have changed principal banks in the past three years.
Any comments on these poll results are welcomed.
Posted by John at 10:39 AM | Comments (0) | TrackBackJuly 29, 2006
Small Businesses See Increased Competition for their Business from Banks
The National Federation of Independent Business recently polled its small business members regarding bank competition. (You can find the complete report in pdf form here.) Its findings confirm the beliefs of those, including this observer, who believe that in many markets competition between community banks for their bread and butter, small business loans, is getting more aggressive than ever:
Small employers believe that banks are competing more for their business today than they were just three years ago. While 45 percent notice no change in competition for their banking business, 43 percent report an increase. Eighteen (18) percent believe there is much more competition. In contrast, 8 percent indicate that there is less; under 4 percent say much less. The bottom line is that a net 34 percent think that competition for their banking business is on the rise.
A great environment if you're a small business, for sure, but a tough one for small banks.
Posted by John at 10:27 AM | Comments (0) | TrackBackJuly 26, 2006
In the South Florida Real Estate Poker Game, Buyers Hold the Face Cards
Broward County's existing single-family home sales plummeted again in June, and the huge price increases of the past few years have shrunk to near nothing.
"The market's done a complete 180-degree reversal," said Jack McCabe, a Deerfield Beach housing consultant. "It's a stare-down between buyers and sellers, and as time passes, the pressure's on the seller, not the buyer."
Sales fell by 34 percent last month compared with June 2005, the Florida Association of Realtors said Tuesday. It was the 24th consecutive month of declining sales in Broward. . . .
Evidence of the continued housing slowdown also appears in the county's condominium market.
Sales dropped 31 percent in June compared with the year-earlier period, while the median price rose a modest 5 percent to $212,300.
Investor speculators looking to "flip" properties have propped up South Florida's condo market during the past several years. Many investors are now leaving real estate.
"We knew condos had to collapse because there was nothing there supporting it, except predominantly speculation," said Lewis Goodkin, a Miami-based consultant. . . .
The number of days on market also has increased, with many homes going four to six months before receiving offers, agents say.
"People are waiting [to buy] because they want value," said Marilynn Obrig, a Fort Lauderdale agent and spokeswoman for the Broward Master Brokers Forum.
Sean Donahue, vice president of sales for HomeBanc Mortgage Corp. in Deerfield Beach, said the slowdown has created opportunities for buyers, particularly those interested in 100 percent financing.
Because of the glut of properties, buyers usually can negotiate favorable terms, not the least of which is having the seller pay all of the closing costs.
"I've seen that a lot lately," said Ellie Maio, an agent for Campbell & Rosemurgy in Deerfield Beach. "Two years ago, sellers would never have considered that. Nowadays, they'll look at any offer."
[Thanks to Sam "The Bull" Haskell for heads up.]
Posted by John at 10:29 AM
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July 9, 2006
Plenty of Bank Branches in South Florida . . . and More on the Way
The Miami Herald reports on the branch building craze in South Florida, amid increasing competition:
. . . the competition is fierce. The number of institutions conducting banking in Broward rose to 54 last year, up from 44 in 1999. In Miami-Dade the increase was to 76 from 69 in the same period.
Many of the new entrants were in fact newly created local banks -- who found that branches were, in fact, a competitive advantage.
And to top it off, branch-intensive Commerce Bank is coming:
Posted by John at 12:31 PM | Comments (0) | TrackBack"It's going to be one of the biggest changes in South Florida banking," [Wharton professor Ken Thomas] predicts. "If Commerce wants the 100 percent site, they'll blow everybody away -- they pay huge amounts for sites."
July 3, 2006
"Free Agency" for Memphis Bankers
In addition to Orlando, personnel costs for banks appear to be rising smartly in Memphis as well, reports the Memphis Business Journal, quoting Regions executive Curt Gabardi: "Key talent comes at a premium, without a doubt, and the over-capacity in the industry is driving some irrational compensation practices," he says. Barret School of Banking Executive Director Chris Kelley, using a baseball analogy, says "it's like free agency out there."
Posted by John at 5:33 AM | Comments (0) | TrackBackJune 19, 2006
Rising Personnel Costs Baked in the Cake for Community Banks
It's getting increasingly difficult for community banks to find qualified bankers, which means salaries, incentive pay, and other benefits are destined to rise. The Orlando Business Journal reports:
. . . Nine out of 10 community bank chief executive officers nationwide say it would be hard or very hard to find qualified candidates to fill various management positions, shows a recent survey by the American Bankers Association.
Community bankers' solutions: thousand-dollar hiring bonuses, competitive salaries, out-of-market searches and better training. . . .
The recruitment and retention of qualified employees is a growing problem. Consider: 60 percent of U.S. community bankers surveyed believe their markets have too many branch locations -- yet 76 percent continue to see branch expansion as their main avenue of growth.
Because so many banks are adding branches, they often steal employees from competitors, community bankers say. . . .
Nationally, the problem is filling certain key positions. At least 90 percent of community bank CEOs surveyed say it would be difficult to find qualified candidates to work as trust officers, business lenders, compliance officers, chief financial officers and information technology officers.
In metro Orlando, community bankers are having trouble filling jobs from tellers to middle and upper managers.
Managers are especially in high demand. A branch manager with five years of experience can get up to $50,000 a year, [Citizens First Bank CEO Mike] Killingsworth says.
"Escalation of the pay for people in banking three or four years has grown to the point where it's hard to stay up with pay," he says.
To better attract and retain quality employees, seven out of 10 U.S. community bankers increased their overall salary scales; at least five in 10 increased incentive pay opportunities; and at least four in 10 increased educational opportunities. Others improved work areas, added 401(k) plans, increased a 401(k) match and established clear career paths.
Moreover, the large banks aren't sitting still. Fifth Third Bank has announced a major central Florida expansion. The company says it plans to grow from 15 branches currently to 70 by the end of 2008, representing an investment of $150 million and 150 new jobs by the end of 2007 alone. They won't staff those branches with trained seals, and they've got a lot more zeroes in their financials to hide those people behind.
Posted by John at 8:28 PM | Comments (0) | TrackBackJune 17, 2006
An Extraordinarily Compatible Couple
I highlighted the tremendous creation of shareholder wealth which makes the careers of Golden West Financial's Herb and Marion Sandler. The San Francisco Chronicle recently offered a touching personal profile of the Sandlers:
"We've almost never not worked together," Marion Sandler said recently week in a joint interview in her husband's office as she pulled out knitting needles and yarn. "It's extraordinarily wonderful. We decided our marriage was the most important thing," and that if working together caused too much strain, they would come to a new work arrangement.
That never happened. "We are extraordinarily compatible," she said. "I just can't describe it."
"Are you going to cry?" Herb Sandler asked.
"Yeah," she said, dabbing at her eyes. . . .
Read the entire article here.
Posted by John at 9:26 AM | Comments (0) | TrackBackJune 16, 2006
Deserved Accolades for the Sandlers at Golden West
With Golden West Financial having agreed to be purchased by Wachovia, the record of Herb and Marion Sandler is being held up for praise.
In this particular case, it's hard to be too effusive. One of the best perspectives I've seen comes from Graef Crystal, a Bloomberg columnist and specialist in executive compensation:
. . . When I was teaching at the University of California-Berkeley in the 1980s, I met the Sandlers at that city's famed restaurant, Chez Panisse. I was introduced by my next door neighbor, who was then the restaurant critic of the San Francisco Chronicle. After we met, my neighbor told me: "You really ought to consider putting some money into their company."
So did I? Unfortunately, I didn't.
My Bloomberg terminal carries stock price history back to July 28, 1980. Starting from that date and extending to June 9, Golden West's total return has placed it higher than all but 3 percent of the companies that comprised the Standard & Poor's 500 Index during that period of almost 26 years.
But measuring returns on what is fundamentally a point-to-point basis doesn't speak to the fact that the company's shareholders not only fared marvelously but had a terrifically-smooth ride doing so.
Here, in 25 narrowing time windows, stretching between Dec. 31, 1980, and Dec. 31, 2005, are the cumulative total returns of Golden West and the S&P 500 Index.
| From | To | Golden West | S&P 500 | Difference |
|---|---|---|---|---|
| 12/31/80 | 12/31/05 | 9732% | 1787% | 7945% |
| 12/31/81 | 12/31/05 | 17084% | 1885% | 15199% |
| 12/31/82 | 12/31/05 | 8561% | 1533% | 7028% |
| 12/31/83 | 12/31/05 | 6016% | 1233% | 4784% |
| 12/31/84 | 12/31/05 | 5548% | 1154% | 4394% |
| 12/31/85 | 12/31/05 | 2767% | 852% | 1916% |
| 12/31/86 | 12/31/05 | 2437% | 702% | 1735% |
| 12/31/87 | 12/31/05 | 3416% | 662% | 2754% |
| 12/31/88 | 12/31/05 | 2678% | 554% | 2124% |
| 12/31/89 | 12/31/05 | 1512% | 397% | 1115% |
| 12/31/90 | 12/31/05 | 1649% | 413% | 1236% |
| 12/31/91 | 12/31/05 | 882% | 293% | 589% |
| 12/31/92 | 12/31/05 | 882% | 265% | 617% |
| 12/31/93 | 12/31/05 | 985% | 232% | 753% |
| 12/31/94 | 12/31/05 | 1091% | 228% | 864% |
| 12/31/95 | 12/31/05 | 654% | 138% | 516% |
| 12/31/96 | 12/31/05 | 556% | 94% | 462% |
| 12/31/97 | 12/31/05 | 321% | 45% | 275% |
| 12/31/98 | 12/31/05 | 346% | 13% | 333% |
| 12/31/99 | 12/31/05 | 305% | -7% | 311% |
| 12/31/00 | 12/31/05 | 100% | 3% | 97% |
| 12/31/01 | 12/31/05 | 128% | 17% | 111% |
| 12/31/02 | 12/31/05 | 86% | 50% | 36% |
| 12/31/03 | 12/31/05 | 29% | 16% | 13% |
| 12/31/04 | 12/31/05 | 8% | 5% | 3% |
The reader can see that there is no time window -- not one of the 25 time windows -- in which Golden West did not outperform the S&P 500 Index. That's the equivalent of hitting 25 home runs in 25 consecutive times at bat.
Now there are CEOs in the banking industry who have done well for their shareholders, but who have done far better for themselves by collecting enormous pay packages. Former Citigroup Inc. head Sandy Weill comes immediately to mind.
Weill seems to me the embodiment of what capitalist America is all about. Perform well for your shareholders and you get a ton of money. Indeed, is it not the ton of money that motivates you to perform well for your shareholders?
Maybe that was so in Weill's case. But it's decidedly not so in the case of the Sandlers.
Given that they are both co-CEOs, it would seem at first glance appropriate to add up their virtually identical pay packages and to consider that sum the cost to shareholders of being CEO. But Golden West has no non-executive chairman, and it has no chief operating officer. So from that standpoint, I think a better approach is to look at just one of the two Sandlers' pay.
In 2005, Marion Sandler received a pay package totaling $1.5 million.
That pay package, in a study I just conducted of 492 CEOs running companies with market caps of $3 billion or more, positioned her 79 percent below a competitive level of pay determined by controlling for differences in company size, in 2005 total return levels and in the relative risk of the pay package (as measured by the ratio of stock option present values to total pay, stock options being the most risky form of pay.)
So the notion that to get good performance, you must offer huge pay may apply to some CEOs. But it certainly doesn't apply to the Sandlers. They were content to hold on to their company stock, work for peanuts and look to the long term.
My only regret is why -- why didn't I call my broker the night after I met them?
Some of you are no doubt thinking: didn't banks and thrifts as a whole, with a secular downtrend in rates over the past quarter century, do much better than the S&P 500? Couldn't you have thrown a dart at the group, or invested in an index fund of financials, and done about as well?
In fact, the answer is not only no, but a resounding no. Intrigued by the question, I went back as far as my SNL database would allow--20 years--comparing Golden West to the SNL Bank and Thrift Index.
In fact, Golden West similarly trounced the SNL Bank and Thrift Index, just one proxy for its peer group. I quit after 15 years, but in every one of those time periods stretching back over the last decade and a half, Golden West blew past its bank and thrift peers.
Notably, the Sandlers did it the old fashioned way: organic growth. In an industry where many are obsessively focused on the next acquisition (and often want you to forget how badly the last one turned out), Golden West grew to its current $128 billion in assets by making only a handful of deals. Most of those, in fact, were branch purchases, particularly those of failed thrifts.
Further, Golden West had a simple operating formula: funding adjustable rate mortgages with checking and savings deposits, with an obsessive focus on costs. Over many years, eschewing many temptations which lured their competitors, the Sandlers kept executing a proven formula.
Organic growth, strategic focus, cost control, and reasonable executive compensation to boot. Depressingly, it's been an extremely rare combination in the financial services industry over the years, much less today.
It's what makes the Sandlers so special, and more than deserving of all the accolades which come their way.
Posted by John at 8:43 AM | Comments (0) | TrackBackJune 14, 2006
Morgan's Jamie Dimon: He's a Leader, Not a Rock Star
JPMorgan Chase CEO Jamie Dimon was in Lexington, Kentucky recently, and gave an interview to the Lexington Herald-Leader during his visit.
"This is not a rock star business and I am not a rock star," he told the reporter. In an seemingly unrelated question and answer, he went on to prove, without necessarily meaning to, that he isn't a "rock star":
Q: I read that as part of your cost-cutting, you discontinued the office gyms at some Chase locations. Why would a guy who likes to exercise do that?
A: There were 16 gyms accessible to -- I forget the numbers now -- 15 percent of the people? So here you have this perk that's pretty expensive and that's accessible to 15 percent of the people and only used by 3 percent of the people. The perk itself cost, if you did it per person, like $5,000 per person.
So here you have this perk that was benefiting very few people. No one liked canceling it, but when I started telling them only 3 percent were using it, they realized it was unfair. Worse than that, in most of those locations, there was a gym across the street where you could join for $600. So what kind of thing is that for a company to do?
In the old days, there weren't gyms everywhere. There are gyms everywhere now. I'm going to tell you that the 3 percent who used it, a lot of them had home gyms. They just liked the convenience of exercising, if they felt like it, in the office at lunchtime.
We've got to grow up. That's not what we are in business for. [emphasis mine]
Rock stars--and many CEOs--need gyms and other perks. Jamie Dimon isn't a rock star. Jamie Dimon is a leader.
That's why the future of JP MorganChase seems very bright.
Posted by John at 6:30 AM | Comments (0) | TrackBackJune 13, 2006
Everything's Big in Texas, Including BBVA Bank Acquisitions
Not only did reported talks between Texas Regional Bancshares and Spain's Banco Bilbao Vizcaya Argentaria SA turn into a reported deal on Monday, but BBVA announced the acquisition of another Texas bank, State National Bancshares, at the same time. Together the two banks will cost about $2.6 billion in cash.
With these two deals, BBVA essentially triples the size of its Texas banking operation and rockets up the market share rankings. On a pro forma basis, BBVA will have over $12 billion in assets and $10 billion in deposits in the Lone Star state, behind only J.P. Morgan, Bank of America, and Wells Fargo.
BBVA paid roughly 22 times estimated 2006 earnings and deposit premiums of 31% (Texas Regional) and 28% (State National), pricing which reflects both aggressiveness and scarcity of targets. After this deal, by my count, Texas, a state with about $360 billion in bank and thrift deposits, will have only six independent banks with more than $2 billion in deposits.
The aggressiveness is easy to understand. As BBVA noted in their investor presentation (pdf), the Texas economy, at $850 billion in GDP, is about the same size as Spain's (about $904 billion). Texas is one of the fastest growing states in the country, while Spain, as we noted in this post, is barely replacing itself demographically. Further, trade ties between Texas and Spain have been growing rapidly, and Spanish companies have been very active acquirers in the state. (You can read more in this post.)
BBVA will finance the deal with its proceeds from the sale of its stake in Italian bank Banca Nazionale del Lavoro SpA and by selling its stake in energy concern Repsol YPF.
Moving the chips on the table from Italy and energy to the state of Texas sounds like a pretty good long-term bet to me.
Posted by John at 7:02 AM | Comments (0) | TrackBackJune 12, 2006
Bankers Dusting Off Resumes in Birmingham
It's never too early to be looking for a job when you're a banker caught in the visegrip of a big bank merger, particularly if there are plenty of smaller community banks with arms spread wide ready to take you in. That's what's already happening in Birmingham, says the Birmingham Business Journal, less than a month after the announcement of the Regions-AmSouth marriage:
Already, bankers at AmSouth and Regions are working the phones and clogging fax machines in search of job prospects.
[Red Mountain Bank CEO Mike] Washburn says his phone rang with the first such call, from a Regions executive, at 7 a.m. the morning after the merger announcement, and "it has not slowed down."
Tom Broughton, president and CEO of ServisFirst Bank, says he, too, has received calls from early job seekers.
Broughton, who worked in AmSouth's commercial lending group until leaving to co-found First Commercial Bank in 1985, says his latest startup is in a position to make the most of new hiring opportunities.
ServisFirst opened for business a year ago and has quickly amassed $375 million in assets.
Broughton says the bank currently employs more than 60 people and, with its fast-track growth, "we think we could double that in a year."
Posted by John at 11:44 PM | Comments (0) | TrackBack[SouthPoint Bank CEO Steve] Smith, a SouthTrust banker at the time of its sale to Wachovia, says his first thoughts after the Regions-AmSouth merger announcement were for Regions' and AmSouth's 37,000 employees.
"The entire population of those banks will go through about two years of worrying, not knowing whether or not they will have a job," he says.
And with the dust barely settled on the SouthTrust sale, it will be tougher to assimilate those whose jobs are eliminated as part of this latest consolidation, he says.
"A lot of the people in Regions and AmSouth are proactively starting to put their resumes out now because they know there are only going to be so many jobs, so many places they can go to," he says.
June 11, 2006
Goodbye, RamSouth
For an unexplained reason, RamSouth, the Birmingham resident who set up a blog to follow the Regions Financial--AmSouth merger, has folded the pup tent:
I’ve decided to pull all posts from RamSouth.com. It was my decision — I haven’t been asked to. More than anything, this site was created to encourage dialogue. I think it achieved that purpose overwhelmingly. This site was never intended to be a vendetta against either bank. Good, hard-working, honest folks work for both and both institutions have done a lot of good for their communities. I hope that the shareholders, employees and community will continue to hold the new Regions to the standards of its predecessors and that the positive impact of the new bank will be even greater than the sum of its former parts.
It's too bad; deals like this one--particularly this one--need more "on the ground" scrutiny.
Posted by John at 12:57 PM | Comments (0) | TrackBackJune 10, 2006
BBVA in Talks to Buy Texas Regional Bancshares
From the Wall Street Journal:
Banco Bilbao Vizcaya Argentaria SA is considering an acquisition of Texas Regional Bancshares Inc., a bank with a market capitalization of $1.87 billion, according to people familiar with the matter.
A deal could come soon, but like all merger situations, nothing may materialize.
For Madrid-based BBVA, the purchase would mark a substantial expansion of its U.S. businesses, especially in terms of retail branch banking. BBVA has primarily focused on the remittance market, in which immigrants in the U.S. send money to their home country. In the most recent quarter, BBVA's Mexico-U.S. business group, which includes remittances, displaced Spain as the bank's most profitable business. [Emphasis mine]
Texas Regional Bancshares, McAllen, Texas, a community in the southern part of the state about 70 miles from Brownsville, has an insignificant remittance business. It is the parent of Texas State Bank, which has 73 branches and about $6.6 billion in assets with banking business focused in southern Texas. The commercial bank started about 25 years ago and began expanding by acquisitions in 2002, buying smaller banks in areas including Houston, Dallas and Corpus Christi. . . .
BBVA, Spain's second-largest bank behind Banco Santander SA, has invested heavily in its Mexico-U.S. business, and its Bancomer unit is Mexico's largest bank. BBVA also has operations in Southern California, Texas and Puerto Rico. . . .
. . . Among its fastest-growing operations is its global money-remittance business. BBVA claims it handles some 40% of the remittance business in and out of the United States, particularly among the Hispanic and Asian population. BBVA Bancomer is the top money remitter between the U.S. and Mexico.
A Spanish multinational continues its rise.
Posted by John at 4:52 AM
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June 4, 2006
Regions--AmSouth: An Insult to Drunken Sailors
Tom Brown, long-time bank analyst, investor and the lead author of Bankstocks.com, weighs in on the Regions--AmSouth combination. Tom can always be counted on to give a frank, unvarnished opinion, which he delivers in heaping doses on this merger:
. . . Soon after the deal was announced, I got a call from a leading investment banker who asked me what I thought of "the merger of the two-drunken sailors in Birmingham." I told him he was casting aspersions on drunken sailors! . . .
This deal will almost certainly be a clunker for shareholders. The combined companies can expect to lose a significant amount of customer revenue as the two franchises are merged, branches closed, and employees fired. This revenue erosion will occur even if the companies make no missteps—-which they almost certainly will. On top of that, one of the great lessons of banking-merger history (not to mention the law of large numbers) is that the new, larger entities that get created grow at a slower rate than the smaller, pre-deal entities would have. It’s happened again and again. . . .
As for the strategic rationale for the deal—-well, there isn’t one. The combined company won’t have a distinct strategy, for the simple reason that neither of its predecessors did, and the two companies haven’t talked long enough to figure out a new one!
In the same commentary, Tom also pans the Wachovia--Golden West deal, despite the fact that he's been a Wachovia fan.
From my chair, the "strategic" part of this merger couldn’t be less inspiring. Both CEOs knew their companies faced a tough time generating growth, both wanted to keep a bank headquartered in their hometown of Birmingham, and both must have figured they’d get paid a lot more by simply running a larger company. Payoff for shareholders from that train of logic: less than zero. . . .
Stay away. This new company will be toxic.
In the same commentary, Tom also pans the Wachovia--Golden West transaction, although he's been a fan of Wachovia for several years now.
Posted by John at 9:10 AM | Comments (0) | TrackBackJune 1, 2006
A Clarification from RamSouth, Blogging on Regions--AmSouth
I posted earlier today about the blog RamSouth, which is monitoring the fallout of the Regions Financial--AmSouth merger. I noted that the anonymous author claimed not to be an employee, but didn't clarify whether he or she might be an ex-employee.
To this person's credit, he or she added a clarification about who they are, and why they are blogging about this merger:
Addendum
For the record, I’ve never been employed at Regions or AmSouth or any other bank. I’m not even in the industry. I’m a customer, but wouldn’t even consider myself disgruntled — I have no intention of closing my account. The merger could actually be of benefit to me if some nearby branches stay open.
I do have an MBA, which I think informs me a bit about mergers. I’m a marketer with an understanding of PR, which I think helps sense the sometimes subtle difference between fact and spin.
Birmingham is a small town in a lot of respects. I know executives at both banks and wish them the best. I decided to post this blog anonymously not because I’m a coward, but because my analysis could make enemies with people that I may ultimately work for or with. I encourage any dissenting dialogue and will attempt to maintain an objective viewpoint.
Thanks for the clarification, RamSouth. I'm looking forward to your reporting.
Posted by John at 11:52 PM | Comments (0) | TrackBackBankers: In a World of Blogs, Paying Attention Only to Wall Street Isn't Enough
A new blog, RamSouth, has been initiated to monitor the Regions Financial--AmSouth combination to "see if the marriage is good for customers, communities, and ultimately, shareholders."
Interestingly, the anonymous author of RamSouth claims not to be a employee of either institution, just an interested Birmingham customer: "The author of this blog is not an employee of Regions, AmSouth or any financial institution or investment firm. He’s a Birmingham native who happens to be a customer at one of the affected banks and is interested in how mergers and acquisitions affect businesses and people. He’s not a sap that thinks businesses exist to serve communities. The sad history is that mergers often fail to benefit the shareholders that businesses are sworn to return value for."
The author doesn't indicate whether he or she is an ex-employee, which can color the analysis. In any case, this blog should be fascinating to monitor, as "on the ground" customer reports can often be quite enlightening as to what's really going on behind the reported numbers.
I don't know how many other blogs like this have been set up in the wake of other big bank mergers. Given how easy self-publishing through blogging is for non-geeks, however, it's clear that bankers have more to worry about than just what the Wall Street types think and publish. Customers and employees now have easy places to collect their views, and such opinions are much more likely to be disseminated when passions surrounding a big merger get unleashed.
If you're a banker, it's easy to dismiss blogs like RamSouth as marginal or something no one will really see. If that's your opinion, you're dead wrong.
The Wall Street types you spend so much time and money dancing in front are arguably the most technologically connected group of people in the world. You'd better assume they'll see it all, because they will. That's what their clients pay them to do.
Posted by John at 8:13 AM | Comments (2) | TrackBackMay 31, 2006
Washington-Area Community Banks: "The Easy Money is All Gone"
This week's Washington Business Journal examines the state of affairs for community banks in the D.C. area, and finds that
Investing in banks, long considered a conservative place to put money, has become a hot market for capital in recent years. Since 1998, the Washington region has seen 20 bank startups.
"When the availability of capital is great, the market gets overbuilt," says Barry Watkins, CEO of Bethesda-based Fidelity & Trust Bank. "That is what has happened to banks." . . .
"Everything is tougher," says Cardinal Financial Chairman and CEO Bernard Clineburg. "Everyone is on alert, and it just makes everything tougher."
Says Potomac Bank of Virginia CEO Larry Warren: "The easy money is all gone."
Meanwhile, more banks are opening -- at least two groups of organizers are planning new banks in Greater Washington next year -- and other established banks are looking to break into the region. Competition for deposits, retail space and loans is fierce . . .
One of this article's main points is that the competitive environment is pushing community banks to sell. If you're thinking that some big dumb super-regional bank is going to bail you out at four times book, however, think again:
The good news for the sellers is that there are many hungry newcomers and bigger regional players who consider themselves growers. Mercantile Bankshares and Provident Bankshares in Baltimore, Pennsylvania-based Fulton Financial, West Virginia-based United Bankshares and New York's M&T Bank have shown their penchant for expansion through acquisitions in the past few years, and no one would be surprised if they continue to gobble up smaller banks.
The small size and relatively poor performance of the banks already in the market, though, suggests to some that the buyers will come from a crew of younger, less-established banks in the region looking to quickly grow their assets. [Emphasis mine]
"It wouldn't surprise me to see a merger of equals," says Cardinal's Bernard Clineburg. Indeed, at least in terms of size, that was the case with WashingtonFirst's planned acquisition of First Liberty National Bank. . . .
If smaller banks make up a proportionally larger number of interested buyers, by definition sale prices for community banks will go down. Smaller banks do not have the balance sheet resources, much less patient enough shareholders, to pay foolish prices.
Posted by John at 4:43 AM | Comments (0) | TrackBackMay 30, 2006
Regions Financial: Bank of America with Training Wheels
I was amused by the comments my friend Chris Marinac at FIG Partners made regarding the announcement late last week of the Regions Financial-AmSouth combination:
AmSouth was greeted with a 3% decline in RF shares - hardly a vote of confidence. The ASO deal is slightly accretive to Cash EPS in 2007 (goal is $2.93 per share). Ironically, $2.93 per share was the same identical goal laid out for 2005 Cash EPS by RF/UPC in January 2004! But hey, what's two years among friends? We remind investors of past proclamations by RF because today's prediction carries limited credibility, unfortunately. Another good statistic is the ratio of merger charges-to-cost savings promised. RF/UPC was 1.5x, but RF/ASO is 1.75x - this is $100 Million difference. Cost savings of $400 million are planned by mid-2008. This equates to 30% of ASO's 1Q06 annualized overhead base (remember - this is an acquisition of ASO, so ASO stand-alone costs are more relevant in our view). In the UPC deal, RF promised just 18% of UPC's expense base. This history is key for investors to remember. A look back at RF/UPC shows that RF shareholders lost 8% on their stock price (i.e., $37.69 when UPC was announced vs. $35.53 on Wed 5/24 prior to the ASO deal). UPC owners fared better as the stock was about 7% higher. However, strong dividends the past 10 quarters have yielded 9.4% for RF shareholders since late January 2004 (no reinvestment was assumed). The S&P 500 is 12.6% ahead over this time frame, BEFORE dividends. But, fear not, RF should eventually return to buying back its stock and raising dividends. Perhaps such financial engineering smoothes out the rough edges on this transaction. But, like most large mergers, Caveat Emptor!
Two years of postponed earnings growth? Cost savings projections which look high? Financial engineering? It all sounds like Bank of America with training wheels to me.
Posted by John at 9:23 AM | Comments (3) | TrackBackMay 27, 2006
A Model of Business Grit: Keefe, Bruyette & Woods Prepares to Go Public
Keefe, Bruyette & Woods announced the firm will pursue an initial public offering. Founded over 40 years ago, the employee-owned bank and financial services firm will be publicly-owned for the first time.
KBW is a corporate model for preseverance and determination. A weak bank stock market and the indictment of the firm's president prevented an IPO in the late 1990s. In 2001, the company was in advanced discussions to be sold. Then, on September 11, 2001, the firm lost almost one-third of its employees and its World Trade Center headquarters in the 9/11 attacks.
There are no manuals or management courses in business school on how to rebuild a firm so devasted. Nothing can prepare anyone for what to do when, in a flash, your firm is ravaged and you are caught up in the grief of burying colleagues you've worked beside for years.
We often throw around terms like "admirable" with abandon, but the character and grit with which KBW's survivors rebuilt the firm is nothing if not admirable. How can you know ahead of time you have what it takes to rebuild after such a tragedy? Whatever it was, deep inside, this collection of individuals had what they needed to come back.
According to the Wall Street Journal, the firm grew from $150 million in revenue in 2001 to $300 million in revenue and $18 million in profit for 2005. In 2002, KBW was 26th in the "league tables" for investment banks; by last year the firm had risen to 16th.
The story is told in detail in the book Triumph Over Tragedy, by John Duffy. Duffy was the firm's co-Chief Executive Officer at the time of the tragedy, and became the firm's Chairman and CEO when his partner Joe Berry was one of the losses in the attacks. Duffy also lost his son, who also worked at the firm.
An IPO is a milestone for most companies, particularly for one which has been private and employee-owned for many years. In KBW's case, however, it's also a special tribute to those who contributed so much to the firm's growth and reputation, yet are senselessly and tragically unable to be here to witness this achievement.
Posted by John at 12:01 PM | Comments (0) | TrackBackMay 26, 2006
Wachovia Now Has 30,000 Customers Receiving Spanish Language Statements
Wachovia announced that 30,000 of its customers have signed up to receive Spanish language statements and statement inserts.
Given what a relatively small footprint the bank has currently in two of the nation's most populous states, California and Texas, and how recently the bank started this initiative, this growth strikes me as something worth crowing about in a press release.
Posted by John at 4:27 PM | Comments (0) | TrackBackA Veteran Community Banker on the Competitive State of His Industry
John Eggemeyer tells the American Banker ($) that the wind is in the face of community bankers, not at their backs:
From his bird's eye view as a successful investor and merchant banker, Mr. Eggemeyer sees some disturbing trends in the industry.
A surge in raising and spending capital has caused competition "to be as intense as I've ever seen it, and that's not a good thing," he said. At many banks, pricing has become more irrational and underwriting standards more slack, he said.
Competition has also increased because of the number of start-ups today, and a flood of capital has spawned a generation of them financed like none were before, Mr. Eggemeyer said. "But there's just not enough opportunities for them all to be successful," and he expects most to sell.
Mr. Eggemeyer also expressed concern about an "overly aggressive" crackdown on banks that own large concentrations of commercial real estate loans. "They may overshoot the mark and really slow down economic activity."
Eggemeyer is not just a successful banker, but a very successful bank stock investor. (Yes, those are often two separate things.) His First Community Bancorp is but one of several successful banking companies he has either been a principal and/or investor in. When he speaks he's worth paying attention to.
Posted by John at 3:42 PM | Comments (0) | TrackBackMarch 26, 2006
While the Heat Gets Turned Up at J.P. Morgan, It's Sleepy Time Down South
One of several airplane reads I had recently was this quite interesting profile of J.P. Morgan’s Jamie Dimon in Fortune. Dimon has turned up some long-overdue heat in this behemoth:
Branch managers are ranked based on how much they raise both profit and revenues; the top group gets bonuses as high as $65,000, and the lowest quintile zip. Salespeople in the branches can do even better, collecting "points" for selling credit cards, mortgages, and other products. Last year the biggest point-gatherer pocketed a $145,000 bonus. If you don't make your quota, you're out.
Dimon is bringing that kind of rigor to every corner of the firm. In the old J.P. Morgan, big units combined their results, so it was difficult for top management to figure out which ones were really making money. "Strong businesses were subsidizing weak ones, but the numbers didn't jump out at you," says CFO Cavanagh. "With the results mashed together, it was easy for managers to hide."
The hiding game is over. Right after the merger, Dimon split J.P. Morgan into six major profit centers--investment banking, retail, and cards are the three biggest--with dozens of units that must report like separate companies. Each month, division heads send Dimon 50-page books packed with data, from the ratio of overhead to sales on every product to BlackBerry bills per employee. Then Dimon goes over the reports in grueling sessions that last hours.
I laughed out loud when I read the line about managers hiding. I was recently with a former senior