Berenberg's European banking analysts have released a new research note. Titled, 'Mad, bad and dangerous to know,' it suggests the investment banking arms of some European banks may be less safe than they seem.
Berenberg compares European banks to Ranulph Fiennes attempting the first winter crossing of Antarctica: they face a long, difficult journey full of material risks. It says many European investment banks are stuck in the old reality: they have inadequate capital and are facing significant problems in their home economies.
By comparison, as the chart taken from the note shows below, US banks appear far better capitalized and therefore far safer as long term banking employers.
Berenberg's analysts pick out French banks for particular censure: the corporate and investment banks of BNP Paribas, SocGen and Credit Agricole have committed unusually small amounts of capital to their investment banking business, they said.
" BNP has over €1tn of assets within CIB, but only allocates €16.7bn of capital to it; SocGen has over €600bn of assets within CIB, but only allocates €10.9bn of capital to it; while Crédit Agricole has over €1trn of assets within CIB, but only allocates €8.15bn of capital to it. Even if we net off derivatives, we calculate equity/assets ratios of 2.6% for BNP, 2.5% for SG, and 1.6% for CA. By way of comparison JP Morgan has an equivalent ratio of 5.4%."
Based upon a number of measures (solvency, complexity, adaptability, risk and management's grasp that the banking industry is in secular decline), Berenberg's analysts concocted the following chart which ranks banks in terms of their overall safety. Neither SocGen nor Credit Agricole fare well. The Swedish banks and Standard Chartered come out best.
Credit Agricole is weak across all measures, said Berenberg. So is SocGen, which it said is being unwittingly forced to change by the market, "rather than grabbing the chance to structurally change its business model."
In a different research note released earlier this month, Deutsche Bank said SocGen's fixed income business looked particularly susceptible to being pruned. SocGen's investment banking arm is particularly sub-scale, said Deutsche's banking analysts, "an exit from the bulk of fixed income to serve only SME and French corporate clients...could make sense."
Of the French investment banks, BNP Paribas looks safest, said Berenberg. However even BNP has its faults: Berenberg said it has a €10bn capital shortfall in its corporate and investment bank (CIB). As a result, BNP is advised to double the amount of capital allocated to the CIB. Alternatively, Berenberg advises that it scales back both its investment banking balance sheet and ambitions.
Separately, there's more bad news for investment bankers at the Royal Bank of Scotland today.
The US government wants RBS to plead guilty to criminal charges associated with Libor rigging said the Wall Street Journal. If this is the case, it said RBS could be exposed to private litigation from individuals in the US who could claim that the manipulation of Libor left them worse off. Private damages could continue to be exacted far into the future and would be difficult to stem with a single settlement.
"The risk of private litigation just adds to the uncertainty at RBS," said Simon Maughan, head of sector strategy at Olivetree Securiites. "It's difficult to pay a fine and draw a line under private litigation. This could run on for years."
The Financial Times said today that RBS's Libor fine is adding to pressure on the UK government to curtail bonuses. Maughan said ongoing private litigation from individuals in the US will perpetuate this pressure. "There were probably only around 30 people among the thousands at RBS's investment bank who were involved in Libor manipulation, but political pressure means they are all tarred with the same brush. It's trial by the media and will make it very difficult for RBS to attract people to work there."
RBS didn't return a call for comment. Chris Wheeler, an analyst at Mediobanca, said RBS's investment bank is being slowly strangled through its inability to pay on a par with the rest of the market. "Good people will leave and then they won't have the revenues to justify the bonus pool. RBS's investment bank is being reduced to a small unit which services the treasury function," Wheeler said.
However, one headhunter informed us that RBS is seen as an appealing place to work: "They pay a lot of their deferred bonuses in the first year - a few months after the bonus announcement. This is actually highly competitive and a big selling point for RBS."