This crisis is worse than divorce

Mint – Blain’s Morning Porridge

I can write a washing bill in Bablyonic cuniform, and tell you every detail of Caractacus’s uniform…

The headlines scream it’s the end of banking as we know it. Tosh and nonsense. I’m thinking it’s time to start picking a few winners here. Yes, if you can keep your head while others are losing theirs, there are a few banks still doing quite good, others that have quietly fixed many of the underlying contradictory bluster problems, banks that are fundamentally OK but have traded too far down, and a few that might even have long-term futures.

I can’t help but notice JP Morgan’s boss, Jamie Dimon, spent US$26.6m of his own dosh to buy JP stock yesterday – at its lowest price in two years. Is he buying because he truly believes the stock is cheap, or because he’s making a sacrifice to stem the confidence collapse in global banks? Clue: he’s a player.

And markets are swirling with rumours of weekend intervention...

But I think Dimon’s a tad early. Before I explain why, let’s start this morning with some old-fashioned boasting. Since I’ve never got around to properly cataloguing the Porridge, I’d like to thank the reader who sent me a copy of the Morning Porridge dated October 8 2015, when I said:

“I better put my bear hat on and focus readers on the developing solids storm that could be Deutsche Bank. The effect on DB paper is going to be fascinating, and there are clearly potential contagion risks. Banks generally don’t go bust because of capital – it's usually access to liquidity that does for them…but I can’t help but wonder just how DB raises new capital now.”

Having proved my limited worth as a financial prophet.. maybe it’s time to look to the upside. When well-known perennial German completion backwards principal bank, Commerzbank, provides an upside surprise - better than expected numbers, actual fourth quarter profits and a dividend (a creature thought to be extinct in that neck of the German woods), you have to take notice. While, in all good faith, I’ll struggle to put a German bank on my buy list.. it does make you think..

While I’ve got a little list of banks to buy, (alongside a longer list of banks that never will be missed, I’ve got ‘em on the list..), it’s not yet the moment to pile in with buying boots tightly laced. There are still a number of shocks likely to further rock the banking sector.

The list of contagion vectors is lengthy. For instance, a brace of European bank bail-ins will likely remind investors just how pants the regulatory capital model is. While I accept banks are better capitalised, they are ultimately less stable because the new capital model is based around breaking debt investors who ultimately are the base of any bank – providing the cash to be levered to lend. Equity holders should bear risk. Remember core Banking Mantra – it’s not Capital but Liquidity that kills banks.

A long-shot crisis multiplier could stem from some old-school European sovereign bail-outs to support core names. It’s an outside bet – and guess which eponymous Teutonic bank heads the list – but it will shock on a too-big-to-fail failure! It will remind investors of just how difficult it is for divided European decision makers to agree. Do they serve national or European goals? No prizes for guessing who will win that vote.

Meanwhile a few more indications of economic slowdown, and yet more NIRP (negative interest rate policies), will remind investors that rising NPLs (non-performing loans) and negative interest rates are massive banking negatives.

And let’s not neglect the external issues; such as a Chinese banking crisis around the corner. China should not be a problem – the banks will be bailed out with none of the angst, hand-wringing drama-nonsense we’ll see here. Other issues include rumours swirling of a well-known Asian, EM (emerging markets) and commodities focused bank struggling to find a buyer, or a host of other potential banking bubbles bursting from Argentina to Zambia… (I could have said Zimbabwe.. but that would have been just too obvious..) 

But while I mull putting some cash back into banks…another long-term development has got me thinking. Do we actually need behemoth banks any more? Some say big clearing and money centre banks will always be necessary – but only to provide these functions. When I look at developing fintech (financial technology) I question the future of commercial, transaction and retail banking. They can all be done for a fraction of the cost, and with far fewer labour costs.

I’m afraid many banking jobs are going the way of shipbuilding. Even though my banker stock, HSBC, is sweetly low priced, never skips a divvy, and looks an enticing buy, I’m going to wait…

Great story from a client yesterday: “This crisis is worse than divorce. Its cost me 50% of my net worth, but I’ve still got my husband.”

Have a great weekend..

Bill Blain

44 207 786 3877

44 7770 881033

[email protected]

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