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 The benefits of size and reach, for years considered the holy grail
of global banking, are now viewed as being outweighed by the cost
and complexity of running businesses across dozens of countries.
Many bank bosses have given up on trying to offer everything to
everyone. But as unwinding years of expansion proves difficult,
pressure for action has intensified, from politicians who show
little patience with institutions they consider too big and complex
and investors wanting more return on equity (RoE).
"The underlying economics for banks ... means being all things to
all people is too big a burden to sustain," said Bill Michael, head
of financial services in Europe at consultancy KPMG. He cited low
RoEs, high operational risk and hefty potential costs from
regulation.
After missing financial targets and racking up a string of
regulatory fines and problems, Deutsche Bank said on Monday that it
would sell retail arm Postbank, take a knife to its investment bank
and exit seven of the 70 countries in which it operates.
On Friday HSBC's bosses responded to investor criticism over
misconduct scandals and weak profitability by emphasising how far
they have shrunk and streamlined the bank in the past four years.
HSBC has already sold or shut 77 businesses and could yet dispose of
big operations in Brazil or Turkey.
Credit Suisse's incoming CEO Tidjane Thiam is expected to cut
trading operations drastically and pull back from other areas, while
Barclays chairman John McFarlane signaled on his first day on
Thursday that he will also wield the knife.
The message is clear: bold action is on the cards to create leaner
and simpler models, even after big cuts in recent years at Barclays,
Credit Suisse, Citigroup, Morgan Stanley, UBS and Royal Bank of
Scotland.
"NOT A SCRAP OF EVIDENCE BIGGER IS BETTER"
Pressure for banks to downsize has intensified since the global
financial crisis, which was preceded by a frenzy of mergers and
acquisitions of the kind that briefly made RBS one of the world's
biggest banks.
The Bank of England's chief economist, Andy Haldane, said in 2009
that "there is not a scrap of evidence of economies of scale or
scope in banking -- of bigger or broader being better".
Politicians worry that large and complex banks can miss problems,
struggle to instill a common culture and are too hard to manage.
Efforts by some national regulators to limit capital outflows have
also encouraged lenders to quit countries in which they lack scale.
Investors, too, are questioning the benefits of size as they lose
patience with promises that returns will recover, with valuations
reflecting their preference for simpler companies.
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Wells Fargo, which focuses mainly on U.S. retail and commercial
banking, is now the world's biggest bank by market value. Its shares
trade at 1.6 times book value, compared with an average for U.S.
banks of close to book value.
Lloyds' focus on UK retail and commercial lending has helped its
shares trade at a big premium to rivals, while Deutsche Bank trades
at only 0.6 times book value.
"SYSTEMICALLY IMPORTANT"
The main challenge for bosses is how far to go.
Most banks want to continue offering a range of services -- from
personal savings accounts to takeover advice for companies and
wealth management for rich clients -- but to fewer customers.
Some bankers argue that simplification reverses two decades of
globalization that have benefited trade and finance, and could leave
only three truly global banks: HSBC, JPMorgan and Citigroup.
JPMorgan has rejected calls for its break-up, saying scale has
always "defined the winner" in banking. It says not having to
duplicate audit functions or cyber security for the thousands of
clients that use more than one part of the bank saves it $18 billion
a year.
But demands that 30 'systemically important' banks hold more
capital, and the more intense regulatory scrutiny they face, also
throw into question the benefits of scale.
The list of banks and their capital requirements are judged annually
on five criteria, including size, international reach and
complexity.
Lloyds is not on the list and Wells Fargo's capital surcharge is 1
percent of risk-weighted assets, well below the 2.5 percent HSBC and
JPMorgan must hoard in case of losses -- in both cases an extra $30
billion or more of capital.
One carrot from regulators is that surcharges can be reduced if
banks simplify, as happened with UBS and Credit Agricole last year.
(Editing by Catherine Evans and David Goodman)
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