Blain’s Morning Porridge – August 4th 2020 – Commerz bites back
“The only true wisdom is knowing that you know nothing..”
I must admit to feeling a tad amused this morning by a bunch of stories that remind me past performance is actually quite a good guide to the future. There is Argentina requiring yet another default agreement – it’s averaging a default every 7 years…! (So why do EM Bankers keep lending to them??) There is a simply marvellous piece on Project Syndicate by that former Greek Finance Minister– arguing Europe’s €750 bln recovery fund will collapse the EU as German workers realise it’s just a massive income inequality play serving Germany’s elites at their expense, using their taxes to bailout the Italians et all to make Germany’s wealthy wealthier yet. Varoufakis says it like it is…
Or how about this most excellent story from the Torygraph: Tesla lies to customer delaying delivery date while using her car as demonstrator. The way a company treats its customers tells you everything you need to know about corporate governance; if the boss cheats so will the staff – fish rot from the head down.
And then there is the old reliable comedy that is German banking. What’s not to like? The concept of post-Brexit Financeplatz Europa based in a backwater village like Frankfurt replacing the metropolis of London has never worried City grandees seriously. This morning German banking is back in the news:
· Commerzbank has appointed former Landesbanker Hans-Joerg Vetter as Chairman, but, shock, horror! (US Readers – mild yet complex sarcasm alert), has ignored Cerberus – guardian of the doors to hell if I recall. The US PE fund is demanding board positions and had their own ideas on who the bank should be putting in charge to rescue the stupendously dull and loss-making German bank. Commerz had the support of the German govt, the largest shareholder in the bank at 15.6%. Cerebus own 5% – which has halved in value since the American firm revealed their involvement a few years ago.
As we all know European banking is not a spot for the faint-hearted.
The whole sector is ripe with opportunities: There are a host of burgeoning Covid-racked NPL portfolios to be financed. There are firms that are keen to buy discrete distressed debt positions held by the banks. Some of the most lucrative trades at present are bank capital relief trades – where the banks are paying up to free up capital by transferring risk to hedge funds who slice, dice and serve it up. Even trading senior and sub debt is lucrative as bank tightens in the wake of EU QE Infinity. (The ECB won’t buy bank debt.. well, at least… not yet.)
(And yes… I am a buyer of all the above..)
But to actually own the equity of European banks? Wow. That’s a brave call… one the Cerberus are learning to their cost. Commerzbank is poised for another round of miserable results later today. Its stock price performance is so bad it makes domestic rival, Deutsche Bank, look good.
Enough giggling… German finance is actually pretty interesting… and may have something to teach us.
But, But and But again….
There is an old story about Germans being brilliant engineers, but terrible bankers. It’s completely unfair. German bankers are actually very good. They are incredibly well trained and professional. They do proper apprenticeships and learn the value of relationships. They are polite and willing to listen and learn. German financial professionals generally ask smart and direct questions. They aren’t risk adverse – they actually analyse and try to understand risks rather than bluff and bluster about issues they barely grasp.
Commerz’ new chair, Herr Vetter has a very sound CV: sorting out the lumbering mess that was LBBW in the wake of the 2008 crisis (when a couple of executives ended up in jail if I recall correctly). Prior to that he’d been at the hybrid Landesbank BG Berlin.
German banking has a bad rep for two reasons:
1) It appears to be impossibly diverse and over-banked. Today there are many small local banks competing for business to have allowed the development of large national champions. Banking is regional; focused around 6 regional Landesbanks orbited by a constellation of over 350 Savings Banks and 850 plus Cooperative Banks.
The concept of Merchant Banking is a much a German invention as its Italian; there is a history of successful merchant banking originating in the small 16th century German states, and the great Jewish finance houses of the 18th and 19thcentury originated on the Rhine before seeking less volatile bases in France and England. Unified Germany is a comparatively young nation without a long mercantile history, meaning there is not a single financial/commercial capital like London creating a whole infrastructure of financial services and market driven mindset. Hence village Frankfurt.
Today, Germany’s financial system resembles half-a-dozen Luxembourg’s without a unified banking system to support Europe’s most prosperous nation. That’s a negative for the German banks which are perceived to lack scale, but, in many ways it’s a great advantage supporting Germany business: diversified and decentralised banking works – small SMEs (which remain a critical part of the German economy) deal with small local banks, rather than see relationships marginalised within centralised HQs. That’s a massive problem in the UK where the value of relationships isn’t taught to young bankers at all.
2) The second problem is politics. While many of these regional/local banks are staffed by well-trained banking apprentices, in the past many were managed by local political appointees who happily lent to favoured businesses like shipping or car makers. Smart investment bankers sold up to the bosses. The system was most brutally exposed during the 2008 crisis when it became clear the Landesbanks (including LBBW) and others were sitting on billions of duff investments. The bosses bought into the stories sold to them by US investment banking snake-oil salesmen.
Despite the losses and a learning process, politics continues to skew German banking. Banking complexity is unlikely to be solved soon. Local “interests” ensure any consolidation will be very slow. The Wirecard scandal has reawakened the concerns about the overall quality of governance. It’s clear the German regulator, BaFin missed all the signs and signals – which had been clearly flagged by the FT and whistleblowers. BaFin is a far more politically managed regulator than makes sense – reporting direct to the Finance Ministry.
European Banking Union – the great EU dream – is going to be difficult to achieve when its most economically advanced member can’t enforce domestic Union! However, the fact Germany doesn’t suffer from over-large indifferent banks is maybe better than being burdened with a bunch of bureaucracies run on the “computer says no” principle. And “Bravo” to Commerz for telling the Hound of Hell where to jump off.
Meanwhile, back in the real world..
Five Things to Read This Morning
WSJ – Gilead Shows The Dangers of The Covid Drug Mania
FT – BP halves dividend as Covid-19 turmoil pushes oil major into loss
FT – Alphabet locks in record low borrowing cost in $10 bln deal
BBerg – Big Bond Traders Double Down on their Bet on Europe
ZH – Egypt to Musk: No, aliens did not build the pyramids
Have fun out there.. out of time and back to the day job..
Bill Blain
Shard Capital