A FIELD DAY FOR THE MEN

IIPM, GURGAON

The US banking sector isn’t for the boys anymore and the going may not be easy even for banks that avoided the sub prime trap, but lack scale. Time for critical decisions, says sunanda roy of 4Ps B&M

Just pick them up if your ‘chopsticks’ (read: financial strength) are strong enough! That’s the scene today at the breakfast tables of banking giants that managed to ride the turmoil; because fallen banking giants who have been swept of their feet by the financial storm, make for easy pickings today...

“Wall Street’s leading investment banks have either disappeared or been transformed by the credit crisis,” state Patrick Armstrong and Morgan McGowan, Assistant Economists at Moody’s Economy.com. At the beginning of 2008, there were five major US investment banks that did not also have commercial banking operations: Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. The first two have now become bank holding companies, subject to greater regulatory scrutiny and tighter restrictions on their activities. Bear Stearns was sold to JP Morgan Chase in a deal brokered by the Federal Reserve and Treasury Department in March. Lehman Brothers was forced to declare bankruptcy, and Bank of America acquired Merrill Lynch. More recently, of course, Citigroup and Wells Fargo are locked in a takeover battle for Wachovia. The US banking system, which was highly fragmented for a long time, has seen enormous consolidation as a fallout of the credit crisis. “Four of the top 15 financial institutions in terms of market capitalisation in the S&P 500 stock index at the beginning of the year have gone away in recent weeks and we may see some more going away,” intimated Neena Mishra, Senior Banking Analyst, Zacks Investment Research. Bank of America, JP Morgan Chase and Citigroup, which collectively held 21.4% of the country’s deposits at the end of last year, now hold 31.3% of the deposits. At the beginning of the year, Bank of America was at the top of the list, with a market cap of $183 billion; it’s now in second place with $138 billion. JP Morgan Chase was in the third place at the beginning of the year, but has moved up to the first with $141 billion market cap.

JP Morgan entered the current downturn in a sound capital position and with significantly fewer problem assets than its peers. It has been taking advantage of its relative strength by picking up assets cheaply. The bank also benefits from better goodwill with creditors, counter parties, and even government officials. “JP Morgan indeed appears to be among the relatively limited number of banks that have the capital strength and competitive position to absorb such transactions”, feels Gregory T. Siegel, Equity Analyst, Credit Suisse.

We may see further consolidation in the banking space as bigger players seek to build up their position and may be assisted by regulators in doing so, as we observed in the past few deals. Ultimately, we will see the US banking scenario dominated by the few survivors. For consumers, it would mean lesser bargaining power but also the convenience of a wider array of offerings from one shop. JP Morgan, Bank of America and Citigroup have all bulked up recently. They are all large depositories and all universal banks at this point. “Goldman and Morgan are still pure investment banks, but in a new regulatory structure. It would not be surprising to see them evolve more towards the universal banking model,” added Matthew. With recent deals, it looks as though we may be headed towards a meaningful consolidation wave of US banks. Smaller banks may find it harder to continue alone, while strong larger banks may stand to benefit. Stronger medium-sized banks could conceivably migrate higher to larger-bank status, given the likelihood of a fewer number of large global banks. “In general, we’re seeing the ultimate triumph of the commercial banking model,” opined James Kim - Editor in Chief - Finance, FierceMarkets.
Moreover, banking power will now be concentrated in the hands of a few large banks, notably the big three JP Morgan, Bank of America & Citigroup. The rest, will, of course face the critical choice of whether they should look to make a giant leap; or wait for the right set of chopsticks!

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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