The credit crunch has thrown the European banking deck high into the air. How it falls will shape the industry for years. It is incredible therefore that most financial services companies, rather than grabbing at opportunities, seem to be transfixed by the swirling cards.
You can bet that corporate bankers (who have plenty of spare time these days) are pitching all kinds of deals. The European banking sector has not been this cheap – now trading on a single digit prospective price/ earnings ratio – for 16 years. There are high-quality Spanish names on seven times earnings and more wobbly, but ultimately fine, UK banks below five times. Price-to-book ratios are at decade lows.
Yet in spite of the bargains most banks say they have little interest in large acquisitions, claiming to be happy with their existing business models and strategies. That is delusional for quite a number of banks and just lazy thinking for others. For well-capitalised banks such as UBS, now is a perfect time to consider acquisitions as part of a more general restructuring.
Nor should highly valued banks such as Credit Suisse sit back and think that their premium ratings vindicate their strategy. Many were either lucky to avoid or late to get into the products that have damaged their rivals – such banks would be wise to use their equity currency before valuation gaps close.
Two other excuses are given for inertia. Companies reckon investors are in no mood for deals. But, in fact, shareholders have little to lose, having watched European banking stocks tumble by a third on average since their peak last year – in many cases prices have fallen much more.
The second reason is a lack of trust in balance sheets. But the toxicity of certain credit assets is similar across the sector and there is now reasonable transparency about the size of exposures. There is also the chance that some assets will be written up if markets improve. Banks historically happy to blow shareholders’ funds at the top of cycles should not be scared of deals when times are tougher.