LONDON Dec 21 Investors will be looking for
banks that can cut costs, pay dividends and stay out of trouble
next year as 2012's across-the-board rally wanes.
Unless they picked the high-risk 'peripheries' of Spain,
Italy and Greece, investors in bank shares were almost
guaranteed to be on to a winner this year as the rising tide
from a steadier euro zone lifted all lenders.
"The 2012 story was about recovering from concerns about the
eurozone banking scenario," said Andrew Lim, banking analyst
with Espirito Santo. "We began the year with a lot of systemic
risk in the system. That's been addressed."
Pension funds, savers and hedge funds with holdings in the
benchmark Eurostoxx 600 banks index enjoyed share price growth
of 25 percent this year, which trumped a 14 percent uplift in
the cross-industry benchmark Eurostoxx 600.
But with fears of a euro-zone break-up receding, investors
are now focusing on which lenders can make a decent return in a
weak economy. With earnings under pressure, that means cutting
"There's been a significant shift to value being given back
to shareholders," said Espirito Santo's Lim.
With compensation the banking sector's biggest expense, the
focus up to now has been on pay.
In 2007, Credit Suisse paid out 16.1 billion Swiss francs in
pay and benefits. By 2011, that figure had fallen to 13.2
billion Swiss francs - a saving of about 3 billion Swiss francs
($3.2 billion) a year, or an extra 2.27 Swiss francs in earnings
But after several years of salary cuts and bonus reductions,
which chimed nicely with the public mood for vengeance against
errant bankers, executives have already lopped off the
"The bonus adjustment will be broadly complete this year,
now it's about operational efficiency," said Deutsche Bank's UK
banking analyst Jason Napier.
Cutting staff is the new vista for reducing the pay bill.
Switzerland's UBS is leading the European cull, announcing plans
to cut 10,000 jobs as it winds down the investment banking arm
fined $1.5 billion this week for rate rigging.
Britain's Barclays is expected to announce
thousands of cuts and a raft of efficiency measures on Feb. 12
when newcomer chief executive Antony Jenkins unveils the results
of a group-wide review.
The programmes are invariably costly in the short term but
shareholders seem happy to play the long game.
When Citigroup announced 11,000 job cuts on Dec. 5,
its shares rose 6 percent.
In addition to culling staff, banks will be shutting bank
branches, streamlining suppliers and investing in IT.
Shares in Spain's Banesto rose 18 percent when
parent group Santander said this week it would fully
absorb the unit, closing 700 branches, to cut costs.
On the earnings side, the challenge of a sluggish economy is
unhelpfully accompanied by the prospect of banks facing more
bills for past misdeeds.
Over the last two weeks, HSBC has been fined $1.9
billion, the largest ever penalty levied on a bank, to settle a
U.S. probe into laundering money for drug cartels while
Switzerland's UBS has agreed to pay $1.5 billion for
its role in a rate-fixing scandal.
The rate rigging controversy, which also cost Barclays $450
million, is set to gather pace next year with Britain's RBS
expecting to be fined by next February, while more than
a dozen banks such as Deutsche Bank, Citigroup, J.P.
Morgan and HSBC remain under the spotlight.
Lawyers believe interest rate manipulation has caused
extensive losses to investors and borrowers worldwide meaning
that payouts in civil cases could run into tens of billions of
Annoyingly for investors trying to pick out the banks with
the cleanest past, the misdemeanours are not restricted to the
high-risk world of investment banking.
A scandal over the mis-sale of insurance products to
consumers in Britain has already cost UK banks 13 billion pounds
and customers have an unlimited amount of time to make a claim.
DIVIDEND EQUALS SAFE
More positively, Deutsche's European banks analyst Matt
Spick said 2013 could be an important year for "normalisation"
amongst Europe's banks, as the healthier ones wean themselves
off emergency liquidity supports and the sector winds down an
aggressive spate of asset sales enforced by regulators.
Spick sees dividends as an important way of distinguishing
the cured banks from the more challenged ones.
"If regulators have given banks approval to return cash to
shareholders that signals that the banks are safe," he said.
Last year, 21 of the 46 Eurostoxx banks paid dividends of
more than 2 percent, suggesting a good number of banks have
managed to convinced regulators of their soundness.
The sector continues to attract fans; in its December
European Investment Strategy outlook, Bank of America Merrill
Lynch identified banks as an 'outperform', noting that tail
risks would recede.
Deutsche's Spick expects bank shares to rise by up to 10
percent next year, while Espirito Santo's Lim expects an uplift
of 10 to 15 percent.
In the broader analyst world, there are 1.3 times as many
buy recommendations as 'sells' today. A year ago 'buys' were 1.5
times more prevalent than 'sells'.
"People are more cautious," said IG Index analyst
Christopher Beauchamp, who compiled the figures.
"A lot of ground has been made up in the last few months, so
the market does finish much higher but it's been choppy