research

toysrusThe investment banks promised favorable research to Toys “R” Us Inc. and its private-equity owners to win roles in its initial public offering, the Financial Industry Regulatory Authority said today in a statement. The regulator fined the firms a total of $43.5 million, faulting them for “implicitly or explicitly” making promises that their analysts would give positive coverage. Six of the 10 firms didn’t have adequate supervisory procedures to prevent the practice…In May 2010, Citigroup’s investment bankers hosted a chaperoned call with the firm’s research analyst, who then e-mailed a supervisor. “I so want the bank to get this deal!” the analyst said in the e-mail, according to Finra. Days later, bankers told the retailer that they could “count on Citi’s firm-wide support and advocacy for the Toys story and valuation.” Other firms contacted Toys “R” Us after making their pitches, expressing enthusiasm about the firm’s prospects and providing assurances that the views of bankers and analysts were aligned, Finra said. Toys “R” Us and investors, including KKR & Co., withdrew the IPO filing last year. [Bloomberg]

Luxury fashion may be switching gender and age roles. In much of the world now, the most attractive demographic for such companies as Burberry (BRBY) and Coach (COH) isn’t middle-aged women with sky-high credit limits; it’s twentysomething men with smartphones and self-esteem issues. At least that’s the theory put forth recently by a three researchers at HSBC. The future of retail is in young, urban males—or as HSBC dubs them, “Yummies” (a handy verbal shortcut if one can say it without gagging). “The metro-sexual, that cliché from 20 years ago, is now becoming a commercial reality,” the HSBC team writes…But hasn’t it always been thus? Apparently not. HSBC notes that a lot of men are marrying later in life these days, freeing up income in their twenties that would otherwise have gone to supporting a family. The college fund can go to Coach totes, and the diaper budget is diverted to baby-soft driving moccasins. In trying to impress, HSBC says many young men are also looking past cars for the first time. After all, anyone with a few hundred dollars a month to spare can lease a Lexus (TM), but a traveling martini satchel from Tumi (TUMI) takes $5,000. [BusinessWeek]

I feel like I’m on the “the too-big-to-fail subsidy is negative!” beat, even though I only kind of believe it, so in that spirit here is a fun paper from Goldman Sachs’ Global Markets Institute1 that finds that the too-big-to-fail subsidy is negative. That is, Goldman concludes, contrary to popular belief, that the biggest U.S. banks actually don’t have a funding advantage over smaller banks due to the possibility that they’ll be bailed out by the government. Here is the money picture:

If that’s hard to read: the bonds of the six biggest U.S. banks – the ones whom everyone thinks the government would rescue if they blew up, JPM-C-BAC-GS-MS-WFC – yielded on average 6bps more than the average non-TBTF-bank bond before the start of the crisis in 2007. They traded hundreds of basis points tighter during the crisis (TBTF subsidy!), but now are back to trading wider: Read more »

Yesterday’s delightful insider trading settlement with Richard Moore, the CIBC banker who deduced the identity of a buyout target through sheer clingyness, is a good reminder that insider trading is weird. Nobody told Moore any material nonpublic information, but he got in trouble anyway.

It’s also a good reminder of this new-ish (March 2013) paper that I came across the other day, in which some academics went and interviewed sell-side research analysts about how they do their jobs. They don’t say anything all that surprising, though I guess if you’ve never met a sell-side analyst it’s sociologically interesting. But it’s a nice counterpoint Richard Moore: reading smoke signals and figuring out an acquisition is illegal insider trading, but having the company tell you stuff and then using it to make trading decisions isn’t. If you do it right.

Why would you talk to management? There are a bunch of reasons but one is surely that they might tell you stuff.1 And they will, though the phrasing is careful: Read more »

I realize it doesn’t actually work this way but I always imagine that sell-side analysts at big banks who cover other big banks enjoy sabotaging each other a little. “Take that, you Deutsche Bank jerks!,” Jernej Omahen might have thought as he hit send on this one:

Deutsche Bank AG fell the most in more than five months after Goldman Sachs Group Inc. cut the company to sell from hold, saying it may have to transfer $13 billion to its U.S. unit under new capital rules.

Deutsche Bank slid as much as 6.2 percent, the biggest intraday drop since Sept. 26, and traded at 33.07 euros at 1:40 p.m. in Frankfurt [closing at 33.66 / down 4.6%]. The stricter requirements may hurt profit at Europe’s biggest bank by assets and require it to ask shareholders for more money, Goldman Sachs analysts including Jernej Omahen wrote in an e-mailed report from London today.

Goldman’s note addresses two impacts of recent Fed moves to make international banks’ US operations safer: the capital impact, and the funding impact. The capital stuff is wholly imaginary, though I guess the economic consequences might be real enough. Start with this chart, and note that “Taunus” is basically shorthand for “Deutsche Bank’s US operations”:

If GS is right – I have no idea, I’ll just assume they are, but there are some assumptions and guesses here – the problem with Deutsche’s U.S. operations isn’t that they’re undercapitalized; it’s that they have negative capital. Read more »

On Monday, as a bevy of banks were settling a zillion dollars of mortgage lawsuits and putting themselves on a path to (1) certainty and (2) giving money back to shareholders, Goldman released a research note with the results of a survey of investors’ expectations of bank capital return.1 Here is what some sample of investors expect:

Total payouts are expected to increase to an average of 58% post-CCAR/CapPR from 43% in 2012. … The survey results suggest the biggest increases in dividend payout ratios will be for Citi and Capital One, while PNC and Morgan Stanley are unlikely to meaningfully move higher. For buybacks, investors expect the biggest increase for BB&T and JP Morgan (vs. their actual buyback, not vs. 2012 approval levels), while there is little change expected for Morgan Stanley, Bank of New York and Northern Trust. … Many of the banks with the most variability of responses are those that are coming off subdued capital deployment levels in 2012, including Capital One, Bank of America, Citigroup and Regions. Given the lack of consensus, it seems that regardless of the announcement, the market is likely to be “surprised”.

I too prefer to order my life so that I’m surprised by everything.2

Anyway the interesting/disappointing part for me is what investors thought about what GS calls the “Mulligan rule.” This refers to the fact that, in the 2012 bank stress tests, banks asked regulators for approval to return an amount of capital, and if the regulators said no then the banks basically couldn’t do anything (ex regular dividends etc.) for another year, but in the 2013 tests if the regulators say no the banks can go back and ask once more for another, lower amount of capital return. I was pretty bullish on this: the do-over gives you a chance to be more aggressive once, and scale back if regulators say no, so you’d think that at least some banks would be aggressive and get away with it, while others will be too aggressive and have to cut back to a more moderate capital return but still no harm no foul. Or so I would think. I am in the minority:

And here, conveniently, is why banks wouldn’t be aggressive – because their own shareholders would get mad at them for being too aggressive: Read more »

Wall Street banks’ research on their competitors is not only a window into analysts’ anxieties about their own banks’ prospects, but also a ripe area for conflicts between investment advice and industry advocacy. The days of analysts writing research reports that were like “Facebook should really do a huge equity offering and hire my bank as sole underwriter,” or whatever, are mostly behind us, but when banks write about their industry you might wonder if they’re giving dispassionate advice or pushing their employer’s interests. And when they write about their competitors it must be tempting to be a bit underminey. So various banks have published research saying “actually breaking up the big banks would be bad for shareholders,” which may be true but also not un-self-interested, as breaking up the big banks would surely be bad for the equity research analysts they employ. And then Morgan Stanley published a don’t-break-up-the-banks piece saying “… except Citi,”1 and if you knew that MS is in the process of trying to buy a chunk of Citi cheaply you might be like hmmm. Today Goldman recommends that Morgan Stanley get out of fixed-income trading, and, again: suspicious!

That’s arguably not their main point; much like JPMorgan last week, GS set out to quantify how much of their fun financial regulation is ruining, which again you could read as advocacy. Even though it’s the opposite of what Lloyd is advocating. Here’s Bloomberg:

New bank regulations and capital requirements are “structural” changes to the industry that are more to blame for declining profits than the U.S. economic slump, Goldman Sachs Group Inc. analysts said.

“The operating environment is unlikely to change any time soon, and we see shareholders of challenged banks becoming more demanding in asking management teams to lay out a path to unlocking value in the near term,” analysts led by Richard Ramsden in New York wrote in a report published today.

Their view contrasts with Goldman Sachs Chief Executive Officer Lloyd C. Blankfein, who said in November, “I don’t think we can conclude that the slowdown is secular rather than cyclical change.”

Here is their main chart, which is sad though perhaps too soon to call secular: Read more »

I like reading banks’ research reports on other banks these days because they give off a certain the-call-is-coming-from-inside-the-house vibe; you imagine the analyst running the numbers, looking them over, and saying “my God, this can’t be right, can it? This seems to say … I’m fired?” JPMorgan’s analysts maybe suffer from this less than most but it still imparts a certain tension to the marvelous, strange, 100-page research note out of J.P. Morgan Cazenove today about global investment banks.* There are two big important points** which are:

(1) European banks are pretty pretty aggressive with how they risk-weight their risk-weighted assets, especially compared to US banks. Basel’s Standards Implementation Group is moving in the direction of requiring convergence on RWA measurement, and JPM thinks that that will lead to the European banks having to revise their RWA measurements – meaning that those banks’ capital positions will look much worse than they do now and they will need to shed RWAs and/or raise capital.

(2) You can quantify the return-on-equity effects of new banking regulation – including Basel RWA convergence, but also things like derivatives clearing, the Volcker Rule, etc. – on the big global banks, and those effects are bad. Bad for shareholders, anyway: per JPMorgan, global-bank average ROE would be 16% in 2013 but for those regulations, while after giving effect to them it will be just 6.3%.

But I presume that like any good utility maximizer you care only about your comp, so the important takesaways are (1) 6.3% is not good enough and (2) it will be remediated out of your pocket. Which leads JPMorgan into the truly chilling: Read more »