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Home > Blogs > Moorad Choudhry > Everyone wants a piece of the (banking) action

Everyone wants a piece of the (banking) action

Banking|Everyone wants a piece of the (banking) action Moorad Choudhry

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If banking is such a tough and competitive environment post-crash, with over-capacity, ever-increasing costs of regulation, and everyone generally despising bankers, why is it that sophisticated investors are scrambling over themselves to buy banks right now? It’s an intriguing one isn’t it?

Today I read in The Times that a group of private equity investors has purchased Hampshire Trust, a small UK bank. Last year, there were several potential investors in the frame for what was being divested from two UK high street banks. There are a number of “challenger” banks in the frame now all over the European Union (EU), some of them very small and some not so small. The UK ones seem to crop up all the time, there is already a new high-street challenger in the retail space (Metro Bank) and in the small business space there are already several new banks operating. The US, with its large number of smaller community banks and a relatively small number of banks that claim to offer country-wide service, is perhaps less affected by this. But elsewhere in the world, all manner of investors, from private equity houses and hedge funds to traditional fund managers and industrial conglomerates (a number of Asian conglomerates have purchased banks in Europe) are jumping in to this business.

Obviously, some people see things that other more conventional investors do not. They do say that these types of investors generally see higher risk as a route to higher reward, which is why their portfolios have a more aggressive outlook. But, clearly, they see an upside.

And that’s because, as the economy improves, banks will improve with it - there are signs of this in the UK, USA and, to a lesser extent, the EU. The fortunes and share prices of banks have always been highly positively correlated with the economic cycle, and this time will be no exception. Of course, that doesn’t mean that bank funding costs will be going down just yet – an A-rated European bank will still need to pay at least 200-300 bps over Libor to borrow 3-year money unsecured in the capital markets – but that’s because the aggressive private equity types don’t buy vanilla capital market debt – they’d rather get in when share prices are low and make a killing when they IPO.

But all this activity does suggest that quite a few people see only upside in the banking industry. And these types of people generally tend to make above-average returns in the short to medium term. Time to jump on the bandwagon?


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