The global systemic banks listed on the European stock markets seem to fair better than those which don’t belong to this group. The Instituto de Analistas Financieros (AFI) has calculated that the share prices of the former have lost 16% over the last two years, six percentage points less than the non-systemic banks. But to draw any definite conclusions about the relationship between the new systemic banks and investors is complicated, according to experts consulted by The Corner.
The demise and later bail-out of US investment bank Lehman Brothers in 2008, which ended up fuelling a financial and later economic crisis of massive proportion, coined the theory of Too Big To Fail (TBTF). This says that it’s better to implement special regulations for the big banks to strengthen their capital – and with public money, if necessary – than allow them to go under, in order to preserve the solidity of the global financial system and ensure that if a bank of this kind does eventually fail, it doesn’t affect the rest of the sector.
As usually happens at times of crisis, the sector’s international regulatory and supervisory authorities implemented the legislative machinery required to stop the drain on confidence and resources at the time. In 2013, an international structure of “systemic banks” – Systemically Important Banks (SIBs) – was created. A list of 29 institutions divided into five categories, according to the amount of additional capital required because of their condition of TBTF.
Only Santander and BBVA were on the initial list of global systemic banks, which is renewed annually – and the latter left in 2015. But the ECB, as the supervising bank for the EU, identifed other systemic banks in the region – up to 120. These include, since November 2016, Spanish banks like the two mentioned above, plus Caixabank, Bankia, Sabadell and Popular. They will strengthen their solvency levels to a bigger or lesser degree in the coming months.
Capital and profitability for the shareholder
Being in the ranking of “systemic” banks has a big influence on their financing. Unai Eraso and Ibai Urra are corporate banking directors at BBVA and the authors of “The current situation and trends in the global banking industry: leverage and profitability”. They explain that the impact of the regulations regarding the systemic banks’ profitability “is negative because the systemic banks have higher capital requirements than the non-systemic lenders. So, with the same level of business, they obtain lower levels of profitability as the base implied in the ROE, ROTE or RORC equation is greater.” If we take the influence of this reinforcement into account in the yield for the shareholder, the impact, in purely theoretical terms, should be negative. “The CET1 ratio of the banks is a factor which limits certain policies for rewarding shareholders. Because it is below certain limits it restricts capacity for paying dividends, amongst other things, which would affect Total Shareholder Return,” say Eraso and Urra.
But the general theory is by no means so clear in practice. Although he acknowledges this negative impact, Ignacio Gómez-Montejo, financial analyst and director of fund management company ICR Institutional Investment Management flags that “it’s not like this in many cases. I won’t give any names, but in Spain for example, we now have some non-systemic banks which have much lower profitability than the systemic lenders.” Gómez-Montejo believes that the general theory should be imposed, “in principle in the long-term, for the average of all. And in fact I understand that this is very much the case in the US and in general outside the Eurozone.”
There are other experts who are directly “in denial” with respect to the impact of the systemic condition. For example, Miguel Angel Bernal, head of the Resarch Department at the Instituto de Estudios Bursátiles (IEB), who says: “I don’t believe that the issue of greater or less profitability depends on (a bank’s) classification, it’s a problem of optimising the business model.” Bernal argues that “the business model is the problem. Deutsche Bank has done extremely badly and, yet, Santander hasn’t done so badly taking into account the performance of the European banks. The problem with the traditional European banks is still their business model.”
The linking of a bank’s systemic condition with the level of profitability it offers shareholders includes other factors. Fernando Fernández, professor at the Instituto de Empresa and banking sector expert, points out that when the regulation was introduced for the SIBs “there was a race amongst the banks to become systemic”. Because it was assumed that, as they would be specially monitored by the regulator with limited risk, “access to capital would be cheaper, which would offset the increase in the capital buffer.” However, according to Fernández, “there is no empiric evidence” that this is the case, or not, given that the history of the systemic banks is still short”.
Stock market valuations
Those analysts who study banking stocks every day don’t seem to pay much attention to the factors conditioning the systemic banks. For example, Renta 4 bank analyst Nuria Alvárez says: “I don’t think it’s an issue which should be taken into consideration. Being a systemic bank or not should not influence a bank’s stock market performance or its dividend policy.”
Look at Banco Santander, the only Spanish bank in the list of global systemic banks. The ECB demands it has a CET1 ratio of at least 7.75% at the consolidated level, which includes the minimum required in Core Tier 1 (4.5%), Core Tier 2 (1.5%), the capital buffer (1.25%) and the requirement related to the fact it is considered as a global systemic lender (0.5%). For Álvarez, these steep capital requirements “should not influence”, but “only when the bank’s balance is well managed from a risk point of view and its financing is also well handled. Furthermore, that it generates capital organically, allowing it to meet solvency requirements and avoid having to limit dividends.”
For this Renta 4 analyst ” there are obviously some European banks which are not systemic and their solvency situation is bad. So in this case, a comparison with Santander would mean a positive not negative premium for this bank.”
AFI analyst Itziar Sola brings some nuances to the debate. Although she acknowledges the theory that greater capital requirements would bring a decline in ROE, “the impact for the shareholder would be neutral, given that although they generate less ROE, the cost of capital or profitability demanded by shareholders would also be lower in so far as they have more capital.”
In any event, according to AFI’s calculations, the stock market correction for the European systemic banks since January 1, 2015 is 16%, compared with an accumulated decline of 22% for other European banks not considered systemic on a global level. That said, as Sola points out, the selection of non-systemic banks is very much conditioned by the inclusion of “some banks with idiosyncratic aspects (fundamentally the extreme deterioration of their balance sheets) which are behind the correction in their share price.” Excluding these banks, the decline in the selection of non-systemic European banks would be 6% from January 1, 2015.
And what about the investor?
So what should an investor do with regard to what the systemic banks have to offer? Felipe López-Vázquez, analyst at Self Bank, believes that “it’s something which needs to be taken into account, but it should never be the only criteria for investing in a bank. A systemic bank gives you a certain tranquility, as you know they need to provide an additional capital cushion, and there are greater information and transparency requirements. As they are considered to be Too Big To Fail, it’s less likely they will disappear.”