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Will ‘Too Big To Fail’ Banks Break Themselves Up?

1 November 2012 in Trading Ideas

Maybe the new phrase is “Too Big to Grow.”

Earlier this week, Swiss banking giant UBS (UBSN) said it planned to shrink its investment bank over the next three years by cutting 10,000 jobs. One of the main culprits behind the decision was the company’s fixed-income operations, which, according to an Oct. 30 report in the Financial Times, had been rendered largely “uneconomic” by tougher capital requirements and a subdued market environment.

Perhaps even more shockingly, the bank admitted that it even considered the “radical option” of axing its entire investment bank.

This news follows an announced plan by Bank of America (BAC) to shed 16,000 jobs by the end of the year, as the company cuts its number of customer branches and reduces its mortgage operation. That’s after a push to exit several international credit-card units, private-equity holding, and insurance unit and stakes in overseas banks.

And let’s not forget Vikram Pandit’s recent departure as CEO of Citigroup (C), which, according to an Oct. 17 article in the Financial Times, was borne out of frustration regarding the company’s direction since the financial crisis in 2008. While imminent regulatory changes was also part of the landscape there, too, John Gapper suggested in a separate piece in the FT that “Citi’s shares trade at less than a third of the multiple to book value of Wells Fargo,” because the latter has been a “steady, predictable bank.”

Citigroup, on the other hand, has become too complex, Gapper contends. This sort of criticism is a twist on the typical criticism of mega-banks – namely, that allowing impossible-to-regulate behemoths with too much overleveraged risk means the next financial crisis may be around the next economic downturn.

Now, it appears, the sought-after hugeness may be exactly the wrong direction to go. As Morgan Stanley analyst Huw van Steenis told the Financial Times, “UBS has raised the stakes for many wholesale banks to demonstrate quickly they can deliver double digit returns where they compete – or start some intensive pruning.”

Interestingly, the recent market performance by big bank stocks has been relatively strong. The Too Big To Fail motif is up 3.2% in the past month. The S&P 500 has fallen 1.2% in that timeframe.

On the other hand, a certain irony may lie in the fact that the contribution of a 14% surge by Citgroup, the motif’s third-largest holding, came after the company shed a CEO now being criticized for helping to build a bank that is too complex to compete.

Performance data was as of 11/1/2012. Performance data and returns are based on past and are not representative of results an investor could expect to achieve. The 1-month and 3-month return shows how a particular benchmark motif could have performed over a stated period of time. Returns of individual motifs do not take into consideration certain fees and/or commissions, corporate actions, or other activity that can affect the return an investor could expect to incur. The performance results attempt to follow a standardized and consistent methodology for performance reporting. While we believe the performance data is gathered from reliable sources, the information that generates performance results uses historical data that we believe to accurate but has not been validated and may contain errors in pricing or other conditions. Reference to return of index does not imply its performance is comparable to a motif, but rather serves to provide a reference point.  For detailed information on how we calculate returns, please visit www.motifinvesting.com.