Steven Davis is CEO of Davis International Banking Consultants, which provides strategic advice to European and U.S. Banks. Before setting up DIBC, he spent 20 years with J.P. Morgan and Bankers Trust. He has written six books on banking, most recently - Bank Mergers: Lessons for the Future .
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Look for strong CEO leadership.
In a rapidly consolidating banking world, mergers and restructuring are the order of the day. Change management skills and the ability to drive a large, increasingly complex organisation are thus at a premium, and banking is not known for wealth in such leadership skills.
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Be deeply suspicious of claims for strategy-driven deals.
Consultant jargon of 'revenue synergies', 'cross selling opportunities', ' penetrating new markets' and the like should be taken with a giant dose of salt. Banking clients change behaviours - and banks - much less frequently than newcomers would like, and the track record for buying into new markets is pathetic.
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Be equally suspicious of commercial banks acquiring investment banks and fund managers.
So-called value added businesses like these are clearly destined to grow in the long term , but their success is a function of a limited number of highly motivated, self confident professionals whose partnership culture does not sit well with that of a commercial bank top management. Unless true integration is achieved - which doesn't happen very often - mutual frustration and ultimate divorce are highly likely.
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A good bank investment becomes an even better one when there is a quoted minority/majority held by outside investors.
As the banking world consolidates, the pressure to buy up outside holdings in core businesses increases . Some of the best investments we have made have been in such quoted minorities/majorities when the parent decides at last to pick the fruits of his investment.
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The best indication of stockholder value commitment lies in the historical record.
Lip service is universally paid to stockholder value, but the real litmus test is how the bank's management has allocated resources in the past and the results obtained. Historical RoEs, cost/income ratios, and the success of expansion moves are the best test of a management's concern for its stockholders .
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Problem banks are usually worse than the figures indicate .
In almost every banking basket case, the ultimate reality is far worse than indicated on the surface. Management knows it's in trouble and usually tries to cover up its problems with more lending and position-taking. And at the same time necessary investment in systems and people usually doesn't take place.
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Look for banks with large, established client bases.
Ultimately a bank's core strength is its client base, which in a consolidating and competitive market is the target of innumerable competitors . These clients rarely shift banks or go elsewhere except for specialist products as long as they feel that their bank is reasonably responsive to their needs.
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Defendable specialist niches are rare, but when they exist they are extraordinarily attractive.
Everybody loves true sustainable competitive advantage, but finding it in the rapidly commoditizing world of banking is not a simple task. Global custody, which is the domain of a handful of US banks who have out-invested their competitors, is one of these.
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In a consolidating banking world, holding the stock of a well-positioned bank gives you a double advantage.
In Europe and to a lesser extent other markets, there is a virtually infinite demand for acquisition candidates which offer entry into an attractive business segment or market. As long as this seller's market exist, a premium over market is virtually assured. And if it doesn't, organic growth should ensure an attractive return anyway!
