FT Why Carlyle is betting on an interest rate windfall at Metro8 Nov 2021 07:48
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"The loose-money environment has driven an investment banking boom. JPMorgan last month trounced third-quarter profit expectations, reporting a 26 per cent return on equity in its investment bank and a group return of 18 per cent. JPMorgan’s market capitalisation grazed $500bn last month after doubling in barely 18 months. Bank of America, Morgan Stanley and Goldman Sachs have also thrived.
Wall Street executives know the best may be over — the exuberant bond and M&A markets will be constrained by tighter monetary policy and they may have to boost staff pay in a more inflationary environment.
Conversely, if interest rates have bottomed, retail and commercial banking should — all else being equal — be set for a rebound as the gap between the cost of funding and what they make from lending widen. In Europe, where such models dominate, that could help close a longtime valuation gap with US giants.
It is against that background that the mid-tier UK banking market is becoming the unlikely focus of interest for big-name US dealmakers, particularly private equity firms looking to deploy their plentiful “dry powder”.
Last week, Metro Bank announced it had received a takeover approach from Carlyle. A few weeks earlier, Co-op Bank — backed by JC Flowers and Bain Capital and a clutch of hedge funds — approached Spain’s Sabadell about a £1bn-plus potential purchase of its UK subsidiary TSB.
These are tiny deals for huge firms. Metro, for example, has a market cap of barely £200m. So why bother? Well, there is the appeal of cheap price tags and a core logic of arbitraging the firm’s ample cheap funding on an operation with lending margins that look set to widen.
But buyout executives will also be eyeing the consolidation opportunity of rolling up other lenders. If Carlyle did buy Metro, it could look at the Co-op and TSB, too, not to mention other mid-tier lenders. Flowers and Bain, via the Co-op, could do the same.
For a listed lender such as Metro, with capital levels stretched by thin interest rate margins and persistent losses, the prospect of a private equity capital injection resolves the Catch-22 alternative of trying to raise capital from existing shareholders at a stubbornly low valuation. Its shares currently trade 93 per cent below a March 2018 peak The pandemic has heightened the opportunity to make cost savings on branch networks in a roll-up. At Lloyds, nearly three-quarters of customers now bank online, up from less than two-thirds pre-pandemic.
There are a few examples of private equity turnrounds of troubled banks — from JC Flowers’ takeover of Japan’s Shinsei to Cerberus’s acquisition of Austria’s Bawag. But regulators have tended to be nervous of large-scale buyouts, given concerns about the potential “double leverage” stemming from private equity’s normal operating model and banks’ capital structures. Beggars, though, can’t be choosers. Both Co-op and Me
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