Individual shareholders might feel like they can’t really influence what happens in the companies in which they own shares. But they can at least hope that if the company’s performance is bad enough, the big shareholders might eventually step in.
Over the past year, several of Europe’s biggest companies have faced such interference as so-called activists go public and campaign for change.
Elliott Management has placed the chief executive of pharmaceutical group GlaxoSmithKline under intense pressure to speed up the company’s overhaul. Trian Partners appeared on Unilever’s share register, adding pressure on Alan Jope, a chief executive who was already under fire. And more recently, Europe’s biggest activist investor, Cevian, called for an overhaul of Ericsson’s corporate governance after the Swedish communications equipment maker’s share price plummeted 30%.
Yet, curiously, activists have so far avoided the banking sector – one of the rare instances where bank managers can look to other industries and feel a collective sigh of relief.
Banks have faced more challenges than most since those heady, leverage-infused years that preceded the global financial crisis of the late 2000s. Ever-lower interest rates have decimated the margins whose they profited between loans and deposits; new fintech companies are gradually encroaching on some of their most profitable businesses; and maintaining creaky legacy IT systems eats up ever larger amounts of a tech budget they’d rather be spending investing in the future.
Under pressure, the regulatory rules governing how they operate and the amount of capital they require have become much stricter. In the face of this, European bank stock prices have fallen 75% from their pre-crisis peak, and 30% since Russia invaded Ukraine.
The European banking sector should be a fertile militant ground. It generates mediocre returns, stocks are cheap and it is relatively fragmented, especially if the Eurozone is considered a single banking market. It should be a rich choice for investors looking to make money. And yet, there are few signs of action.
There have been a few minor skirmishes over the past few years, but nothing matches a successful foray. In the UK last year, Edward Bramson’s Sherborne Investors dropped its bid to force Barclays to cut its investment bank, wrecked by a strong rally in the investment banking cycle, which undid its attack.
A decade earlier, Knight Vinke tried to force HSBC out of its US business, but again had to walk away defeated. And more recently, global private equity firm Cerberus, not strictly an activist but certainly an agitator, cut its stakes in Deutsche Bank and Commerzbank as it abandoned its long-held aim of forcing a merger of the German duo.
Historically, activism in the banking sector has been held back by several factors, the most important of which are regulators and size. Regulators must approve anyone who seeks to ‘control’ a bank – control generally being interpreted as owning 10% or more – and the presumption is that regulators are nervous about allowing activists to go on the share register .
Indeed, a 2015 paper from the Federal Reserve Bank of Kansas claimed that while activists create shareholder value, it comes at the expense of depositors, taxpayers, and regulators.
The fact that activists often advocate for big business change may be viewed by regulators as introducing unwanted instability.
But that attitude could change, as regulators seem increasingly open to the role these activists could play, perhaps in part because they are increasingly concerned about still-low levels of profitability and depressed valuations of the banking sector.
Activists have always targeted small businesses. This has left banks, which are large, seemingly safe, but that too is changing. Unilever’s stock market value of £90 billion exceeds that of any bank in Europe except HSBC. Size is therefore no longer a defence.
Of course, this lack of activism could represent something simpler. Banks are incredibly complicated, remain highly leveraged and earn low returns. And indeed, bankers might express relief that activists, so far, don’t seem to want to dance with them.
But that could change. Bankers and shareholders should be alert to the possibility that the activist wave may indeed reach the shores of the banking sector. If that were the case, banks in some of Europe’s most fragmented and less profitable markets – Germany, Italy, France and even parts of the UK – could find themselves looking the other way. their shoulders with concern, in the same way that the management of many other European companies have done. had to do it for several years.
For investors, banks have been cheap for so long that they might seem destined to stay that way forever. But a brave campaigner could quickly change the way the market values them.
Simon Samuels is a founding partner of Veritum Partners