Investment Banks Strategy, the strategy of ‘do nothing’?

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As a child one learns about animals that store up food before winter and then go into long deep sleep or periods of inactivity while living off their stored food reserves during the winter months.

As a Manager in the Risk Consulting division of one of ‘Big 4’ in Bahrain one comes across many types of Banks. There are the Banks that are busy all year round and there are those that choose to do absolutely nothing during recession years other than conserve capital. The region as a whole has been going through a deep recession and Banks in the region also took a big pounding due to their exposure to predominantly long and medium term real estate assets and projects. Many say that we are looking at the slow upswing of the curve in the long climb from recession. News reports tend to suggest that Investment Banks have started to do deals and have started looking at ventures and businesses for purchase in MENA, Europe etc.

However there is the breed of Banks that took a decision to not touch a single deal during the deep recession years. They tended to focus on ‘rolling’ of short term money market deals and nothing else. Due to depressed asset values, exits could not also be processed and hence ‘asset-management’ and ‘value- extraction’ were what Banks appeared to be focusing on, with an allergy towards further capital injections and loans to existing projects. While this was perfectly justifiable for Banks with little liquidity or mired in projects with significant unexpected stumbling blocks, a question needs to be asked as whether this ‘hibernation’ strategy was in the best interest for all stakeholders of the Banks who had reasonable available funds for investment.

Now that it appears that the economy is on the upswing, I start to wonder whether the concept of hibernation works for Banks. Was this strategy that was followed by some of these Banks the right one?

A review of financial figures and deal activity that are published in the paper does seem to suggest that some of them came away unscathed in the crisis as they maintained capital without any further exposures. They pared down staff to the most essential only. Placement, Investments, Operations, Corporate Communication and HR departments experienced the bulk of termination with numbers being pared down to the absolute minimum.

Stakeholders such as shareholders suffered the most. Shareholders had to stretch (and still are forced to) their patience razor thin. The question is, while the Bank survived and some employees retained their jobs, was this the best use of capital for all concerned? Have the economies in which these Banks are registered ultimately benefited?

Shareholder and customer activism in the region is almost non-existent (which is the subject of another blog post) as opposed to the situation in the United States, Europe and other regions such as India etc.  This allowed Banks to take the strategy of ‘hibernation’.  In regions such US, Japan, we see shareholder activists such as Daniel Loeb, Carl Icahn target Sony, Yahoo and others asking them to merge, split etc. as they are not performing.

On the other side it also appears that the relatively active Banks who continued looking at deals actively during recession years and did not shed their placement staff completely, were able to return much quicker to the markets and new customers at the first hint of return of investor confidence.

It seems they may have the last laugh as shareholders are compensated with dividends and employees with bonuses at the end of 2013.

One waits to watch whose strategy was better, those who hibernated or those were active…Two to three years from now the picture will be clear.

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