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Bankers say big is beautiful, safe and economic

Thu 22nd January, 2015 8:52pm
By Alexander Smith 
    DAVOS, Jan 22 (Reuters) - Europe's bankers defended the big 
bank model this week in Davos as the mounting cost of regulation 
puts a question mark over its future. 
    Big complex banks must now hold far more capital than in the 
past because they are seen as posing higher economic risks and 
they have to be easier to dismantle if they hit trouble. That 
has hurt their profitability and held back share prices. 
    JPMorgan  JPM.N , the biggest U.S. bank by assets, has faced 
growing pressure to consider a break-up, and similar questions 
are being put to less profitable European rivals such as 
Deutsche Bank  DBKGn.DE , Barclays  BARC.L  and Credit Suisse 
 CSGN.VX .   
    JPMorgan Chief Executive Jamie Dimon last week said 
splitting his bank would be bad for the financial prestige of 
the United States, and he won support from his peers at this 
week's World Economic Forum in Davos. 
    "Is there a better model? Those of us who are large have 
always faced questions." said Douglas Flint, chairman of HSBC 
 HSBA.L , Europe's biggest bank by market value. "If we were 
asked the same question (as JPMorgan on breaking up) we would 
give the same answer." 
    Pressure has built on JPMorgan since it emerged in December 
that it could require more than $20 billion of extra capital to 
meet tougher U.S. rules on big banks. 
    Banks around the globe are having to consider radical ways 
to cut costs and change their size and shape as they come out of 
the worst year since 2008 for investment banking revenues and 
remain under what Dimon called an "assault" from regulators. 
    In Europe, banks have still not returned to economic profit 
since the financial crisis, according to a study by Boston 
Consulting Group.  ID:nL6N0TL2X4  
    Many so-called universal banks are being valued by stock 
markets at much lower than their net worth on their balance 
sheets, or the 'book value' of their assets. 
    JPMorgan shares are trading at 0.9 times the bank's book 
value and Citigroup  C.N  trades on 0.7 times. In contrast, 
Wells Fargo  WFC.N , which is mostly reliant on U.S. retail and 
commercial banking, trades on 1.6 times its book value. 
    Barclays shares trade at 0.7 times book value and Deutsche 
Bank trades at barely half book, whereas Lloyds Banking Group 
 LLOY.L , a UK focused retail bank, trades on 1.2 times.  
    While banks went on the defensive in Davos, behind the 
scenes changes are afoot. 
    Deutsche Bank is considering splitting off its retail 
division and Barclays boss Antony Jenkins has said the universal 
banking model is dead. 
         
    "TOO SMALL TO PROSPER?" 
    Universal banks benefit from selling asset management and 
capital markets products to wealthy clients and companies, but 
bankers admit there are far fewer benefits from cost savings or 
cross-selling than in the past. 
    Many corporate clients still wanted strong national or 
regional firms, however, bankers said. 
    "We have become a global, multi-product bank because clients 
want it," Deutsche Bank co-CEO Anshu Jain said during a panel 
discussion on the future of banking on Wednesday. 
    Despite brickbats from some politicians, there remains 
strong support for large national banks in countries including 
the United States, Germany, France and Italy. 
    "Shouldn't we have concerns about banks that are too small 
to prosper?" said Italian Economy Minister Pier Carlo Padoan in 
response to a question from Reuters on whether banks should be 
broken up. 
    Urs Rohner, chairman of Credit Suisse, also saw little merit 
in splitting firms up. "Breaking up banks will not do anything 
to make the system safer," he said. 
    But it is investors who will ultimately call the shots if 
returns don't improve. 
    "The pressure to restructure is moving from the public 
sector to the private sector," said Bob Penn, partner at Allen & 
Overy in London. "It's a cold, logical, analytical decision that 
at some point the incremental costs of regulation exceed the 
costs associated with breaking up." 
 
 (Additional reporting by Steve Slater and Carmel Crimmins in 
London; Editing by Elaine Hardcastle) 
 ((steve.slater@thomsonreuters.com; +44)(0)(20 7542 4367; 
Reuters Messaging: steve.slater.thomsonreuters.com@reuters.net 
and follow me on twitter @reuterssteves)) 
 
Keywords: BANKS BREAKUP/DAVOS
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