Mike Mayo’s annual presentation at CLSA’s investor forum in Hong Kong is always eagerly awaited by journalists. Last year, Mayo was scathing in his strong and repeated condemnation of Citi, saying that a bank that could not find time during the course of a year to meet a sell-side analyst and address his concerns was exceedingly badly managed.
Yesterday, Mayo continued to be generally negative on US banks, but did not harp as much on any one bank with the repeated references this year mostly to his forthcoming book — but more on that later.
Banking crises are not new, said Mayo, referring to the fact that there has been at least one banking crisis every year for the past century. Mayo’s presentation this year built the case that the situation US banks currently face is akin to the one Japanese banks have faced for the past two decades, and thus he is bleak on the medium-term outlook for US bank stocks.
“I am not saying it will take 20 years for US banks to get out of their problems, but am saying it is important to factor in how long it will take,” said Mayo, suggesting there could be a long haul of up to eight years ahead.
The similarities between the downward spiral of Japanese banks in the 1980s and the current situation in the US can be seen in how quickly home prices in Japan escalated then crashed, the decline in loans and the low asset yields that translated to lower margins.
“You can increase the supply of money, but cannot increase the demand for money,” said Mayo, adding that low-rate environments are horrendous for bank earnings. “This decade will be the worst decade for US banks in terms of revenue growth since the Great Depression and this year will be the worst since 1938,” emphasised Mayo, repeating that a zero-interest rate environment did not turn things around for Japanese banks and will not for US banks either.
While making his case, Mayo conceded that US banks are better positioned to weather the storm than Japanese banks were. US banks are more efficient, with the ability to close branches and fire people; problems in the US are related to consumers, whereas in Japan they were related to commercial business; US banks are more diversified and better capitalised with more than $300 billion of common equity raised by US banks in the recent past; loss recognition in the US has been faster; the US government has reacted faster to the problems facing banks; demographics in the US are more favourable for banks than they were in Japan; and US banks are more profitable with a higher focus on shareholder returns.
“If you strip out all costs of Japanese banks, including paper clips, US banks will still be more profitable,” said Mayo.
Despite this, Mayo, who has been covering US bank stocks for CLSA since 2009, said he has been one of the most negative bank analysts for a long time. US banks will also face some degree of contagion from the current crisis in the eurozone, he said, further highlighting the headwinds. “The steps currently being taken are akin to putting lipstick on a pig,” said Mayo about the policy responses.
After last year’s CLSA conference in October, Citi finally granted Mayo a meeting with Vikram Pandit and others. Mayo termed it a productive session, which helped him better understand Citi’s strategy. But he is still underweight the US bank.
“Citi has had 20 major risk management mishaps in the last decade — in this environment, we prefer to own the best management teams, the more prudent and well-managed banks; the higher-quality banks,” he said.
On Bank of America Merrill Lynch, Mayo said that the party line was that the bank is committed to maintaining its presence in investment banking and the recent move to consolidate both investment and commercial banking under one head suggests that is the direction BoA Merrill wants to take.
“However, it is not the same Merrill Lynch it used to be and we think they’ve lost a step even if it is still a top-tier franchise,” said Mayo. “The jury’s still out on whether Merrill Lynch should stay a part of Bank of America.”
In response to a question regarding job cuts, Mayo was categorical: “So far US banks are using a pocket knife when it seems they need a machete.” He foresees significant headcount reduction and branch closure before the problem is resolved.
“Incentives are still messed up, still out of whack — that’s why bankers haven’t learnt over two centuries,” he said in response to another question. “What’s shocking is that bankers haven’t learnt in three years since the financial crisis. This is not the way capitalism is supposed to behave.”
Exile on Wall Street is the title of Mayo’s book, which is intriguingly sub-titled: “One analyst’s fight to save the big banks from themselves.” Mayo started the book a decade ago when he was on an enforced six-month sabbatical after being fired from Credit Suisse. The book is not about the financial crisis, as such, but is based on Mayo’s experiences working at the Federal Reserve, UBS, Lehman Brothers, Credit Suisse, Prudential, Deutsche Bank and now CLSA.
“I work in the money factory, on the shopfloor,” he said. “In my book I talk about how sometimes machines get jammed.”
