Friday, July 08, 2011

Chase's History Dogs Its Overseas Expansion Efforts

Wednesday's Wall Street Journal's Money & Investing section featured a piece on Chase's inability to significantly expand its international banking business while CEO Jamie Dimon has been running the firm.

According to the article, overseas revenues have fallen below 25% of the bank's total revenue, a level it was above in 2006 & 2007.

By contrast, zombie bank Citigroup "gets roughly twice as much revenue outside the U.S." as does Chase.

This comes as no surprise to me. Believe it or not, large US banks, once known as money center banks, had their long term international fortunes shaped by the Latin American debt crisis of the 1980s. At the time, only three US banks had international networks of significance- BofA, Citi and Chase.

When the Latin American defaults hit, Citibank took a then-staggering writedown of $3B, while Chase took a $1B loss. That's how big the difference in their overseas business volumes were even then.

The ultimate outcome of the crisis, however, was that BofA was forced to severely curtail its overseas network, while Chase and Citi, while maintaining theirs, no longer expanded them as aggressively.

There's no point in going into details concerning the next 25+ years of the management of those banks, but, suffice to say, Chase stalled under mediocre management while Citibank swung between tremendous earnings and business unit problems so severe that their entire St. Louis-based mortgage business was nearly shuttered by the feds in the 1990s.

Ironically, these hallmarks of the two remaining old-line money center banks- BofA being the name which NationsBank assumed when it took control of the old San Francisco-based outfit- remain pretty much intact.

Citigroup should have become insolvent and bought in pieces out of bankruptcy in 2008-09, so badly mismanaged were its risks in mortgage lending. Chase, on the other hand, was so moribund in moving into anything new that it never had time to become ensnared in that business' problems. Little wonder, then, as it bought Bear, Stearns and WaMu at fire-sale prices, generously allowed by the Fed and FDIC, that its domestic business became even larger as a percentage of its total revenues.

Meanwhile, foreign-domiciled banks such as UBS and Barclays have larger presences in the US than in past decades. Such is the nature of modern international finance that there's no shortage of large financial institutions with balance sheets to fund project finance. They all have similarly-capable trading floors.

Back when I was with Chase, I did some analysis of the international businesses under then Vice-Chairman Tony Terracciano. The results weren't flattering to Tony or his management team. Attempting to discredit the work, Terracciano asked the source of my data, to which I replied it was from his own financial people.

Ever the loyal manager, he promptly sneered,

'They wouldn't know their asses from a hole in the ground,' and summarily, in his mind, dismissed the findings as irrelevant.

However, the truth was that many of the international unit's businesses and countries weren't able to command superior profit margins. Even then, with Citibank and various local and regional competitors, the international bank's profits were nothing to write home about.

The real action back then, and still, I'd expect, were in faster-growing onshore consumer finance businesses, securities trading and the then-hot real estate finance unit.

Funny how things didn't change much two decades on, isn't it? But that's the manner of financial services- businesses cycle through booms and credit-loss busts with painful regularity.

Which suggests that one should be wary, should Chase suddenly begin to grow significantly overseas. Prices paid for local banks will probably be a bit too rich, or risks won't be adequately understood by the suits from New York, as they hoover up the deals local and regional veteran bankers choose to pass by.

As I wrote recently regarding the fuss bank CEO made over rumored capital level increases,

"I've written in a post some years ago that banks want to portray themselves as competitive companies in terms of equity values and growth, even though the business in which they are in doesn't lend itself- no pun intended- to such dynamics. And the traditional nosebleed level of regulatory capital/risk assets doesn't really matter once risk becomes loss. Which happens in as little as one or two days, if not overnight. Ask the former executives of Bear Stearns."

Banking, for the long term, sensibly managed, was and is never a high-growth prospect. When a former henchman (Dimon) of the guy who cobbled together a string of Wall Street wire houses into Shearson Lehman (Weill) becomes regarded as a savvy international commercial banker, you should worry.
Rather, the history of large US bank management over the past three decades has been more often one of loss, ignorance and disgraced CEOs. It would be a rare CEO of Citi, Chase or BofA who was capable of not presiding over some disaster on his watch (The aggregation of Chemical, MannyHanny and Chase by the Chemical management team doesn't count, since that was simply the integration of three large mediocre money centers).

And, when that becomes true, well, it'll be because the business has become such a regulated, slow-growing financial utility that it wouldn't take anyone very talented or smart to simply sit still and leave such an institution on autopilot.

So if Chase does begin to grow its international businesses significantly and quickly, one might want to regard the bank's future performance as suspect.

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