Individual shareholders might feel that they cannot truly influence what happens in companies in which they own shares. But they can at least hope that if the performance of the company is sufficiently bad, large shareholders may eventually step in.
Over the past year several of Europe’s largest companies have faced such interventions as so-called activists get on the share register and agitate for change.
Elliott Management has placed the chief executive of drugs group GlaxoSmithKline under intense pressure to accelerate the reshaping of the company. Trian Partners has appeared on the share register at Unilever, adding pressure on Alan Jope, a chief executive who was already under fire. And most recently Europe’s largest activist investor, Cevian, has called for an overhaul of Ericsson’s corporate governance after a 30 per cent plunge in the Swedish communications equipment maker’s share price.
Yet, curiously, the activists have so far steered clear of the banking sector — one of the few instances where bank directors can look at other industries and experience a collective sigh of relief.
Banks have faced more challenges than most since those heady, leveraged-infused years that preceded the global financial crisis of the late 2000s. Ever-lower interest rates have decimated the margins they used to enjoy between loans and deposits; new fintech companies are progressively encroaching on some of their most profitable activities; and maintaining creaking legacy IT systems consumes ever greater amounts of a technology budget they would rather devote to investing in the future.
Heaping on the pressure, the regulatory rule book governing how they operate and how much capital they need has got much tougher. In the face of that, share prices for European banks are down 75 per cent from their pre-crisis peak, and down 30 per cent since Russia invaded Ukraine.
Europe’s banking industry should be fertile activist terrain. It is generating lousy returns, shares are cheap and it is relatively fragmented — especially if the eurozone is viewed as a single banking market. This should be rich pickings for investors looking to make money. And yet, there is little sign of action.
There have been some minor skirmishes over the past few years, but nothing amounting to a successful incursion. In the UK last year Edward Bramson’s Sherborne Investors abandoned its attempt to force Barclays to scale back its investment bank, scuppered by a strong upswing in the investment banking cycle, which nullified his attack.
A decade earlier Knight Vinke tried to force HSBC to exit its US business, but again had to retire defeated. And more recently the global private equity firm Cerberus, not strictly an activist but definitely 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 bank sector has been held back by several factors, the most significant of which are regulators and size. Regulators must approve anyone who seeks “control” of a bank — with control typically interpreted as owning 10 per cent or more — and the presumption has been that regulators are nervous of allowing activists to get on the share register.
Indeed, a 2015 paper by the Federal Reserve Bank of Kansas claimed that, while activists create value for shareholders, it came at the expense of depositors, taxpayers and regulators.
The fact that activists often agitate for large corporate change itself can be seen by regulators as introducing unwelcome instability.
But that attitude may be changing, as regulators appear increasingly open to the role such activists might play, perhaps in part because they are growing concerned about the persistently low levels of profitability and depressed valuations in the banking industry.
Activists have historically targeted smaller companies. This has left banks, which are large, apparently safe, but that too is changing. Unilever’s stock market value of £90bn exceeds that of every bank in Europe, bar HSBC. So size is no longer a defence.
Of course this lack of activism might represent something simpler. Banks are incredibly complicated, remain highly leveraged and make 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 might indeed reach the shores of banking. If it did, then banks in some of Europe’s more fragmented and least profitable markets — Germany, Italy, France, even parts of the UK — could find themselves looking uneasily over their shoulders in just the same way that management of many other European companies have had to for several years.
For investors, banks have been cheap for so long it might seem that they are destined to stay that way forever. But a brave activist could quickly change the way the market values them.
Simon Samuels is a founding partner of Veritum Partners