The world of banking can be complicated to understand, with peculiar language and impenetrable accounting concepts. After the financial crisis of 2008, some countries’ banking systems healed well, while others still have much more work to do; but banks should not seem enigmatic: they are part of everyday life, just like, well…cars.
Swedish banks are rather like their cars – rather boring. Nonetheless, they are safe and solid, with superior build quality, suitable for all the family. Sweden undoubtedly has one of the safest banking systems in the world.
Turning to Germany though, we find, among its banks and cars alike, a recent fall from grace. In the case of both Volkswagen and Deutsche Bank, all seemed good above the hood, but scandal was festering beneath. Deutsche Bank faces the prospect of a large fine from the US Department of Justice in relation to its selling of mortgage-backed securities in the run up to the 2008 financial crisis. On the surface Deutsche Bank had a ‘good’ financial crisis, but it came to light in 2012 that it had covered up potential losses and avoided a state bailout. This was a good example of prior management burying their heads in the sand. The bank is now playing catch up: trying to change in a world that has already evolved.
The American large caps banks are like the Ford F-150, a towering pickup truck with plenty of beef. American banks are strong and muscular. Their enormous capital and liquidity strength strikes fear into their more svelte European counterparts. When the financial crisis hit, the Americans recognised their banks needed capital, they saw that bank balance sheets needed cleansing, and then they got on and did it. They have now created one of the world’s safest banking systems. As a credit investor, I like financial might because it means safety: so I love investing in the pickup trucks of the banking world.
French: comme ci, comme ça
French cars, in my opinion, are average. It is the same with French banks: I find them non-descript and mediocre. As a credit investor, I believe that owing a French bank may not do much harm, although they can be susceptible to breakdowns. Société Générale suffered a €5 billion rogue trader scandal, for example, and Crédit Agricole made an ill-advised foray into Greek banking that almost put it on the scrap heap.
The names of Italian banks are redolent of beauty … Monte dei Paschi Di Siena, Intesa Sanpaolo, Banco Popolare di Milano … much like a purring sports car, Italian banks are beautiful and exciting. But as a credit investor I do not like excitement. Credit investors just want their money back and to be paid a good price for lending it. Italian banks sadly have yet to face up to the ills of the post financial crisis world. Their nonperforming loan balances remain eye-wateringly large, a distraction for their management and a drain on resources that could be better used for fresh, beneficial lending into the economy.
Much like the US, the UK recognised it had a major problem with its banks quite soon after the onset of the financial crisis, and tried to do something about it. UK banks took longer to heal than the US banks, mainly because RBS was the biggest car crash of all the global banks: eight years later, and it is still firmly in public hands. But the balance sheets of all the large cap UK banks look healthy. UK banks are relatively muscular without being big enough to be brash. And the car? Range Rover, of course, for its safety, size and quality. However, I would exclude the Co-operative Bank from this comparison. In 2013, the Co-op almost collapsed under the weight of bad property loans, and in 2014 it was the only bank to fail the Bank of England’s stress test. The Co-op reminds me less of a Range Rover, and more of a drunk-driven Austin Allegro.