America’s banks have been handed a few lifelines this year, but their luck might be finally running out in a way that could have activists waiting at their doors. This week’s big news was a CNBC report that ValueAct Capital Partners may have set in motion the process by which Citigroup CEO Mike Corbat announced his retirement.
Q2 2020 hedge fund letters, conferences and more
ValueAct May Have Played A Role In Mike Corbat's Retirement
CNBC quoted a source close to ValueAct on the bank’s financial performance: "It’s unacceptable to fall short on your own numbers, which are cushioned numbers to begin with, these targets are set to be beaten."
Mike Corbat’s departure, signposted a week ago and confirmed for February yesterday, was initially reported as a major milestone for gender equality, with his named successor Jane Fraser set to be the first female CEO of a major financial institution. While that is still momentous, the Wall Street Journal followed the announcement by reporting that a reprimand from regulators over Citi’s risk-management controls hastened Mike Corbat’s exit.
Regulatory issues that prevented ValueAct from seeking a board seat have now been resolved, so next year could see Mason Morfit’s firm take a more proactive stance at Citi.
A Federal Reserve rule defining "control" for bank holding companies, which loosens the restrictions on how many nominees an activist or hostile acquirer can place on a bank’s board, is due to come into effect on September 30, having been delayed for six months earlier in the year.
"The overall business has certainly changed but the underlying conditions and incentives to pursue mergers have not," John Popeo, a former regulator turned consultant, told me this week. Considering mergers of equals or investments in financial technology is "more critical than ever," he added. Indeed, fintechs themselves have joined stronger banks as potential acquirers, with LendingClub and Jiko charging into the sector.
The performance of both trades and a shortage of levers for value-creation may be enough to deter other activists from campaigns at mega-cap banks, at least for now. But smaller banks, which have benefitted from fees for implementing stimulus plans, loan forbearance, and a light regulatory touch since the onset of the COVID-19 pandemic, have more reasons to fret.
The Federal Reserve this week signaled that a low interest rate environment will persist until at least 2023, adding pressure to profit margins. Bank stocks have also suffered since June, when some federal stimuli expired. The S&P Regional Banking ETF, a pool of smaller banks, is down 35% year-to-date when the Dow Jones Industrial Average and S&P 500 Index have recovered most or all of their losses.
So the most likely scenario is a trickle of campaigns in the sector, not a gold rush. Activists have struggled in some recent contests – losing at HomeStreet and First United (although Driver Management continues to pursue the latter for damages, alleging the board sought to undermine the integrity of the vote) – and bank M&A is currently moribund as executives try to assess the damage to credit from the looming recession. A shortage of banking expertise among well-capitalized activists, who prefer to steer clear of complex balance sheets, is also a dampener even if it didn’t stop the likes of Hudson Executive Capital, Blue Harbour Group, or ValueAct before the pandemic.
Then again, few industries are untouched by economic uncertainty, or as needful of consolidation as regional banks. Even as they see challenges at every juncture, banks should keep their wits about them.
Japan Retains The Ability To Disappoint Activist Investors
While Japan this week confirmed that Shinzo Abe’s successor will be Yoshihide Suga, perceived as the more shareholder-friendly candidate, the country retains the ability to disappoint activist investors. Reuters and the Financial Times reported separate instances of government intervention in a recent proxy contest between Effissimo Capital Management and Toshiba that may have helped tip the vote, which was narrowly in favor of management. Effissimo was already heavily restricted in its campaign and was forced to vote for management as part of an agreement with the Ministry of Economy, Trade and Industry (METI). Whether the government is sufficiently embarrassed by the allegations to pursue further reforms remains to be seen.
Quote Of The Week
Quote of the week comes from Change to Win Executive Director Dieter Waizenegger, who told Activist Insight Monthly that the defeat of Electronic Arts’ "say on pay" resolution was emblematic of a re-energizing of their environmental, social, and governance (ESG) engagements in light of COVID-19:
"Most, if not all ESG engagements of union funds remain relevant or have even gained greater significance during the pandemic."
