Structured finance profits
Structured finance profits
FINANCIAL TIMES
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Published: August 30 2007 09:27 | Last updated: August 30 2007 12:49
Trying to work out how much exposure investment banks have on their books to the subprime market can be a frustrating business – even for the banks concerned. An easier game is guessing which investment bank will be next to cut staff in structured finance in the wake of the subprime crisis. Royal Bank of Scotland has already set the ball rolling, and there are reports that Lehman Brothers, Goldman Sachs and Bear Stearns are poised to follow suit.
This rapid shedding of staff reflects the urgent need to cut costs as revenues decline in this highly lucrative and (until recently) growth business. Lehman and RBS, for example, topped the underwriting league tables for asset-backed securities last year, according to Dealogic. Cutting back quickly is par for the course for investment banks, with their high staff costs. It will help, but won’t replace lost revenues. For the top 10 global investment banks, fixed income revenues (where most asset-backed business is booked) reached more than $27bn in the first quarter – more than double the total five years before, according to Credit Suisse. And structured finance has been particularly profitable, so margins are likely to decline too.
Is it just a blip? Writedowns may be out of the way quickly, but the loss of confidence in some high-yielding structured products is likely to be more durable. The history of structured finance, though, is that a blow-up in one area is swiftly followed by a surge of demand for ingenious new products elsewhere. And there is no reason why companies should stop hedging currency risk, or locking in energy prices. In fact, increasingly risk-averse investors may even be more inclined to buy structured products with guaranteed returns, for example.
Working out which banks will prove most vulnerable is still tricky, since they do not break down the contribution of different areas of structured finance. That explains the lack of differentiation in the market. The S&P investment banking and brokerage sector is trading at 8.3 times next year’s earnings – and Deutsche Bank, Barclays, RBS, Lehman and Goldman, for example, are all trading at between 7.5 and 8.5 times. This does not mean that they will all cope equally well.
Copyright The Financial Times Limited 2007