Banking is about people. One way to illustrate this is with per capita revenue, which Numis updates twice a year:
A week ago, Deutsche Bank agreed to buy Numis for £410m in cash. Deutsche’s offer values Numis employees at £1.2m each, although as several desks appear to be surplus to requirements, the true figure is likely to be much higher. For now, every broker, scribbler, and jobber is given a dotcom rating of nearly 3x their revenue over the cycle.
One problem with people is that they always want to get paid, but brokerage is a cyclical business. Revenue from customers comes and goes, but costs are tight, so operating gear is tight. So it’s no particular surprise that in a difficult six months through March for capital markets, a 14% drop in Numis revenue meant a 60% drop in earnings.
But then, Numis is a very small investment bank. We already knew from the acquisition incident that the number of corporate customers had dropped from 176 in September to 166 at the end of March. Today he adds the detail that excluding acquisitions, he added just three customers in the period while losing four.
Headcount continued to grow to 338 from 325 a year ago, even as corporate clients were shrinking: their average market capitalization fell from £1.2bn a year ago to £1bn, which when trying to trade firm it is a useless tendency.
We also learned that while the value of the Numis investment portfolio has remained stable, it is entirely thanks to an upward revaluation of its stake in Wizz, a start-up cybersecurity software maker, whose $300 million fundraiser in February it was at a credibility-testing $10 billion valuation. The £17.7m investment portfolio represents 10% of group equity.
Perhaps most interesting about Numis’ results is its FX bath: its net FX losses for the six months were £1.1 million, reducing its net profit by 25%.
The root cause here is the US branch.
Offshore branch balance sheets are converted into sterling at period end, as is standard accounting practice. But Numis does not cover dollar exposures, having judged US operations too small to care, so in lean times the translation effect is magnified. The £1.2million headwind reported today is on a reversal in dollar strength that created a £3.4million tailwind last year and inflated net income by nearly 20%.
None of this matters to Deutsche. It’s not even that important to Numis. Things tend to balance out over the cycle—some win some lose—and since Numis C-suite bonuses are tied to total shareholder return, there’s an efficient market hypothesis that works against any attempt to squeeze the numbers. When the time comes, a million here and there won’t even merit a footnote in Deutsche’s income statement. Numis is, to reiterate, small.
Investment banking mergers and acquisitions can work if the staff and clients the buyer wants to keep choose to stick around long enough to justify the costs. That’s all that really matters.
Deutsche is betting too much per capita and per customer what will it do? With the acquisition not closing for months and little known about how cultures and egos will be handled, it’s too early to make any predictions. But yes.
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