(pictured: Christian Stracke and Tom Collier)
Making money from the new challenges facing big banks should warm the cockles of any investor’s heart. PIMCO shows how in a paper titled ‘Disruptive Regulation – A Secular Investment Opportunity’.
The paper, written by Christian Stracke, PIMCO’s global head of credit research, and Tom Collier, product manager alternative investment strategies, says the many reforms of the past few years may create opportunities to capture economic profits being ceded by banks.
The authors say: “It’s been nearly a decade since the global financial crisis prompted an onslaught of regulations intended to abolish excessive risk-taking and make the financial system safer. Yet the implementation of reforms – and their disruptive effect on financial business models – will peak only over the next few years.
“As Dodd-Frank [in the US] and Basel [global] regulations come into force and a further wave of regulatory reform is announced, we believe banks will exit more non-core businesses, specific funding gaps will become more acute and dislocations between public and private markets will become more frequent. Each will create investment opportunities for less constrained and patient capital to capture economic profits being ceded by banks.”
Banks are facing higher capital requirements, higher loss provisioning and higher compliance costs – pressures that PIMCO believes will prompt banks to exit more non-core businesses.
“The result, we believe, will be more acute funding gaps and more frequent dislocations between public and private markets – all of which will create investment opportunities for less constrained and more patient capital.”
The authors split the opportunities into three main categories:
- Specific funding gaps. Many banks have stepped back from originating non-conforming mortgages. Originating mortgages to even a sub-set of the estimated one million to 1.4 million potential borrowers affected (in the US alone) would represent a scalable opportunity at historically high credit spreads.
- Public-private market dislocations. In contrast to the public markets, many assets in private markets are enjoying historically high liquidity conditions. An example of various opportunities is taking a public real estate investment company private to capture a discount to net asset value.
- Structured deleveraging. European banks still have non-performing and sub-performing loans on their books that they cannot sell without triggering capital adequacy problems. There is an opportunity for managers with less constrained capital and a more hands-on approach to partner with banks, reducing information asymmetries and infusing necessary asset management expertise.