Saturday, November 08, 2008

Risk reduction continues

In yesterday's WSJ was an article about Royal Bank of Scotland and how they are looking to reduce risk. As the article says there are no "scared cows" any business is a potential victim as the banks looks for ways to reduce its risk and balance sheet "as part of a turnaround strategy".

RBS has hired a consultant to advise on each business in the group.

"Even if you have an average return on equity, if it is low risk and good prospects, we might keep it" said Stephen Hester the banks new CEO. Conversely high return, high risk products might not be kept.

This follows a story I heard earlier this week that CSFB had eliminated Latin American Trading from its strategy also.

It seems to me that Banks are looking at core businesses and how to return to low risk and steady returns. In the case of CSFB, do they have a strategic advantage in the Latin American region? If the rumour that I heard is correct I would assume not, and rather then put capital at risk there it is better(safer) to put the money at risk in a business where they would have a strategic advantage. Lets remember all (almost all at least) major banks are now partially government owned, as such risk was bound to be down. If you do not have a strategic advantage in a business line you need to invest more capital and leverage to get over sized returns. If you have legitimate business in the region then it makes sense to put resources in that area. "Prop Trading" then becomes a small part of the business and handling customer flows (legit corps not hedge funds)is the main focus. In this case fee driven income is the main driver of the business.

This goes back to my post from NOV 3 where I said that I didn't think now that banks were partially government owned that they would be allowed to take "uncalculated risks". Banks are in retrenchment mode, plain vanilla is back in vogue and the days of high leverage are at least temporarily behind us. That is one reason I think Goldman Sach's stock has been hit hard this week. Yes, I read the story about being caught in the stock sell off, but I think that the market is assessing there ability to take leveraged bets in the future. Right now the prospects for that are lower then in the past and as such returns should fall. This is my opinion here but I think I am on the right track.

Good Luck and Good Currency Trading



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