The best of Lex: The Great Divide

The buildings of the banking district are seen during sunset in Frankfurt, Germany. (AP Photo/Michael Probst)

The story of winners and losers that has played out over the past half year will continue as a new rise of coronavirus infections and a wave of lockdowns sweep across Europe. A flurry of deals and third-quarter results over the past week crystallise which group individual businesses fall into.

Corporate results paint a picture of rapid recovery in earnings in the three months to September. Roughly one-third of US and European companies have reported earnings so far and the majority have exceeded expectations. But within a broad recovery for the largest businesses, divergence is clear.

Investment banking divisions are some of the biggest beneficiaries of the turbulent markets, industry consolidation and refinancings that the pandemic has created. Even perennial laggard Deutsche Bank managed to get in on the action with a bumper quarter. Revenues at Deutsche's investment bank jumped 43 per cent and profits rose 15-fold. Lex concluded that the difficult part was keeping the momentum going. Even with a good quarter behind them and rock bottom valuations, Europe's banks need to offer a more compelling argument for investors.

One that disappointed was Credit Suisse. Results showed that its investment banking division failed to keep up with competitors. Performance in fixed income and equities lagged behind US peers and local rival UBS. The Swiss bank's shares have already attracted a discount after the ousting of Tidjane Thiam earlier this year. Even with a payout to come and the promise of well-funded buybacks, the discount remains. Operational underperformance will make the restorative job of new chief executive Thomas Gottstein difficult.

For sharp-suited investment bankers in other parts of the industry, record-low interest rates continue to cause problems. Pre-tax profits at HSBC fell 36 per cent. The bank said it was thinking of implementing fees for account holders in the wake of collapsing interest margins. That strategy has proved successful in places such as Japan but seems unlikely to take off in a world where technology allows low-cost banking to proliferate.

Deutsche Bank headquarters in Frankfurt. (AP Photo/Michael Probst)

In Europe, bank investors have been particularly relieved by the strong quarter. Santander proposed paying a small dividend this year. Its geographical range spreads risk, and capital levels are well above regulatory minimums. Payouts remain restricted by regulators but Lex supported the Spanish bank's pushback against a blanket ban.

Like banks, traditional energy companies now fall into the value category as oil prices remain subdued and investments are channelled to renewables. US consolidation in the sector spread north of the border this week with the $18b all-share merger of Cenovus and Husky. Unlike US stock-based combinations such as Parsley-Pioneer, Concho-ConocoPhillips and Noble-Chevron, the deal features a 21 per cent premium for Husky shareholders. The high costs of production from Canadian oil sands would mean both groups would need the cost savings that the deal would produce as dirty energy increasingly falls out of favour.

At the opposite end of the deal spectrum is the acquisition of Dunkin' Brands by private equity-backed group Inspire Brands. Inspire is paying $9bn for the doughnut franchise group. An enterprise value of 26 times forward ebitda looks full compared with the 19 times that JAB paid for rival Krispy Kreme in 2016.

Whether by an inch or a mile, a win is still a win. LVMH billionaire Bernard Arnault is probably telling himself that after getting a better price for jewellery group Tiffany. Delaware courts stuck with form and did not allow a "materially adverse effect" clause to result in a big discount. Renegotiations settled on a price just 3 per cent lower, or $500m, for LVMH's purchase. Not that it is any skin off Mr Arnault's nose. Luxury groups have remained remarkably resilient to any economic weakness. Their success highlights the largest division to emerge as a result of the pandemic: that between the top 1 per cent and everybody else.

© Financial Times