There’s bound to be an element of pots and kettles here, but Jonathan Glionna, a credit analyst at BarCap in New York, is not at all impressed by the efforts of his closes rivals to rein in leverage and stop using too much short-term funding.
Goldman Sachs and Morgan Stanley, he says, may have improved on both fronts, but leverage at both firms remains high and their attempts to improve their funding position with a larger deposit base appear to have petered out. As Glionna told BarCap clients on Thursday:
While leverage has been reduced, we believe it remains high and note that the reduction has plateaued. At Morgan Stanley and Goldman Sachs, leverage ranges from 6x to 15x depending on the measure used to evaluate it. We believe leverage of this magnitude remains a risk for bondholders given the volatility and correlation of asset prices displayed during the past two years. In addition, we expect that leverage will begin to rise again if the capital markets remain stable.
On the funding front, deposits and long-term debt constitute 36 per cent of liabilities at Morgan Stanley and 28 per cent at Goldman, compared with respective figures of 25 and 20 per cent in the middle of 2008.
Glionna is particularly concerned that while Goldman is currently able to produce a decent return on equity (17 per cent), it is only doing so because of wide bid-offer spreads. If and when markets normalise, Goldman will either have to settle for lower returns or protect its profitability with greater leverage.
Which route might these firms choose? Here’s a little table which might offer some clues:
Related links:
Leverage ratios are the new VaR? - FT Alphaville
Lloyds as leverage-leader? - FT Alphaville
Citi of over-leveraging - FT Alphaville
When banks use capital made of sand - Rolfe Winkler / Reuters
