Retail Banking Promises Cosy, Slipper-Clad Future For Hedge Funds

Retail banking, while seen as a teacups ride compared with investment banking’s triple-loop rollercoaster in terms of thrills, is nonetheless proving very valuable to banks during the credit crisis. Goldman Sachs and JP Morgan started retail divisions last year, and they’ve been buoying their already pretty buoyant profits; American Express also got into retail banking last year so it didn’t have to rely on people paying off their credit card bills, which they’d not been doing so much. It also meant they could get their hands on some lovely TARP bailout cash.

And now that private equity firms are pulling out of their usual investments, like Permira did yesterday with its stake in Britvic, they’re also turning towards the stability of the retail sector. Fortress, the private equity company and hedge fund, is apparently close to a deal that would see it and some other private equity chums injecting $800m into a wee little Floridian bank, First Southern. The FT says that thanks to the bank not being riddled with subprime toxicness and the like, it’ll prove to be “a good vehicle for future banking acquisitions”.

Last week BankUnited, another Florida bank, was also taken over by a group of private equity companies led by John Kanas - ”It’s a long-term commitment, not hit and run”, he said after the deal went through. The FDIC, the insurers of bank deposits in America, clearly expects more of these deals, because it issued some new policy guidance for folks looking to add a retail bank to their portfolio.

This is the banking equivalent of a playboy who shags the most exotic women imaginable for years, before deciding to settle down with a nice girl he used to live next door to. The whole hedge fund party of the last few years, where the 20% returns kept rolling out and the commissions came rolling in, is well and truly over – a timely example is Man Group, the UK’s biggest hedge fund, who have announced today that their profits are down 64% this year. Now that smaller banks are finding it hard to keep going – 36 have failed this year so far in America – they’re bland but attractive investment prospects for hedge funds and private equity groups looking for a nice hot dinner, some no-frills sex and a cuddle, to continue the metaphor. Florida is the perfect place for them to settle down – “for banks seeking steady deposit growth, Florida is the closest thing there is to Shangri-La”, as Matt Stichnoth of The Big Money says, citing Florida’s growing population and already massive deposit levels.

Could we see something similar happening with the UK’s stricken small building societies? Given their levels of lending they could be a much riskier bet, but the right candidate could be just the thing for recovering hedge funds to shack up with.

Posted by Ben Beaumont-Thomas in Hot Money | May 28, 2009 11:35AM |