The Economist - USA (2020-11-21)

(Antfer) #1

64 Finance & economics The EconomistNovember 21st 2020


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t the very last minute, the lawyers of
Christian S tried to stop his trial, argu-
ing that the 77-year-old former bigwig with
M.M. Warburg, one of Germany’s oldest
private banks, was too frail to attend court
in a pandemic. But on the evening of No-
vember 16th Germany’s constitutional
court ruled that the trial could go ahead the
next day. With judges, lawyers and the ac-
cused wearing contraptions that looked
like oversized diving masks, each shielded
by a perspex partition, a prosecutor read
out the charge sheet. It took so long that the
judge ordered a break halfway through.
Mr S, who cannot be fully named due to
reporting restrictions in Germany, is one of
four Warburg bankers accused of grave tax
evasion through so-called “cum-ex” tran-
sactions in 13 cases between 2006 and 2013
that cost the German taxman more than
€325m ($386m). (The other three will be
tried separately.) Cum-ex trades are share
transactions done at high speed on or just
before the day dividend payments are re-
corded. Before payment, shares come with
(cum) dividends, which are reflected in
their prices; after, they come without (ex).
A flurry of deals may allow two or more in-
vestors to reclaim tax on a given dividend,
even though it has been paid just once.
The defendant said very little. He was a
confidant of Christian Olearius, the patri-
cian co-owner of the Hamburg-based bank
who was head of its supervisory board until
he resigned last year, because of his alleged
involvement. (Mr Olearius denies any

wrongdoing.)Lastmonththeeffectsofthe
scandalrippledouttothepoliticalsphere,
seemingtodrawinOlafScholz,Germany’s
financeministerandaformermayorof
Hamburg.Thecity’sparliamentlaunched
aninvestigationintowhyHamburgunder
MrScholzlet€47moftaxpaymentsowed
bythebanklapseundera statuteoflimita-
tions.Asmayorin2016,MrScholztwice
metMrOlearius,a donorto,andfund-rais-
erfor,thecity’sculturalvenues;hesays
suchmeetingswithbankersandbusiness-
menwerecustomary,andthathecannot
rememberwhatwasdiscussed.Warburg
saystheinvestigationispurelypolitical,as
MrScholzistheSocialDemocraticParty’s
candidateforthechancellorship.
This is the second cum-ex trial. In
Marchthesamecourtfoundtwoformer
Britishbankersguiltyoftaxevasion.They
receiveda suspendedsentenceastheyhad
co-operated with prosecutors. Warburg
came upfrequentlyduringthe trialbe-
causeofitsroleinthetradesmadebythe
Britishduo.Itwasorderedtopayaround
€176maspartoftheMarchruling.Itsaysit
hasnotbreachedanylawsandisappealing.
ThelawyersforMrS maintaineda simi-
larline.Thetrial,whichisduetoconclude
inJanuary,seemslikelytobemorecon-
frontational thanthefirst—and perhaps
moreembarrassingforGermany’spolitical
and financial classes. Many expect Mr
Oleariustobeindictedsoon.
Whateverhappens,Warburg’sstanding
mayhavealreadysuffered.“Itmighthave
gambledaway thetrustof clients,”says
ChristopherKopperofBielefeldUniversity.
Itsfuturedependsonhow muchitwill
havetopayoutwhenallthefinesaretotted
up—andwhethercustomersabandonthe
grandoldbank. 7

BONN
A tax-fraud scandal draws in
Hamburg’s financial and political elite

Tax evasion

Court controversy


I


n may pnc, America’s seventh-largest re-
tail bank by assets, sold a stake in Black-
Rock, an asset manager, for $17bn. Bill
Demchak, pnc’s boss, said at the time that
worries about the economy had prompted
it to divest, in order to “bullet-proof” its
balance-sheet. On November 16th he broke
cover. pncsaid it would buy the American
arm of bbva, Spain’s second-largest bank,
for $11.6bn. The deal could set off a scram-
ble for scale on both sides of the Atlantic.
Indeed, bbvain turn said on the same day
that it was in merger talks with Sabadell,
another Spanish lender.

Scale has become increasingly impor-
tant for retail banking in America. It is
dominated by four giants—JPMorgan
Chase, Bank of America, Wells Fargo and
Citigroup—that have amassed branches
while lavishing spending on marketing
and technology. The investment in digital
banking has paid off during the pandemic,
as flashy apps have attracted a growing
share of deposits. At the same time, the
Federal Reserve’s low interest rates are
squeezing lending margins. That hurts re-
gional banks most: they rely more on inter-
est income from loans than their Wall
Street rivals, which also earn fees on trad-
ing and investment-banking activities.
pnc’s acquisition of bbva usa Banc-
shares is the largest banking deal in Ameri-
ca since bb&tbought SunTrust for $28bn
last year. It will create the country’s fifth-
largest retail bank (see chart). The com-
bined entity will be a coast-to-coast fran-
chise operating in 29 of the country’s 30
largest markets: half of bbva’s branches are
in Texas, and the rest span southern states,
where pnc’s presence is limited. Still, pnc
may seek to expand further. It has excess
capital to deploy, in part because regulators
have capped dividends and banned share
buybacks. And America’s field of mid-size
banks remains crowded. At least 30 lenders
have assets of around $50bn-250bn.
The price tag on bbva’s American fran-
chise amounts to about 30 times its pro-
jected earnings in 2021, according to an-
alysts at ubs, a bank. That is a lot for a unit
that has long underperformed, posting re-
turns on equity of around 6-7% (bbva’s
Mexican arm, which is comparable in
terms of risk-weighted assets, routinely
produces returns of 20% or more). But pnc
has demonstrated a knack for turning
round ailing ventures, notably the Ameri-
can arm of rbc, a Canadian bank, which it
snapped up in 2012. Investors seem confi-
dent pnccan repeat the trick: the bank’s

The sale of bbva’s American unit to
pncmay set off a wave of mergers

Retail banks

Bye bye America


Nearer the big league
United States, largest commercial banks
AtJune30th2020,byassets,$trn

Source:FederalReserve

BNY Mellon

Capital One

TD Bank

Truist Bank

US Bank

PNC/BBVA

Citigroup

Wells Fargo

Bank of America

JPMorgan Chase

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