09 08 2016

Wall Street banks seen benefiting from Bank of England rate cuts

Bank of England cuts key rate by 25 bp Bank of England cuts key rate by 25 bp The Bank of England delivered a shocker to the market Thursday morning, and potentially a little bit of good news to banks.

The decision by the central bank to cut interest rates from 0.5 percent to 0.25 percent might mean investors' margins get crimped. But the British central bank's renewed commitment to buying bonds could help banks around the world. For investment banks, in particular, it may lead to a flood in new revenue, since the BOE's rate-cut and bond buying decision may well spur more revenue on Wall Street and for U.K. and European Union banks.

"Rate cuts and other stimulus measures will allow hard-hit companies to boost buybacks and take other measures to regain their footing and buoy their share price," said lawyer Steve Wolosky, who represents activist investors for Olshan Frome Woloksy. "We would expect this type of activity to attract investors of all types, including activist investors."

Having worn a path to many companies' doors to demand buybacks and dividends in the U.S., activist investors taking on new targets on the other side of the Atlantic would potentially mean more revenue to Wall Street banks, if they can succeed yet again in forcing dividends, buybacks and M&A.

Debt underwriting is big business to Wall Street banks, particularly investment banks. The Bank of England's rate cut may spur dividends and buybacks, which means more business for Wall Street investment banks that arrange billion-dollar bond deals.

Goldman Sachs' debt underwriting team accounted for a whopping 7 percent of the bank's revenue in the 12 months ending March 31, noted Erik Oja, U.S. banks analyst at S&P Global Market Intelligence. It doesn't make up as big a percentage at consumer banks, which have broader streams of revenue, but it's still big business. Goldman was not immediately available to comment.

U.S. investment banks have been able to expand their size, market share and clout in places like Europe as international competitors struggle, said Dick Bove, vice president of equity research for financials at Rafferty Capital. At a time when U.S. banks are seeing margins compressed by the Federal Reserve's hesitance to lift interest rates in the United States, it's paradoxical that another central bank's rate cut could turn into a near-term boost for Wall Street.

"It's pretty good for third- and fourth-quarter numbers," Oja said. "It should help global investment banks a lot."