Who's seaworthy in a "perfect storm?"

September 24, 2008

Abstract

New York, NY, USA September 24, 2008

Who's seaworthy in a "perfect storm?" Historical perspective on Financial Services firms' valuation in downturns

Report Published by Oliver Wyman

Oliver Wyman looks back over 25 years and seven crises to extract management agenda for navigating through the financial storm.

The severity of the financial sector’s current turmoil has highlighted the vulnerability of large financial institutions in tough times. But while the collapses and bailouts of 2008 are historic in magnitude, downturns occur regularly in the industry, and an analysis of their effects can be instructive as firms plan for the future.

In its report published today, "Who's Seaworthy in a Perfect Storm"?, Oliver Wyman assesses the previous seven downturns affecting 600 North American and Western European companies in banking, asset management, consumer finance, insurance, investment, and specialty finance. The report looks at how firms have responded and what impact this had on their valuation. In almost three decades covered in the analysis, there were roughly two to three downturns per decade, each lasting for one to two years. The implication is that in each decade, the financial services sector is likely to suffer the effects of downturns every three to five years.

The impact of firms’ characteristics on their performance during downturns can largely be seen by the business mix and model choices that they made before the downturn broke. Put another way, when the storm breaks, the ship you set to sea in makes much more difference to your survival than how well you sail it. Thus, on average, universal banks have fared much better than specialists and bancassurers. There are nevertheless actions that banks can take, such as to decrease their reliance on wholesale funding, to reduce earnings volatility by diversifying their product mix and to improve investor confidence by timely, complete communication.

For those that weather the storm, historic evidence points to the value of acquiring while asset prices are low. This is particularly true in this crisis given the need for many banks to reshape their business models away from specialization and towards the universal banking model.

Mark Weil, Partner and Head of Europe for Oliver Wyman said: "We see this crisis as a once-in-a-generation event that marks not just the end of a cyclical bull market and asset price bubble, but also marks a structural shift in the financial landscape, with whole business models proving untenable, new ones taking their place, and regulation likely to squeeze and shift returns away from investment banking activities."

The report is 32 pages.  A table of contents is available online.

Oliver Wyman Media Contact  For further information or a copy of the report, please contact: Rita Savage, Oliver Wyman +44 (0)207 852 7378

About Oliver Wyman With more than 2,900 professionals in over 40 cities around the globe, Oliver Wyman is the leading management consulting firm that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation, and leadership development. The firm helps clients optimize their businesses, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is part of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit www.oliverwyman.com

Members of Celent's research services can download the report electronically by clicking on the icon to the left.  Non-members should contact info@celent.com for more information.  

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

New York, NY, USA  September 24, 2008

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Introduction 1
Summary 2
1. What forces propelled firms into the 2007 storm's path? 4
  1.1. The route to the 2007 downturn 4
  1.2. The unprecedented and uncertain path of the 2007 storm 5
  1.3. The 2007 downturn in historical context 7
2. Firms' valuations in downturns 11
  2.1. Historical analysis of price earnings ratios 11
  2.2. Impact of firms' characteristics in valuations during downturns 14
  2.3. Business model choices 18
  2.4. Operating levers 21
3. Conclusions and recommendations 24
  3.1."The life-rafts" 25
  3.2. "The tankers" 27
  3.3. "The battleships" 28
Conclusion 32

 

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