Banking is about people. A way to illustrate that is with revenue per head, which Numis updates twice a year:
A week ago, Deutsche Bank agreed to buy Numis for £410mn in cash. Deutsche’s offer values Numis people at £1.2mn each — though since several desks look surplus to requirements the true figure is likely to be much higher. For the moment, each broker, scribbler and jobber is being awarded a dotcom valuation of nearly 3 times their through-the-cycle revenue.
A problem with people is that they always want paid, but broking is a cyclical business. Revenues from clients ebb and flow but costs are inflexible, so operational gearing is severe. It’s therefore no particular surprise that in a tough six months to March for capital markets, a 14 per cent drop in revenue at Numis meant profit was down 60 per cent.
But then, Numis is a very small investment bank. We already knew from the takeover bumf that corporate client count had fallen from 176 in September to 166 at the end of March. Today adds the detail that excluding takeovers, it added just three clients in the period while losing four.
Headcount kept growing, to 338 from 325 a year ago, even as corporate clients were shrinking: their average market cap fell from £1.2bn a year ago to £1bn, which when trying to negotiate retainers is an unhelpful trend.
We also learnt that while the value of the Numis investment portfolio has been holding steady, it’s thanks entirely to an upward revaluation of its stake in Wizz, a start-up cyber security software maker, whose $300mn fundraise in February was at a credibility-straining $10bn valuation. The £17.7mn investment portfolio accounts for 10 per cent of group net assets.
Perhaps the most interesting thing in the Numis results is the bath it took on FX: net losses on foreign exchange for the six months totalled £1.1mn and reduced net income by 25 per cent.
The root cause here is the US subsidiary.
Offshore subsidiary balance sheets are translated into sterling at the period end, as is standard accounting practice. But Numis doesn’t hedge dollar exposures, having judged the US operations too small to worry about, so in lean times the effect of translation is magnified. The £1.2mn headwind reported today is on a reversal of dollar strength that last year created a £3.4mn tailwind and inflated net income by nearly 20 per cent.
None of this is important to Deutsche. It’s not even that important to Numis. Stuff tends to balance out through the cycle — win some lose some — and since Numis C-suite bonuses are tied to total shareholder return there’s an efficient market hypothesis working against any attempt to juice the numbers. When the time comes, a million here and there won’t even merit a footnote in Deutsche’s income statement. Numis is, to reiterate, small.
Investment bank M&A can work if the staff and clients the buyer wants to retain choose to stick around for long enough to justify the costs. That’s all that matters really.
Is Deutsche gambling too much per head and per client that they will? With the takeover not due to close for months, and little known about how cultures and egos will be managed, it’s far too early to be making predictions. But yes.