Inside Financial Services

Mike Mayo’s Misguided Myopia

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In the early 1990s, I was a bank analyst at DLJ and Mike Mayo, working at the Fed at that time, interviewed with me for a job as an assistant. He was aggressive, hungry, and understood bank regulation—but it was clear that he had no clue about the challenges of actually managing a bank or the challenges of investing in one. I didn’t hire him.

That didn’t seem to slow Mayo down, though. He has since gone on to a long career as a high-profile sell-side analyst. I’ve always liked Mayo personally, but based on comments he’s made over the years, I still don’t think he’s gained much understanding about the challenges of managing a large banking institution or of being a successful long-term investor.

All this was underscored to me over the weekend when I read in the Wall Street Journal that Mayo has lately taken to being something of an activist. In particular, he’s not pleased with the recent performance at Comerica, and believes the company should put itself up for sale. Imagine this: after oil prices have fallen by 60% over the past two years and the industry rig count down by 51% over the past year alone, a Dallas-based commercial bank’s earnings have fallen on account of higher loan-loss provision tied to its energy-related loans There’s a shocker!

If anything, Comerica’s recent results might be viewed somewhat positively. Despite the crash of the energy economy, the company is still profitable and has a strong capital position. Management is doing what it’s supposed to be doing: managing through the energy cycle.

But, oddly, Mayo says that’s not good enough. He and a handful of activist investors apparently think that, since the company posted just a 3% ROE in the first quarter and since its stock has lagged the KBW Banking Index, the board of directors should give up and seek a buyer. “Mr. Mayo, a managing director at CLSA,” reports the Journal, “said he wants to take a more active role as an analyst. ‘This is just how the job should be done,’ he said in an interview.” Hold on a minute. Mayo’s been at this for 25 years, and now he suddenly comes out with this holier-than-thou “This is just how the job should be done”? Really Mike?

I disagree with Mayo totally: Comerica should not be considering a sale at this point in the energy cycle. As at all banks between $10 billion and $1 trillion, managements need to make a distinction between the short-term cycle (in this case, of energy prices) and the long-term secular changes taking place in banking, which are massive and challenging. Mayo wants the board to overreact to the former, yet I’ve never heard him discuss the latter.

Comerica’s annual shareholder meeting is Tuesday; Mayo says he is going. I assume he owns a few shares, so he’s entitled to pontificate. The board is entitled to thank him for his comments, but then suggest that it can create more shareholder value by guiding management through a cyclical energy slowdown and improving its long-term strategic position.

If instead the board takes Mayo’s misguided advices and does put the company up for sale, it would be doing shareholders a serious disservice and would be yielding to a lamentable instance of short-termism.

What do you think? Let me know!

8 Responses to “Mike Mayo’s Misguided Myopia”

  1. Jeff W.

    This is not just about the impact of low oil prices on CMA’s loan book. CMA has had poor profitability for years, even when oil prices were high. ROE has been 8% or lower since 2007. Now they have to hire Boston Consulting Group to figure out how to improve things. Not exactly confidence inspiring.

    • Tom Andrewjeski

      Actually your incorrect anout ROE . Most banks have reported much lower ROEsincluding the larger banks. All financial sectors in the market They are way undervalued . They have been down due to unusually low interest rates over a long period of time Your spreads are much better with banks when rates are not in the basement especially Comerica which their loans are floating rate loans. . The Feds feel differently as they have stated that Comerica is an integral part of US banking. And it doesnt take a rocket scientist to know that all bank stocks have been taking a hit in the stock market for quite sometime so whats your point you should be pointing out ROEs in every bank. Your not justified!

  2. Don St.Germaine

    Tom, You nailed it. This is a very well run company handling a tough environment. They will come out stronger because of it. DPS

  3. Strongboy

    Sounds like the mayo is spread a little thin

  4. etoleary

    Isn’t the current question how does a large banking company improve its ROA in an environment of historically thin net interest margins? This is beyond management’s ability to control and a “more work for less rice” attitude just wrecks morale and cuts service when that’s all a bank really offers.

    Separate issue and not directly involving Comerica is the fees and fines paid in recent years owing to extensive malfeasance. Seems like the regulators aren’t moving very aggressively on it so maybe this is a legitimate activist role. How can we be sure that the culture has changed in a permanent, lasting way? What’s the appropriate shareholder reaction if it recurs?

  5. Ferdinand

    You’re supposed to sell when everything is hitting on all cylinders (Detroit pun intended) and the valuation is stretched. Not now.

  6. Tom Andrewjeski

    Comerica was able to get through the Detroit Michigan declining economy in part cause 10 yrars ago by GM and other auto manufacturers
    Their certainly capable of getting through this oil debacle. Their moving in the right direction and accelerating this process! Once the rates go up that will be icing on the cake but obviously management even before this report have been moving in the right direction.

  7. Tom Andrewjeski

    @Jeff W. So Bank of America has a ROE of 6.65% and Comerica is about 6% as reported on March 2016. Comericas was 6.95% Dec 15! So whoop dee do! You should be pining about all banks ROEs as Comerica is well in line above the majority. I see your drinking the same Kool Aid Mayos drinking!

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