Research reports often go straight into the recycle bin, but the annual Oliver Wyman and Morgan Stanley note on the future of wholesale markets is a notable exception. The firms don’t just parse financial statements and stroke their chins; they get out there and interview, and their thoughts about the future of investment banking business are well worth examining.
Unfortunately, it’s mostly doom and gloom. Fees are down to 1995 levels, as a proportion of GDP — two decades of 'financialisation' might be rolling back, with consequences for the industry that creates, markets and trades securities.
There are dozens of similarly noteworthy facts and figures — the extent to which tangible equity in wholesale business has risen, even as balance sheets have fallen, the likely impact on various future regulation, the limits on repricing product as a solution to investment bank woes, the decline in fees, the cost of different adaptations, the increase in compliance costs per front office employee (up 50% since 2009) and other data points.
GlobalCapital decided to focus on investment banking fees and some of the problems of scale, but it’s really worth seeking out the whole thing.
In particular, the study highlights the strength of the top five global banks, especially in US underwriting, and the rising proportion of fees going to boutiques. Banks in between the two extremes, following traditional lending-to-mandate models, are being left behind, according to the study.
Of course, maybe that’s an evergreen complaint, but with the fee wallet shrinking, its resonance has never been greater — come with something special, or don’t come at all. The report, to be fair, does deal with the possibility of regional or product strength
“Many banks excel in one region or product and not in another, and the economic benefits of size at the overall wholesale level are more muted…..all those we spoke to saw a very strong role for specialist providers, reinforcing our view that narrow, focused models can also produce advantaged economics.”
With that in mind, what to make of the Natixis restructuring? David Rothnie deals with the main changes in Southpaw — what it comes down to is splitting the wholesale bank into a global finance arm and an investment banking (CIB) arm, while the French bank folds its various boutique acquisitions into corporate finance. In the last year, it has bought the French arm of Leonardo & Co, the Spanish boutique 360 Corporate Finance, and the US boutique Peter J. Solomon Company.
The bank's “global finance” bit, somewhat confusingly, doesn’t look like it has much in common with the financing bits at other banks. Instead, it looks like a grab bag of structured lending products, including aviation, export finance, infrastructure and real estate.
“Investment banking” is where all the capital markets businesses, along with corporate lending and event finance, will sit.
The particularly interesting part though, is the string of boutique acquisitions. All of the Natixis purchases so far have been essentially mid-market or specialist firms, suggesting it’s taken heed of the Oliver Wyman advice to offer something different. The other niches where it wants to grow are lucrative, apparently well chosen businesses — CLOs, portfolio financings, covered bonds and so on — but it’s hard to figure out how, or if, it all hangs together.
Incidentally, it has also named a new FIG DCM head, to replace Philippe Hombert, who left the bank in December.
UniCredit changes
UniCredit’s manoeuvrings are also merit some attention. The bank has huge advantages as a mid-tier player, if it can cross-sell effectively into its commercial and corporate banking clients. That’s the mainstay of its investment banking strategy, but this week, it announced some other changes.
Most notable was the new role of UK head of corporate coverage. At many institutions this would mean an M&A push in the pipeline, an area where UniCredit has plenty of room to grow — this year, so far, it is 35th in the European league table, though it has pockets of strength in Italy and CEE. But coverage at UniCredit is more likely to focus on supporting its financing and transaction banking businesses, covering those clients with a strong European connection. UniCredit isn’t proceeding with big splashy hires — David Vials, the former head of international financial sponsor solutions, will take the job — but it could be a sign of things to come. GlobalCapital understands the next layer of changes is in the pipeline.
Also notable is UniCredit trumpeting its New York expansion, with coverage of Latin America, financial institutions, and debt capital markets. Being a sub-scale operation in the US is notoriously hard — so it will be interesting to see what UniCredit’s distinctive edge is.
Regulation this week has also seen some big changes. Following European Central Bank president, Mario Draghi’s hint at the ECB press conference that additional tier one (AT1) needs more protection, there has been both a reopening of the market, and further hints that it needs reform.
In particular, there could be tweaks to the exact place of instruments in the creditor hierarchy. Right now, management and regulator views of AT1 coupons are close, but not identical.
The design of the regulation suggests AT1 coupons could be blocked for essentially trivial reasons at solvent banks, but bank management is likely to strain every nerve to avoid missing one, including, according to one senior FIG banker, doing a pre-emptive rights issue. Much of the market turmoil in the instruments rests on this mismatch, so closer alignment, such as formal seniority for coupon payments, could help.
The other big news was on MiFID, where the European Commission, closely supported by the European Parliament, sent draft rules backed to the regulator, ESMA, for some changes. The changes are believed to include some of the bond industry’s biggest asks — tweaks to calculations of liquidity which should exclude far more bonds than previously from the MiFID disclosure rules.
That’s well worth doing, since too much transparency could reduce liquidity even further. According to a study from the UK’s FCA though, there’s nothing to worry about — liquidity has barely changed since the crisis, and certainly not on account of regulation at banks. Of course, the study is deeply flawed — liquidity seems to be just as scarce and difficult to source as it ever was.