Deutsche withdrawal symptoms ring alarm for EM zero fee tactics
Over the last decade no bank has drawn more criticism for executing CEEMEA bonds for low or no fees than Deutsche Bank. That the bank is now pulling back from this region should be an example to other banks, and to issuers, that it is difficult to build a sustainable business this way.
Romania, Nigeria and Zambia bonds done between 2009 and 2012 were among the landmark deals that Deutsche Bank was accused of pulling fees lower on. In the first case, the bank was said to have charged nothing for executing Romania's mandate. The low fees the bank has previously offered for this business are far from the whole reason for the scale-back, but they won't have helped.
In its third quarter results, the bank announced its plans to "rationalise" its emerging markets business, including closing offices in 10 countries. The term is surely a euphemism for trimming the business, if not something more drastic, given it used the same term to describe how it is going to cut €9bn in risk weighted assets and €40bn in leveraged exposure (while eliminating an estimated €700m in revenues).
Of course, Deutsche is far from being alone in using super low fees to attract business — Citi was with Deutsche Bank on Nigeria’s debut bond, Barclays was alongside the German bank on the Zambia deal, and HSBC was on the Romania mandate.
And bankers have in the past staunchly defended the need for this tactic in some circumstances. But DCM bankers say that Deutsche has historically been one of the most aggressive of the international banks on fees.
For several years at the start of this decade, Deutsche rode high in the CEEMEA bond league tables, in part because of that strategy and also because the bank did not skimp on its staffing. In the last 10 years as the CEEMEA market has developed, the bank has had highly respected bankers executing deals — Neil Shuttleworth heading EM syndicate and Martin Hibbert, who was let go last week, heading CEEMEA origination.
But running a quality service is expensive. It was perhaps inevitable that the bank would at some point have to reassess how many of these low fee deals it was doing. GlobalCapital understood that at the start of 2014 the bank had become more focused on P&L in this business rather than league table positioning, but it lost market share in the process — DB did 11.48% of the business available in 2013, 8.21% in 2014 and 6.25% this year so far — which will have hit hard coming at the same time as total CEEMEA volumes have shrunk this year to half what they were in 2013.
The CEEMEA pull-back at Deutsche Bank is reminiscent of UBS’s shutting of its SSA business in 2012. In the sovereign and agency bond business, banks have grown smarter at computing the costs of regulation, designed to make capital markets safer, but which make the sector more costly to deal in. They are leaner, but UBS remains the only bank to have exited the business entirely.
The same reassessment of costs is now taking place for CEEMEA businesses. For these desks to survive, banks must make difficult decisions with regards to what business they want to do, and how much they are paid for doing it. Deutsche Bank’s withdrawal is the strongest signal yet that the EM bond fees have bottomed out.