On the surface, US investment banks are committed to Europe. Goldman Sachs is building a new European headquarters in London. J.P. Morgan relocated to a new EMEA headquarters in London’s Canary Wharf last July. Wells Fargo is expanding its investment banking business in the City.
Europe is presented as a revenue growth zone by U.S. banks. In last week’s investor presentation, J.P. Morgan highlighted Europe as a growth market. Goldman Sachs has done the same in the presentations over the past year.
The European economy isn’t exactly growing. Last year, real GDP in the eurozone fell by 0.3%. This year, it’s expected to grow by 0.1%. So why are U.S. investment banks so excited about their opportunities on the continent?
Disintermediation, or not
When U.S. banks get excited about growth in Europe, the source of their enthusiasm is usually ‘disintermediation.’
Disintermediation describes the situation in which European companies raise money by selling bonds on capital markets instead of taking out loans from banks.
There’s some evidence that this is happening. For example, J.P. Morgan included the following chart in its investor presentation last week. It shows that last year, 50% of debt fund raising in Western Europe took the form of bonds (as opposed to loans), up from 30% in 2011.
Similarly, Goldman Sachs included the following slide in a presentation last year. The charts on the far right reflect the development of the European leveraged finance market in Europe since 2005. They show a big shift away from loans and in favour of high yield bond issuance.
Goldman Sachs and JPMorgan were unavailable to comment for this article, but Marcus Hiseman, Head of European Corporate Debt Capital Markets at Morgan Stanley confirmed that European debt capital markets banking is perceived as a growth area. “There is no doubt that debt capital markets are the place to be for borrowers that are keen to diversify away from traditional bank lending and are enthusiastic about primary markets. The market is facilitating an array of capital solutions week after week,” Hiseman told us.
But where are the fees?
Ok, European companies may be shifting their debt raising away from loans and towards the market. So far, however, there’s little sign yet of this feeding through to fees. Figures from Dealogic show that the fees banks earned from debt capital markets (DCM) activity in the Europe Middle East and Africa (EMEA) peaked in 2006 at $8.6bn. Last year, EMEA DCM fees rose 16% compared to 2011, but they were still considerably below their 2006 level, at $6bn.
One European banking analyst, who declined to be named, said the European DCM growth story is chimerical. “That’s banking for you,” he said. “Bankers will tell you loads of great things but they never materialize. People have been saying the European bond market will develop for 10 years, but if you look at the fee figures it hasn’t happened.”
Banking analyst Ralph Silva said banks’ expectation that DCM revenues will take off in Europe is a case of wishful thinking. “Banks are effectively making the assumption that the European economy is on the precipice of a recovery, but most economists think that’s unlikely to happen – at least not this year. They’re also assuming that any recovery will mean European organisations will need a lot more capital, but most organisations already have enough,” he said.
In the meantime, banks’ misplaced optimism about European debt capital markets means debt bankers’ jobs are at least safe. There is not much hiring, but there is not much firing either. Headhunters say the only big recent hire in European DCM was RBC’s appointment of Christoph Seibel, former head of EMEA DCM at UBS. Meanwhile, there have been few layoffs – with the exception of UBS, where the sovereign debt team was closed last November.
“DCM teams are all staffed pretty consistently,” said Lee Thacker at search firm Silvermine Partners. “They’re lean teams and US banks are very committed to them. It’s a stable business to work in.”