Equity businesses prepare for a bloody 2012
A miserable reporting session is expected for the first few months of 2012, and equity bankers are expected to bear the brunt of it with widespread bloodletting predicted in the market. However, some senior figures claim that consolidation in the equity sector is long overdue, with overcrowding pushing down markets to unsustainable levels.
JPMorgan was the first major US bank to report its figures from the fourth quarter (Q4) of 2011, in the second week in January 2012. It began what turned into a dismal reporting session. JPMorgan's investment bank profits fell 52% to $726m on a 30% drop in revenue. The bank, which ranked fourth in Thomson Reuters' global equity and equity-related league table and first in the US, saw equity underwriting fees plunge by 65%.
Equity bankers had been expecting the worst. Last year global equity capital markets (ECM) activity was down by 28% and the fourth quarter was the slowest three-month period since the height of the financial crisis in the first quarter of 2009. Global initial public offerings (IPO) volume was down by 40% on the year before, and follow-ons were down by 22%. According to estimates from US-based consultancy Freeman Consulting, fees from ECM transactions during the year were down by 23% on 2010.
With the global economy still teetering, few see a quick return of the confidence needed for equity market activity to pick up. Despite an up-tick in the US and a handful of opportunistic private placements in the first two weeks of the year, the plunge in profitability and the miserable numbers likely in this reporting session have already set in motion an industry-wide bloodletting of equity bankers.
Shrinking assets
The pain is being most keenly felt in Europe, where the debt crisis continues to unsettle markets. As the sovereign crisis weighs on bank capital, many are looking for ways to shrink investment banking activities.
Towards the end of 2011, Italy's UniCredit, currently in the market with a bumper €7.5bn rights issue, shut its western European equities unit, cutting 130 jobs, and is partnering with Kepler Capital Markets to provide sales, trading and research for some stocks. In January, troubled UK bank Royal Bank of Scotland announced a wholesale retreat from equities and corporate finance globally, shedding as many as 5000 jobs when it closes its cash equities, corporate broking, equity capital markets, as well as mergers and acquisitions units.
Other banks reported to have cut equity headcount in Europe (and elsewhere) include Bank of America-Merrill Lynch (BAML), Credit Suisse, Deutsche Bank, Investec/Evolution, Morgan Stanley, Nomura, Société Générale and UBS.
This present round of consolidation is beginning to look more structural than cyclical
Industry participants say that expensive equity franchises are getting harder to justify and that the industry needs to shrink by about 30%. “Competition in both underwriting and brokerage is fierce and profitability is getting squeezed. There is still serious over-capacity and that has to be taken out,” says one banker. “This present round of consolidation is beginning to look more structural than cyclical.”
Cash equity businesses have taken a big hit. Credit Suisse, for example, is understood to have cut about 10% of its cash equities headcount in London in the second half of 2011.
Shutting up shop
Banks had expanded significantly into equities trading over the past decade in Europe, attracted by the relatively stable revenue proffered by trading shares for money managers. But with the average value of European stocks traded daily in 2011 falling by about 58% from their peak in 2007, according to data from Greenwich Associates, the fall in revenue has compounded a squeeze on commissions caused by increasing competition among brokers and electronic alternatives.
Asia too is feeling the pinch. IPO volumes and revenues, typically accounting for about two-thirds of investment banking revenues in Asia, dropped in the second half of 2011, as global markets fell mainly on worries around the eurozone debt crisis. There were no IPOs between late July and late September in Hong Kong, the world's top destination for IPOs in the past two years. Activity resumed towards the end of the year, but for 2011 as a whole, the region saw a fall in ECM volume of about 44% and a drop in IPOs of some 80% year on year.
A slump in secondary equity markets has cut mergers and acquisitions and primary markets activity in Asia. As in other regions, increased competition has left lucrative sole mandates a rarity and means that more banks are sharing a smaller fee pool. This has prompted many to review their staffing levels.
Among other headcount losses by firms in the region, Macquarie cut jobs at its equity trading division in Asia and closed part of its equity derivatives operations in Hong Kong in November 2011.
Business structures, too, are being reworked. According to press reports, BAML, for example, has revamped its coverage model, moving from the typical industry coverage teams headed by senior bankers with dedicated resources and staff, to a shared pool of analysts, researchers and industry experts.
“The consolidation in the equity sector is long overdue,” says one senior equity banker at a global investment bank. “For the past few years there have been too many peripheral players trying to get into the game. This has pushed down margins to unsustainable levels.”
