The creation of a single financial institutions group at Barclays in February 2013 formalised increasingly close co-operation between coverage investment bankers and capital markets practitioners. The co-head of its FIG EMEA capital markets unit tells Philip Alexander how this has been working.
Before moving into investment banking, Ben Davey qualified as a barrister, practising banking and insolvency law. Two decades later, that legal knowledge proved to be more useful than he could have imagined when he first made the career change. Starting at Rothschild, and continuing after his move to Barclays in 2010, he has advised eight governments on the recapitalisation and restructuring of their banking sectors. In May 2013, Barclays worked on the share offering that enabled Greece’s Piraeus Bank to avoid full state ownership, having previously advised Piraeus on its acquisition of the Greek subsidiaries of Portugal’s Millennium bcp and distressed Cypriot banks.
Eurozone leaders will be hoping that the Greek recapitalisations are the final round of state bail-outs. At the other end of the spectrum, governments in the UK and Ireland were among the first wave to undertake state participation in the restructuring of their banking sectors from 2008. Following Lloyds’ return to profit in the first half of 2013, and Bank of Ireland’s steadily improving access to capital markets, there are growing signs these two governments will also be the first to take a test drive down the exit ramp. Mr Davey says investors see the banking sector as a good entry point to tap into the economic recovery that is emerging in at least some European countries, including the UK.
“As Europe repairs itself, the banks are likely to be beneficiaries, and the relative stability in Europe is allowing banks to slowly unwind support sponsored by the centre of Europe. The European Commission's state aid rules typically required a five-year period to deliver the remedies attached to the support given to the financial sector, so we are approaching that point for a whole raft of measures that were provided for in 2008 and 2009,” says Mr Davey, who is Europe, Middle East and Africa (EMEA) co-head of an integrated financial institutions group (FIG) advisory and capital markets unit created in February 2013.
Combined approach
Alongside his own advisory speciality, Mr Davey's co-head, Richard Boath, brings extensive primary markets expertise. Mr Davey says co-operation between the two FIG functions had been increasingly close since his hire marked the creation of a FIG advisory team in 2010. His own team, while relatively new to Barclays, was able to draw on the large, long-established FIG debt capital markets franchise to enable a rapid build out. He adds that it was the optimum time to hire staff, with other investment banks retrenching. The public announcement of a FIG vertical in 2013 formalised the co-operation between the two functions in an institutional structure.
“We had been pitching jointly for nearly three years, offering FIG clients a full suite of advice and capital market products in one meeting. Clients liked it, so it was natural to join up the management of the group as well,” says Mr Davey.
The structure also reflects the changed nature of the FIG business, not just in terms of the scale of government intervention in the banking system. Previously, investment bankers would discuss strategic merger and acquisition (M&A) plans with the executive suite, while capital markets bankers generally interacted with clients at the treasury level. The financial crisis and wave of regulation that followed it has transformed those priorities.
“These days, the central discussion at board level is about capital optimisation, liquidity management and business line rationalisation, so all our conversations really start with an examination of the balance sheet and then extend into deciding what products are needed,” says Mr Davey.
Those conversations have extended to the advisory team building a closer relationship with sales and trading functions, within the boundaries of internal firewall compliance requirements. Many banking clients have identified non-core portfolios for divestment, and some of these will be better suited to a trading solution rather than an M&A process. Mr Davey says even the traditional reluctance of universal banks to speak to perceived competitors about advisory and execution projects appears to be ebbing away. That allows Barclays to compete with pure advisory banks such as his previous employer.
“I am seeing a much more open dialogue across the industry. There has been a significant change of management across the industry, sweeping away banks’ past perceptions of each other, and there is a pan-industry view that whoever gives the best advice, even if it is a near competitor, should be engaged in that discussion,” he says.
Capital questions
The evolving regulatory landscape has made it difficult for banks to form a final judgement about the shape of their business over the medium term. Overall, Mr Davey thinks the sector is “getting to a point of relative clarity”, especially on the question of eligible capital. The EU’s Capital Requirements Directive (CRD IV) has identified the characteristics needed for hybrid issuance to qualify as Tier 1 capital, and Barclays itself issued two similar contingent capital bonds in November 2012 and April 2013, which will write down to zero if the bank’s capital adequacy ratio falls below 7% – so-called 'high trigger' bonds.
“As AT1 [additional Tier 1] is now better defined by the CRD IV clarifications, the market is ready for that new asset class conceptually. In the past, banks were trying to pre-empt where they thought regulators might come to, whereas now we are into a much more standardised phase,” he says.
But a new note of uncertainty has been introduced since the start of 2013, as US and UK regulators begin to focus more on the pure leverage ratio, which does not factor in the risk-weighting of assets held by the banks. Barclays itself was obliged to raise £5.8bn ($9.04bn) of extra capital in August 2013 to meet the decision of the UK Prudential Regulatory Authority to bring forward the 3% leverage ratio compliance date from 2019 to 2014. It is still too early to know how the new focus on leverage will play out, but Mr Davey believes that if banks solve to gross rather than risk-weighted assets, logic leads to two probable conclusions.
“The first will be a cut in gross assets. The second is the development of asset strategies designed to support net interest margin, which will change the usage of balance sheet. Safer but lower yielding assets such as high-quality residential mortgages would become less attractive as a monoline strategy, which may encourage banks to move up the risk curve, in contrast to the generally defensive environment,” he says.
Reshaping finance
Even before the regulatory focus on leverage ratios, banks were seeking to divest assets that carried high capital charges and were no longer core to their business. Mr Davey says the general recovery and stabilisation in financial markets in 2013 has allowed clients to push ahead with transactions that would previously have been grounded by volatility. Barclays advised Commerzbank on the €5bn sale of its UK commercial real estate business to Wells Fargo and asset manager Lone Star in July 2013.
“Commercial real estate is still the largest component of non-core assets. The improving economic outlook in certain geographies and higher provisioning levels among potential sellers are beginning to bridge the gap with buyers on pricing,” he says.
Mr Davey identifies two other themes highlighted by the Commerzbank deal – the growing role of non-bank players acquiring banking assets, and the deployment of US and Asian balance sheets in Europe as confidence returns. Barclays advised Rabobank on the €1.9bn sale of its asset management unit Robeco to Japanese financial services firm Orix in March 2013. Mr Davey says the ownership of asset management businesses is seen by investors as a supportive factor for insurance company valuations, and he anticipates further M&A activity in that direction.
Leasing is another asset class that carries heavy risk weights for banks, but a high yield for a more liquid investor. Mr Davey says Asian or US institutions enjoying a significant liquidity surplus are ready to take on such speciality finance. Barclays advised Japan’s SMBC on the acquisition of the RBS aircraft leasing business in 2012.
The next step for banks across the EMEA region is domestic, rather than cross-border, consolidation. Even that was virtually impossible in previous years, when so much uncertainty swirled around bank asset quality and valuations. Mr Davey believes investors are beginning to actively encourage management to look at cost synergy-driven, domestic M&A.
“In an environment of low net interest margins, consolidation is a good way to extract low-risk cost synergies and boost returns without taking on unwanted additional leverage,” he says.
