Revenues may be down but market share is up for Bank of America Merrill Lynch's corporate and investment banking division. This is giving its global co-head, Christian Meissner, cause for optimism going into 2012, despite the tough markets in Europe and Asia.

The corporate and investment banking business at Bank of America Merrill Lynch (BAML) faces the same headwinds as the rest of the industry. Third-quarter results spelled out the challenges. Its global banking and markets division reported a net loss of $302m, down from net income of $1.5bn in the same quarter in 2010, while revenue declined 26% to $5.2bn, primarily driven by lower sales and trading revenue and investment banking fees. 

Still, Christian Meissner, appointed global co-head of corporate and investment banking at BAML in April, has reason to feel optimistic. The fee pool may have shrunk, but BAML is maintaining or growing its share of investment banking revenues. According to information provider Dealogic, it ranked second for global investment banking revenues in the first half of 2011 (for the third year running) and, so far, it is ranked second for the second half of the year. For the first three quarters of 2011, it ranks fifth for mergers and acquisitions (M&A), third for equity capital markets (ECM) and second for debt capital markets revenues on a global basis. It has worked on some of the year's biggest deals, including four of the top 10 ECM deals and three of the top 10 M&A transactions in the first three quarters of the year.

Game of two halves

Mr Meissner says it has been a year of two halves, with the investment banking fee pool rising 39% in the Americas and Europe, the Middle East and Africa (EMEA), and 18% in Asia-Pacific in the first, before contracting by 9% in the Americas, 16% in EMEA and 29% in Asia-Pacific in the second.

“The first half was very good for us and it looked as if there would be strong recovery of activity compared with 2009 or 2010; then from mid-July, activity declined dramatically. The US is picking up a bit in the past month or so but it’s very tough in Europe and Asia,” he says. “There are a lot of deals in the pipeline, but many of them will now move into next year. The windows in which you can do deals in this market open and close very quickly.”

As the data show, BAML is getting its share of deals. So far this year, it has had a strong run of bank capital deals, which include a €2bn rights issue for Banco Popolare and a €5bn rights issue for Intesa Sanpaolo, as well as acting for Danske Bank on its $3.8bn rights issue, and VTB's $3.3bn share sale. These have helped push BAML into second position for financial institutions group M&A and ECM combined, up from eighth in 2010.

In November, it secured the role of sole international global co-ordinator for UniCredit's $10.3bn rights issue, announced along with the Italian bank's third-quarter results, when it revealed a surprise €10.6bn loss for the quarter. 

The deal, which involves 14 other joint and co-bookrunners, involves significant risk for the underwriters. Notwithstanding a volatile market amid the eurozone crisis, issuing new stock in Italy is a tortuous process; companies cannot pre-approve capital raises but have to call a shareholder meeting, which requires up to 45 days' notice. Once an issue is passed, it has to be open on the stock exchange for five weeks. This leaves underwriters vulnerable to absorbing a large number of shares should markets deteriorate further and investors decline to take up the deal.

The big themes

Mr Meissner declined to comment on the UniCredit deal that is under way, but says internal risk discussions for all deals are increasingly intensive. “Underwriters and investors have to make a call on banks, on the eurozone and on risk. These are big themes that impact on all the risk decisions the bank has to take.”

The tough environment has weighed on all corporate activity, with M&A much lower than was expected coming out of 2010. While US activity has begun to recover, European and Asian volumes are proving less resilient. This means banks are having to make tough calls about the shape and scale of their investment banking businesses. Many are culling headcount to reflect falling volumes and low profitability, with some banks rumoured to be cutting back to 2003 levels.

In Europe, Mr Meissner says banks have to take a stance on the region's future in order to right-size the business.

“Either you think market conditions in Europe are going to continue to be very challenged and it will be difficult to be profitable here for a long time, or you believe it is difficult right now but it is going to recover. If so, you need to maintain your client and product footprint,” he says. “We take the latter view. Other regional fee pools have more or less recovered from the decline in 2008 while Europe remains low by comparison. This means there is tremendous potential for upside when it recovers.”

Investment banking is an important battle ground, but it is not the only business we compete in. If you have a strong corporate bank and a global business, as we do, you will be able to weather the storm

Christian Meissner

Mr Meissner says BAML's business model gives it greater flexibility. After a career spent at broker-dealers, his time at BAML has convinced him of the power of a corporate and transaction banking franchise. The relative recovery in BAML's US heartland is another advantage.

“Investment banking is an important battle ground, but it is not the only business we compete in. If you have a strong corporate bank and a global business, as we do, you will be able to weather the storm. The universal banking model, and the scale that comes with it, is pretty powerful in these markets,” he says.

Reshaping the industry

That said, Mr Meissner says the entire industry is reshaping to fit the emerging regulatory environment. This was also clear from BAML's third-quarter results. Chief financial officer Bruce Thompson laid out the bank's focus for the quarter: strengthening the balance sheet by selling non-core assets and building capital. To that end, BAML reduced the size of its balance sheet by $42bn from the second quarter of 2011 – reducing risk-weighted assets by $33bn from the second quarter (and $117bn from the third quarter of 2010) – and has nearly doubled its Tier 1 common equity ratio since early 2009.

“The regulatory environment is impacting everything we do. You can see the impact of Basel III in terms of our risk-weighted assets, the amount of capital we need to hold, the kinds of business we do, the amount of lending we do and the kinds of structures we commit to. It's fundamental,” says Mr Meissner.

The implementation timeline as envisaged by regulators, however, is almost irrelevant, he adds. “The markets are looking at everything on a 'now' basis, and that is having a huge impact on how we think about our business in terms of accounting and the way we look at our metrics, for example. Whatever the official deadline, the markets are asking us to get there [to Basel III compliance] as fast as we can.”

The future's bright…mostly

Fundamentally, Mr Meissner is fairly optimistic about the outlook for the bank going into 2012. He says the numbers show that the corporate and investment bank has outperformed most of its competitors and gained market share in most of its businesses. And with the merger bedding in, he believes the bank is in a position to deliver to clients the products and services they need.

“We have a lot of momentum, which comes from hiring great people and making progress with clients. We face headwinds, of course, but we have the right business model to continue making progress,” he says.

One of the challenges is to continue growing the proportion of revenues coming from the emerging markets. Mr Meissner says that this is clearly a major push for the bank; senior bankers such as Andrea Orcel, executive chairman of global banking and markets, are focused on these markets, and the bank is continuing to hire in key areas. But he acknowledges that monetising relationships and investment in emerging markets is tougher than expected.

“It's harder than we would have anticipated 12 months ago – as those markets have all seen levels of volatility and uncertainty spike. That said, the macro story is still in place and we have put the right building blocks in place, it's just monetisation of that has been pushed out. But this has always been a long-term game.”

The Asia challenge

Asia is particularly difficult, says Mr Meissner. The market is maturing and the fee pool is very sizeable, but the ability to make money is relatively limited. “Some of the big drivers of profitability, such as the Chinese initial public offering market, have become increasingly competitive and domestic banks are playing a much bigger role,” he says. “There is less of a tradition of paying for M&A advice, so although there is a lot of M&A business, the profitability of that business is significantly lower.”

The trade-oriented nature of Asian growth is also being reflected in BAML's corporate and investment banking strategy. Mr Meissner says BAML is tweaking the business model – with an emphasis on building out corporate and transaction banking – to be able to capture the trade financing business flows that dominate bank business in the region.

“You have to have a strong corporate banking business to monetise the Asian opportunity. We are trying to shape our business to reflect that balance,” he says.

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