Investment banking fees in western Europe are falling victim to the Greek debt crisis, as companies from London to Dusseldorf pull stock and bond offerings and put takeovers on hold.
Income from advising on mergers and selling shares and bonds in the region dropped 17 percent from a year earlier to $5.9 billion in the first four months of 2010, the lowest in six years, according to estimates from New York-based research firm Freeman & Co. Fees in Europe are at about the same level as in 1999, the year the euro started, the data show.
“Companies have been held back from tapping primary markets because of the volatility and uncertainty driven by concerns over sovereign debt,” said Ivor Dunbar, London-based co-head of global capital markets at Deutsche Bank AG, the top- ranked adviser on corporate bond sales and mergers in Europe this year.
The decline in fees in Europe contrasts with a 53 percent jump in revenue in the U.S. and a 68 percent increase in Asia, Freeman said. The sovereign debt crisis, which led to an unprecedented bailout package of almost $1 trillion, sapped confidence among European companies. New York University Professor Nouriel Roubini said May 18 that Greece is the “tip of the iceberg” and European governments may still fail to fix their finances.
“We won’t see a move towards normal M&A and capital markets financing volumes until there is clarity on the scale of the issues facing the euro zone,” said Paulo Pereira, a partner at Perella Weinberg Partners LP in London and former head of European mergers at Morgan Stanley.
‘Doesn’t Look Good’
European leaders announced the loan package and a program of bond purchases on May 10 to stop concern that Greece will default on its debt from spreading to Portugal, Italy and Spain. Amid the turmoil, ex-Federal Reserve Chairman Paul Volcker said last week he’s concerned the single European currency may break up.
“It doesn’t look good,” said Simon Maughan, a banking analyst at MF Global Securities Ltd. in London. European fees may stay depressed until the fourth quarter, he said.
The fallout may be lasting, with sluggish growth in Europe being compounded by a regulatory crackdown on banks that may drive some capital markets business away from London to Asian financial centers like Hong Kong, said Tom Troubridge, head of the London capital markets group at PricewaterhouseCoopers.
Gross domestic product in the 16-nation euro region may rise 0.9 percent this year after shrinking 4.1 percent in 2009, according to the European Commission.
Britain’s coalition government, formed this month, plans to introduce a tax on banks and started a commission that will decide how to separate retail banking from investment banking. European Union finance ministers last week approved draft rules to tighten regulations for hedge and private equity funds.
U.S., Asia Fees Rise
In the U.S., fees rose to $10 billion in the first four months, from $6.5 billion in the year-earlier period, driven by revenue from stock offerings and sales of high-yield bonds, according to the Freeman data. Revenue in the Asia-Pacific region jumped 68 percent from a year earlier to a record $5.6 billion in the first four months of 2010, Freeman said. At that rate of growth, Asia will become more lucrative than the whole of Europe by next year, the data show.
“Asia’s share of global volumes will continue to rise,” said Farhan Faruqui, head of Citigroup Inc.’s Asia-Pacific global banking division in Hong Kong. “Asia is home to a growing list of domestic corporate champions who are keen to move to global champion status” and in doing so will need to make acquisitions and raise funding, he said.
China Fee Boom
Fees in China and Hong Kong surged 161 percent, according to Freeman, as the country’s economy boomed. China’s economy expanded 11.9 percent in the first quarter, the fastest pace in almost three years.
Western banks are adapting to China’s rising importance. HSBC Holdings Plc, Europe’s largest bank, moved its chief executive officer to Hong Kong in February, and is seeking permission to sell shares in Shanghai. JPMorgan Chase & Co., the second-biggest U.S. bank by assets, is setting up a securities joint venture in China with First Capital Securities Co., people with knowledge of the matter said in March.
“Investment banks which have invested heavily in China and some emerging markets are finally seeing the fruits of their labor,” said Scott Moeller, a former Deutsche Bank dealmaker and now a professor at London’s Cass Business school. “The West will go into decline for the next few years.”
Greece’s debt crisis froze bond and stock sales as well as takeovers in Europe, said Frank Aquila, a partner in Sullivan & Cromwell LLP’s mergers team in New York.
The value of European takeovers completed in the first four months dropped 68 percent to $62.4 billion, according to data compiled by Bloomberg. Royal Bank of Scotland Group Plc, Britain’s biggest government-controlled bank, abandoned a sale of its aviation-finance unit and Germany utility E.ON AG decided to pull an auction of its Italian natural gas grid last month.
Bond sales also fell, tumbling 44 percent from the same period last year to 271 billion euros. Towergate Partnership Ltd., Europe’s largest independent insurance broker, postponed a 665 million-pound sale of high-yield bonds this month, citing market volatility. National Express Group Plc, the U.K. rail and bus operator, postponed its bond sale in late April.
Companies raised $9.1 billion in 28 IPOs in western Europe in the first four months, compared with no offerings in the year-earlier period, the data show. Still, the sovereign debt crisis forced Russia’s fertilizer maker UralChem Holding Plc and Germany’s GSW Immobilien AG to shelve IPOs worth a combined $1.23 billion in the past four weeks.
Siemens AG shelved a possible sale of its hearing-aid unit in March after bids fell short of the 2 billion euros sought, two people familiar with the plan said at the time.
“Confidence has returned to issuers in Asia and the U.S., but that has not been the case in Europe,” said Philip Keevil, senior partner at advisory firm Compass Advisers LLP in New York. “Many of them are quite concerned about the recovery, and so haven’t wanted to raise equity or debt to finance expansion or make acquisitions.”