It used to be fairly straightforward to achieve success in corporate broking — the bank that won the most pitches to represent the UK’s biggest companies and amassed the most brokerships was the market leader. But in these capital-constrained times, where every bank is trying to follow their own niche strategy, there is no longer a straight race for supremacy.
Andrew Tusa, co-head of corporate broking at Deutsche Bank says: “We are looking to grow our client list in a focused way — we are not a trophy hunter and decline to pitch more than we do.”
This is now a common refrain. But the idea of turning down an opportunity to pitch would have been unthinkable a decade ago, when banks were locked in a land-grab for the UK’s most valuable accounts.
But the emphasis on capital preservation and returns-based banking models mean banks are becoming much more discerning about which clients they are willing to commit to for the long-term and how they deliver corporate broking is more closely aligned with their overall strategy. If banks want to grow their market share in UK investment banking, they must have a strong broking offering, but not at any cost.
Loyal and long-standing
Corporate brokerships are among the most long-standing, loyal relationships that banks have and historically been have rooted in equity capital markets, with the role of the corporate broker confined to giving market-based advice to companies and lead equity capital raisings when the company needs to.
Over the years, as US banks expanded in the UK they came to realise that these trusted relationships carried a much broader institutional value and could lead to more lucrative business such as M&A advisory mandates.
But corporate brokers jealously guard their relationships and often see their role as keeping the bank’s other products out, rater than letting them in, but the new reality is such that they now see themselves as part of a more integrated whole.
Now, corporate broking is central to banks’ overall UK coverage efforts, and serves two purposes — to continue to provide the nuts-and-bolts of equity advice, as well as acting as a gateway to deliver a broader set of products.
But a broking offering that merely sees itself as a means to winning other business is doomed to failure. “It’s important not to be distracted from the overall aim and that is to deliver excellence in corporate broking,” says Alisdair Gayne, head of corporate broking and head of UK investment banking at Barclays in London. “Unless you execute and deliver well in broking, then the relationship will not last.”
Banks’ ambitions for their broking business now reflect their broader strategic aims. Barclays launched its corporate broking operation five years ago after it built up its equities sales trading and research business from scratch. It has amassed 21 FTSE100 brokerships in that period.
Under its strategy launched by CEO Jes Staley this year, it has identified the UK and US as it two home markets. “In the UK, we have invested in our equity platform and built up a critical mass so it clearly benefits our model to continue to build out our corporate broking offering,” says Gayne. “Our aim is to be number one.”
Mid-cap push
Equity sales trading and research platforms represent huge sunk costs, so the most deals that can be pumped through them, the greater the revenue opportunity. In order to maximise its equities businesses, Barclays is looking to grow its mid-cap offering, as are others.
“The key thing about corporate broking is to have a diverse portfolio of clients,” says Will Barter, co-head of UK investment banking at UBS in London. “The bigger clients typically need more resources than smaller ones, so it’s important to have a broad offering that can give the business stability.”
A bank that has a strong offering among FTSE250 clients can ensure a steady pipeline of business rather than relying purely on a handful of blue chip clients to be active.
HSBC is re-building its presence in broking and, like Barclays, is looking to provide more investment banking services to its corporate banking clients, albeit from a much smaller base.
Credit Suisse is also looking to grow its mid-cap client list and in October revamped the structure of its UK corporate finance business with the creation of a new unit called UK advisory and broking, which comprises its corporate broking and coverage effort for non-FTSE100 companies.
At the same time, Nomura withdrew from corporate broking last year when it closed down its European equity capital markets business. But rivals say this has not decreased competition. “They had a tiny list of clients so it doesn’t really mean there will be lots of mandates up for grabs,” says a rival broker.
The increased focus by big banks on mid-cap clients will result in an intense scrap for mandates. Banks such as Investec and Macquarie are boosting their broking businesses while mid-cap broker Numis has more clients in the sector than any other firm.
As banks’ overall strategies have diverged since the financial crisis, so too have their broking operations. As a result, banks are taking a more targeted approach and making tough decisions about whether to take on new business. David James, co-head of UK investment banking at UBS in London, says: “Banks continue to provide a top level of service to their existing clients but given the pressures in the market they must be strategic and selective about where they focus resources; we focus on high quality active clients, where we have the skill set and can add real value.’’
Battle for supremacy
Because of the long-term nature of broking, the hierarchy has remained unchanged for years with JP Morgan leading the pack, after taking over Cazenove more than a decade ago. Bank of America Merrill Lynch runs a close second and briefly overtook its arch-rival, while UBS completes the top three.
The big growth stories of the last decade have been Morgan Stanley and more recently Barclays, which is aiming to upset the status quo.
Goldman Sachs takes a different approach from its rivals. Rather than going head-to-head with JP Morgan and BAML to win the biggest number of brokerships, it focuses on delivering its integrated offering to a handful of FTSE100 firms. “In a sense, Goldman doesn’t need to be that active in corporate broking because it has an incredible brand in M&A,” says one rival. “Companies already use it for advice so it doesn’t reality need to work its way up the relationship food chain.”
Acting as long-standing broker to a company that is not active ties up resources which can be better deployed elsewhere, particularly as clients do not want banks acting for more than one client in a given sector. For example, in 2014, Anglo-American replaced UBS as its corporate broker, ending a relationship that had lasted 14 years. But Anglo had not been active in the equity capital market for some years and the change paved the way for UBS to become corporate broker to rival BHP Billiton last year.
Equally, acting as broker does not always guarantee a place at the table on M&A deals as the boards of companies have a range of relationships with different banks. Added to that, as blue chip companies have become bigger and industries have consolidated along global lines, banks have a smaller number of companies they can act as broker to without giving rise to conflicts. For example, JP Morgan acted as long-term broker to British American Tobacco but was replaced last year by the company’s long-term M&A adviser, Deutsche Bank. When Deutsche landed a plum role as adviser and broker earlier this year to BAT on its $47bn takeover bid for Reynolds Tobacco, JP Morgan worked on the other side of the deal.
Also last year, UK-listed miner Rio Tinto replaced Credit Suisse as its corporate broker after the bank emerged as an adviser to its rival Glencore. But sources close to Rio Tinto said the decision to replace Credit Suisse with Deutsche was more a refection of the fact that Deutsche had built up a strong relationship with the company.
Return of the retainer?
In the past, banks used to charge clients a small fee or annual retainer to act as their corporate broker but that has become far less common following Big Bang when banks could earn money from offering other products to broking clients. Now, bankers say the retainer model could be on its way back. “Given the pressures in the market, some banks may look at charging again,” says a managing director in broking at one London-based firm.
Corporate broking has evolved and is less just about accessing the equity markets for capital. “Going back more than a decade, companies used the equity capital markets much more to fund themselves but the growth of the global bond market and era of low interest rates has made the debt markets increasingly more attractive,” says Andrew Seaton, head of UK corporate broking at Citi in London. That means successful corporate brokers must be capable of serving their clients with a broader palette of advice than they previously did.
Increasingly, foreign companies are looking for corporate broking advice, particularly when they make acquisitions into the UK.
While banks are taking a more pragmatic approach to chasing new business, companies also look at the value they are getting and are inclined to invite incumbents to re-pitch more regularly than they used to.
Some companies use the same broker for more than a decade while others chop and change more regularly. Others, such as Shell, do not see the value of having a retained corporate broker but will use banks on a horses-for-courses basis. “Some companies effectively ‘rent’ brokers so winning certain accounts as clients may not be as long-term as others” one broker says.
Because broking is a long-term relationship business, it is still rooted in the power of the individual. In recent years, a number of the UK’s best recognised senior relationship bankers such as David Mayhew at Cazenove, Credit Suisse’s James Leigh-Pemberton and Simon Fraser and Michael Findlay at BAML have retired or left the industry, passing the mantle to the next generation. As banks sharpen their focus in the UK in the coming months, the battle for talent could heat up.
