European banks look to ECM specialisms to end Wall Street dominance

European banks’ attempts to close the gap on their US counterparts in the EMEA equity capital markets league table were frustrated again in 2023. Not only were they able to unseat any of the Wall Street names that dominate the top five but had little business of their own to do. But issuers are rethinking their approach to market and that will give Europe’s banks an opportunity to respond. But first the deal flow must return.

Inflation and rising interest rates made it another year to forget in much of European ECM, a thin year for issuance volumes and fees, making the competition for the little work there was fierce. The top five banks for deal volume were a familiar line-up: Goldman Sachs, Bank of America, Morgan Stanley, Citi and JP Morgan.

Adding to the pressure on banks, another year of scarce issuance means they are overstaffed but hesitant to cut headcount too far and surrender market share when issuance rebounds.

At the start of 2023, the market was quietly hopeful for a recovery. The memories of 2021, which was one the busiest years for ECM on record because of pandemic-era catalysts such as ultra-low interest rates, were still fresh, and there were expectations that the lows of 2022 would be an anomaly.

Three quarters of respondents to our 2022 ECM survey predicted that volumes in 2023 would be more than 20% higher than the preceding year. Predictions suggested a slow first half before a second half recovery.

But it turned out to be another thin year for ECM issuance in EMEA, with a broken IPO market, a lack of recapitalisations, and a top-heavy blocks market in which a small number of giant trades accounted for a huge chunk of the volume.

In the summer, there were hopes that the IPO market would revive in the second half but that rebound also failed to materialise.

Equity market participants, however, are a positive bunch. In GlobalCapital’s 2023 survey there is more optimism. Half of the respondents expect IPO volumes to be 20% higher or more in 2024 year than 2023, with similar expectations for blocks and other cash ECM transactions, such as rights issues.

Expectations for equity-linked deal volumes are more muted, however, with only a third of respondents expecting increases of more than 20%.

Nonetheless, there have been subtle shifts in which banks are winning which business. “ECM market positions in certain products and regions have evolved slightly in the last two years,” says Stephane Gruffat, co-head of ECM and head of equity syndicate at Deutsche Bank in London. “In 2020, 2021 with technology’s prevalence, many US banks consolidated market share and certain regional boutiques experienced outsized growth.”

In 2023, the market positions of banks in European IPOs reflect lower levels of activity, but also a change in which parts of the region contribute the most volume, Gruffat says, as well as the consolidation in the sector, referring to Deutsche Bank and Numis’s merger this year.

“Away from the IPO market, refinancing and balance sheet support are likely to be drivers of ECM activity in the ‘higher for longer’ environment,” he adds. “Again, banks that can provide solutions across the capital structure, including private capital, and have credit or broking history with the issuers, should benefit.”

Block volumes, while not disastrous, were dominated by a handful of large corporate monetisations in the first half of the year. Three London Stock Exchange Group trades and two Heineken deals account for nearly 20% of the total volume in EMEA up until mid-November.

“Deal volume has been suppressed and the level of confidence among issuers and investors in how well that market is working is at a bit of a low,” says one ECM banker in London.

Private equity companies have been quieter when it comes to selling blocks than many expected and market sources see pockets of distress for specific companies starting to bubble up because of rising borrowing costs.

“It has been a very difficult market for investors to navigate for pretty much the last 18-24 months,” says Tom Swerling, global head of ECM at Barclays in London. “We have had a consistent view that the moment the market is reasonably confident we have reached the widening of the basis between rates and growth, and we see rates stabilising and growth coming back, that will be the environment that appetite for risk assets comes back.

“What we hoped would be an encouraging reopening of the IPO market this autumn did not materialise,” he adds. “We have grounds to believe that next year [2024] we will have a much better functioning IPO market.”

Of the IPOs that did materialise, their track record has been patchy.

Lawrence Jamieson, co-head of EMEA ECM at Barclays in London, says that he came into 2023 expecting a gradual reopening, but that the “post-summer cohort has been mixed”. He suggests that there has been a “flight to liquidity and perceived quality”, where bigger deals have fared better.

The listing of Schott Pharma for example is widely regarded as one of the deals of the year in EMEA, but like Porsche in 2022 it was more of an outlier than a market reopener.

Those companies with business models that are more defensive and predictable to model and that can demonstrate profitable growth have found early favour,” says Jamieson. “What we have not seen is a return to real mid-cap and outright growth [stocks] — but I don’t think they were ever going to be the type of businesses that came to market first.

“Investor risk appetite and tolerance for growth businesses will come but we need more data points to drive that confidence.”

But the path of economic growth is far from certain and banks will not support underemployed business lines indefinitely. Some have taken steps to wind down certain operations. In November, Berenberg, for example, made cuts in its investment bank amid the increasingly difficult mid-cap equities market.

Eight staff were affected in London and three in Paris in the first round of redundancies. All of them work in continental European ECM and corporate finance. The bank cut around 20 US equity researchers a few weeks before that in New York.

Morgan Stanley, despite its lofty position, also cut Angus Millar, its head of UK ECM, in a round of redundancies in May. Before its demise, Credit Suisse was winding down parts of its European ECM team. Goldman Sachs, Citi, JP Morgan all made cuts in their ECM departments as well.

It would therefore not come as much of a surprise if, facing an uphill struggle to keep up amid low fees, more European banks had cleared the roster. However, that has not happened.

“Once again, Europe continues to amaze me,” says one ECM banker working for a US bank in London. “We have always wondered in previous cycles if banks would throw in the towel. Nobody is pulling out of ECM, so it is a very competitive environment.”

The blocks business is not as lucrative as IPOs, says the banker, but most deals have not been competitive risk auctions, they have been mandated, so have provided revenue.

“We’ve also not had too many rights issues, which are usually the other highest margin product when the IPO cycle is quiet,” the banker says.

A third UK banker at a UK bank suggests that there will be “be a lot more primary issuance to improve balance sheets, and we will also see more corporates on the front foot around M&A,” in 2024.

Around two thirds of respondents to our survey on the European ECM market did not expect to be making changes to headcount going into 2024, however, with less than 10% expecting further personnel reductions and 20% looking to add numbers. This suggests many think the worst is in the past, in terms of market volume and redundancies, and banks can begin to look to the future and to growth.

The data does suggest though that moving up or down the league tables will become even more difficult and will lead to increasing competition for fees.

“There is a competitive element in terms of what banks bring to the table and the fear around competition is fee compression, as everyone has to justify their role and business,” says the banker at the US firm. “That is my fear for next year if spreads and margins start coming down.”

According to BNP Paribas’s ECM boss, the bank sitting directly behind the US leading pack in sixth position, while competition for slots on syndicates remains fierce, more issuers have realised that diversification is crucial, given the uncertainty surrounding finding demand in a depressed market.

“It is intense in the sense that everyone chases after everything as if their life depends on it,” says Andreas Bernstorff, head of ECM at the French bank in London. “That doesn’t necessarily change the outcome. I am sometimes surprised about the degree to which everyone spends a lot of time on pitch processes, but you can’t afford to not chase something.

European banks may pin their hopes on persuading their clients that hiring a wider variety of banks will serve them better. “More and more issuers are starting to understand that in this market you need diversification in your lead banks,” adds Bernstorff. “You need diversification in a market that is extremely difficult to read in terms of who is going to be buying your equity, and that is broadly understood and accepted by many more clients than a few years ago. And there are not many banks that can provide that alternative.”

Despite the scale of the deal downturn, European banks have shown resilience and continue to look for gaps to fill.

“When there are so few deals, there is so little between us. It doesn’t take much to move up and down the league tables,” adds the banker at the US bank. “It is competitive and to the credit of the non-big five, everyone has their angles and there is something to be said now about syndicates and distribution, and having connectivity that others don’t.”

While not going as far as to predict an end to Wall Street hegemony, the banker suggests that this approach, amid low volumes, could pay off. “The US banks will continue to have the dominant market share,” he says, “but we will see more European banks on the top line because their pitch does resonate with clients. It is going to be more competitive generally compared to a rising market. When positioning an equity story having big brand banks behind you continues to be important, but there is going to be a lot more thought around putting syndicates together.”

In Europe, competition has been affected by Credit Suisse vanishing into UBS and the latter being far less active in the market. Deutsche has performed well, partly due to the strong year that Germany has had relative to other major European markets.

“When it comes to pitching, these are the sort of markets where clients value banks with a lot of recent experience and big distribution machinery,” says the second US banker.

With Deutsche also building its UK capacity via the Numis acquisition, and in the wake of UBS’s absorption of Credit Suisse, which had a far bigger ECM footprint than its new owner, how 2024 develops is going to prove fascinating.

The market conditions in 2023 have had a disproportionate effect on ECM. Not only has there been a lack of IPOs, but M&A financing is well down. Yet, things have not been so bad that companies have needed to carry out balance sheet repair in ECM, says Bernstorff.

“We will have to see which direction it moves in next year,” he adds, “but I do think we will see a lot more balance sheet repair next year. The companies that rely on a strong balance sheet are finding that it is not as available as before, or that it is much more expensive than before.”