RBS Securities Capitulation a Blueprint for Banks in Europe

RBS, the U.K.’s largest government-owned bank, said yesterday it will sell or close its equities, mergers advisory and equity capital markets businesses, eliminating 3,500 jobs. UniCredit SpA, which in November shut part of its equities unit, Nomura Holdings Inc. and UBS AG (UBSN) are also pulling back.

Banks running securities arms that are laggards in their industries may follow RBS in shuttering units because a decline in trading and a jump in the cost of operating under incoming regulation is rendering some businesses not viable, say analysts. Competition among dozens of lenders in Europe for services such as underwriting initial public offerings and advising on mergers and acquisitions contributed to record low fees, exacerbating the pressure on returns for firms that are relying on the region to drive growth.

“Middle-ranking banks are being squeezed as volumes have collapsed,” said Christopher Wheeler, an analyst at Mediobanca SpA in London. “The banks that are neither betwixt nor between can’t afford the cost base they’re running.”

Fees Decline

Europe’s investment banking fee pool, which comprises payments to banks for M&A advice, loans and underwriting debt and equity sales, posted the worst quarter since 2004 in the three months to December, according to New York-based research firm Freeman & Co.

Investment banking fees in Europe dropped to $4.2 billion in the fourth quarter of 2011 from $4.7 billion in the previous quarter and $7.2 billion in the second quarter. Fees hit a record $11.1 billion in the second quarter of 2007, the data show.

Competition has driven the average fee for an IPO in Europe to a record low of 1.87 percent, according to data compiled by Bloomberg. That is down from 2.5 percent in 2008 and 2.2 percent in 2007, a record year for IPOs.

Earnings in the 25 banks in Bloomberg’s European bank index are forecast to fall 40 percent from 2010 on average, driven by profit warnings among the U.K. banks, UBS and Erste Group Bank AG, according to a survey of analysts by Bloomberg.ifbIntlKmePA

Profit Declines

Profit at RBS’s investment bank fell 85 percent in the third quarter to 80 million pounds ($123 million), from 549 million pounds in the same period a year earlier. Nomura (8604) posted a 46.1 billion yen ($600 million) loss for the three months ended Sept. 30, the first since the quarter ended March 2009, driven by declines in trading and investment banking income. Pretax losses from overseas operations swelled to 52.4 billion yen, the most in at least six quarters.

“Low returns are an industry issue, although pressures are greatest for businesses that lack scale and have weaker market positions,” Raul Sinha, an analyst for JPMorgan Cazenove in London, said in a note to clients. “In addition, a structurally negative increase in fixed costs for the sector has removed a natural offset to revenue volatility.”

RBS is reversing a decade of expansion, closing units and cutting employees at the securities unit, led by John Hourican, by 29 percent to 13,500 by 2015. The Edinburgh-based bank will focus on fixed income, foreign exchange and transaction banking.

RBS Shares Rise

“The tough economic outlook and regulatory changes will impede our progress — as it will for all banks,” RBS Chief Executive Officer Stephen Hester, 51, said in a memorandum circulated to employees yesterday. “I expect other banks to follow our lead in their own differing ways.”

Shares in RBS rose 6.6 percent to 24.5 pence at 10:40 a.m. in London, giving it a market value of 27 billion pounds. They have risen 22 percent this week.

RBS’s move is similar to Barclays Plc’s decision in 1997 to sell its Barclays de Zoete Wedd’s equities and advisory business for about 100 million pounds to focus on fixed income and foreign exchange, said Mediobanca’s Wheeler. The retained division was renamed Barclays Capital. (BARC)

“Both of them ended up with sub-scale equities businesses,” Wheeler said. “If you look at the track record for BZW, at a rather better time in the market, they had to give it away.”

UBS, Societe Generale

The resignation of two former Lehman Brothers Holdings Inc. executives from Nomura this week may allow Japan’s biggest brokerage to revamp the business, which has stumbled since it bought assets of the failed U.S. firm in 2008. The firm plans $1.2 billion in cost cuts.

Last year securities firms globally culled more than 200,000 positions, according to data compiled by Bloomberg. Among them, UBS, Switzerland’s biggest bank, said in November it will reduce staff at its securities unit by 2,000, or 11 percent, as it scales back in investment banking and focuses on wealth management.

Societe Generale SA (GLE), France’s second-largest bank, said it may eliminate 1,580 jobs in corporate and investment banking. UniCredit, Italy’s biggest lender, cut 130 jobs as it exited sales, trading and research for western European equities. UniCredit’s investment bank will tap Kepler Capital Markets SA, a French securities firm, to provide some research.

In Europe, 160 lenders underwrote stock sales last year, a $90.6 billion market, data compiled by Bloomberg show. In the U.S., less than half the number of firms, 72, managed $159 billion of stock offerings, the data show.

Nomura, Barclays

Notwithstanding the competition, the top 10 underwriters in Europe controlled 71 percent of the market. RBS, which is focused on Europe and the U.S., ranked 26th while the top nine underwriters, led by Goldman Sachs Group Inc. (GS) and Deutsche Bank AG, (DBK) run global businesses.

Banks expanded in equities trading over the last decade in Europe, lured by the stable revenue provided by buying and selling securities for customers. The credit crisis prompted firms such as Nomura and Barclays, Britain’s second-biggest bank by assets, to exploit the collapse of rivals to expand their equities operations and seize market share. Meanwhile, brokers that dominated the industry sought to maintain their leads and build on their positions.

Mergers Activity

M&A activity hasn’t recovered from the banking crisis of 2008 as companies opt to preserve cash rather than spend on acquisitions. The total value of M&A deals last year was $2.3 trillion, 44 percent lower than in 2007, according to data compiled by Bloomberg.

“It is expensive and difficult to reverse these decisions so banks have put them off as long as possible,” said Matthew Clark, a bank analyst at Keefe, Bruyette & Woods Inc. in London. “We have had two years of depressed investment bank earnings.”



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