Corporate financing: optimism abounds for 2014
M&A looks set to grow in Europe; Citi hopes to build on a breakthrough year
This could be a good year for investment banks, according to the CFOs, treasurers and strategic planning executives at 120 corporations surveyed in the last months of 2013 by Thomson Reuters and Freeman Consulting. Respondents range from regional firms to mega-cap global conglomerates across sectors including healthcare, technology, industrials, media and telecommunications, consumer and retail, energy and power, finance and real estate. Just over half the companies surveyed are based in the US, with the remainder split roughly equally between Europe, the Middle East and Africa, and Asia Pacific.
Key findings are that companies will target more-shareholder-friendly actions in 2014, including disbursing cash holdings through dividends. Firms are seeking to increase profitability, and rising numbers will seek to rebalance their business portfolios, with the focus for M&A on product-line expansion rather than cost-cutting.
Pressure to match acquisitive competitors was seen as a top 2014 M&A driver, particularly in the Americas, where two-thirds of respondents cited it. Despite a widespread belief that interest rates are moving higher, the proportion of global respondents citing favourable financing as an M&A driver rose by half compared with the previous year’s survey.
Debt capital markets bankers are optimistic. "If we see a pick-up in growth in Europe, we would expect a pick-up in various forms of financing from banks," says Paul Young, head of debt capital markets, EMEA, at Citi. "Additionally, new rules like required leverage ratios may also prompt banks to raise new forms of capital such as additional tier 1 that could be a cheaper way to deleverage rather than shedding assets at a discount. All the recent AT1 deals from banks have been well received and we expect the AT1 market to grow substantially over the next years. There is a pool of approximately €150 billion in existing capital that needs to be replaced over the next two to three years.
"We expect confidence in the corporate sector to improve as well on the back of better economic growth, and M&A to pick up as a result. There are a lot of companies out there that in many ways look substantially cheaper than they did five years ago and cash-rich companies that are leaner and better run than they were back in 2008 and 2009. They have lots of room and a chance to impose these disciplines on new acquisitions."
Corporates’ forecasts supplied to Thomson Reuters and Freeman Consulting imply an overall 17% increase in M&A activity in 2014 on 2013, with the biggest likely increase coming from the finance sector, where volumes could be up over 30%. This promise of a further increase in fee revenue from M&A comes even after volume was running 17% ahead of 2012 going into the final stretch of 2013. Equity capital markets revenues also improved strongly last year, especially in Europe, which had previously lagged behind the US, but enjoyed an increase in IPO volume going into December 2013, up 75% from the year to December 2012.
|Manolo Falco, co-head of corporate and investment banking, EMEA, at Citi|
If the volume outlook is good, which firms are best positioned to take advantage and which can cope with the attendant pressures on margins? Bank boards of directors have had five years of listening to investment banking heads pitch that they can deliver good profits and returns when markets pick up. So although 2014 might well be a good year, it will also be a testing one for those who have made such promises. Data on investment banking wallet share in Europe shows one big climber in 2013, with Citi rising seven places in the rankings from 11th in December 2012 to fifth in December 2013, with a market share increasing from 3.44% to 5.08%. With its strong transaction banking business tieing it closely to large and internationally active corporations and with its balance sheet health restored, Citi has been a good defensive business. Can it thrive if markets take off?
"We had a good revenue performance in 2013 and a good performance in the wallet share league table," says Manolo Falco, co-head of corporate and investment banking, EMEA, at Citi. "Two or three years ago, this was an underperforming business as we headed into the European crisis. Since then, we have refocused to concentrate on a smaller group of core clients. We have shown that even with fewer investment bankers, we can still grow revenues and market share. That is partly because we have capital to put to work for our clients, which is somewhat distinctive in Europe."
He adds: "You should never declare victory after one good year, but we go into 2014 in good spirits because the markets are in great shape and we think we have the right business model, which combines investment banking with treasury and trade services and our large markets businesses.
"When we look ahead to 2014, Europe looks like one of the most promising growth areas of the world, which feels almost a little surprising."