It felt like European investment banks were going to make large inroads into traditional US business after the crisis. Firms like Barclays, Deutsche Bank, Credit Suisse and UBS were expected to make gains in market share as corporates moved to spread counterparty risk. But it did not happen.
| As the dust has settled from the crisis, the cultural mismatch between investment banks and depository institutions has become clearer|
Silver Lane Advisors
In November Deutsche overhauled its senior management. John Eydenberg, co-head of investment banking for the Americas, was given the new role of vice chairman of CIB for the Americas to drum up senior client business, while Tom Humphrey, who had been global head of credit and head of corporate banking and securities in the Americas, stepped down. Zia Huque was made head of global markets in the Americas.
Barclays, which looked like it was scaling back in investment banking, appointed a new chief executive in October — US investment banker Jes Staley — a move that is likely to put it back in the ring. Credit Suisse has undergone a big overhaul, shedding its US wealth management business, but keeping hold of its US investment bank. And UBS in the Americas just made a series of senior shuffles with Bob McCann, who was president of UBS Americas, leaving the role to become chairman.
If any of the European investment banks are hoping for an increase in market share, however, they could be disappointed, because it’s not only the European banks that are struggling in the US. Since 2009, JPMorgan, Bank of America Merrill Lynch, Goldman Sachs, Morgan Stanley and Citi have all lost market share of US investment banking fees — from a combined 54.4% to 44.4%.
Who has benefited? Many mid-sized players such as Jefferies, Lazard, and SunTrust Robinson Humphrey have all picked up market share in the last five years. In ECM, competitors like Cowen and Co, and Leerink Partners, which specializes in healthcare, are taking share. In DCM, Mizuho is a new entrant this year to the top 15. But, the biggest reason why market share is becoming diluted is that there are simply more mid-sized investment banks than there were in 2009. Firms like Moelis and Centerview Partners, for example.
Dick Bove, vice president of equity research at Rafferty Capital Markets, says regulation was the straw that broke the camel’s back for many senior bankers. “Taxing the large institutions, capping their activities and investigating them was enough for seasoned individuals to leave and either set up on their own, or join an investment bank that had fewer pressures,” he says. “That has leveled the playing field.”Peter Nesvold, managing director and head of strategy at Silver Lane Advisors, agrees that some of the gains of mid-sized firms are due to this exodus of senior bankers from large firms. “As the dust has settled from the crisis, the cultural mismatch between investment banks and depository institutions has become clearer. Moreover, compensation at some banking conglomerates — even for top producers — can be influenced by bad decisions by others in completely unrelated parts of the business. Many of these top producers have departed for more entrepreneurial, ‘eat what you harvest’ environments, as bankers with deep Rolodexes should be able to execute even on smaller platforms.”
Nesvold says the pressure is likely to remain from the mid-sized players who he believes may be better-suited to investment banking than the large global financial institutions.
“The mid-sized investment banks, which follow the more traditional advisory-only model, reflect the roots of investment banking more so than today's behemoths,” he says. “Investment banks, in the classic sense, were nimble organizations; they differentiated themselves using intellectual capital, not balance sheets.”
This boost for the mid-sized investment bank may also been in part due to client demand. According to the National Center for the Middle Market, mid-sized companies — prime fodder for mid-sized investment banks — are doing very well.
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While they require financing, they aren’t doing M&A deals, however. Bove points out that this year has been dominated by mega-deals, which have actually halted the growth in market share that mid-sized investment banks had been enjoying.
That said, even large issuers seem to be willing to take a bet on boutiques. Centerview advised Warren Buffett on the Kraft-Heinz merger. It was founded in 2006 by a group of senior investment bankers from various firms on the Street and since then it has advised on $750 billion in transactions.
The extra competition is not what the large investment banks want to see. According to analytics firm, Coalition, based on third quarter earnings, revenue at the world's 10 largest investment banks is on course to decline again this year, by 2% from 2014, to $148 billion. Revenue for the largest 10 that include those mentioned in this article, slipped by a combined 8% over the third quarter.