The Deal: `Superbanks' to Dominate the World

NEW YORK ( TheDeal) -- A key executive at a European bank is predicting the rise of "superbanks" that will dominate the global M&A scene amid a backdrop of a continuing euro-zone crisis and a wave of regulation forcing many institutions to pare back. Tom King, Barclays ( BCS) Co-Chief Executive of Corporate and Investment Banking, tells The Deal this means a smaller number of banks would be positioned to provide the full range of M&A services on significant transactions.

"I anticipate it will be a smaller superleague of banks competing for large cross-border transactions," said King. "For the first time in 20 years we're seeing capacity come out of the market. If you fast forward five years we'll only have five or six banks that are really competing for global financial and advisory flows."

King's argument has some basis in recent difficulties. Five years after the financial crisis, many of the big banks are still reeling from a variety of woes. Blamed for causing the crisis and pilloried for bailouts, the major banks have struggled to make a profit in recessionary economies while facing re-regulation and higher capital requirements. And to make matters worse, they have had to cope with a five-year slump in M&A. As a result, many -- particularly in hard-hit Europe -- are cutting back dealmaking activities to refocus at home and retreating from the ambitions of being truly global banks.

For instance, both Swiss giants Credit Suisse Group ( CS) and UBS ( UBS) have announced plans to exit certain markets and regions, following Royal Bank of Scotland Group's ( RBS) earlier withdrawal from M&A advisory in the U.S. and from several European markets.

Will those pullbacks erode their positions on the M&A league tables? The evidence is mixed. Credit Suisse had crept up in global Dealogic rankings from between 7th and 8th in 2003 to 2009 to 3rd and 4th in 2010 and 2011, respectively. But last year it dropped back to 7th and it ranks 9th so far this year. UBS also appears to be faltering. It rose from 7th and 8th in 2003 and 2004 to between 5th and 6th place from 2005 to 2009. But since 2010, it has tumbled back to between 9th and 11th.

Deutsche Bank ( DB) shows no clear pattern, shuttling between 6th and 10th since 2003, with Barclays the only major European bank to have risen in global league tables. The London-based bank powered from 9th and 10th between 2003 and 2008 to 5th and 8th between 2009 and 2012. So far this year it ranks third. Goldman Sachs ( GS) President Gary Cohn acknowledged last month that international banks were taking a "substantial step back." As Cohn told investors at a press briefing in Brazil, "We are actually seeing banks withdraw from investment banking and the capital-markets business."

In fact, while provocative, King's scenario of a league of superbanks does run into some complexities -- as it has in the past. King's notion resembles oft-made predictions in the 1990s that the world was about to be dominated by a tiny cadre of universal banks. That drove bank consolidation for many years (both cross-border and between investment and commercial banking), culminating in the bailout consolidation of the financial crisis.

But for all the furious dealmaking, that small -- four to six -- league of elite big banks never really emerged. Why? The universal banks ran into debilitating management issues and conflicts, some of which continue, such as the trading disasters at JPMorgan Chase ( JPM) and UBS, or the 2008 breakdowns. In many cases, corporate customers resisted the one-stop-shop for competition and specialization. Globalization and development opened up new regions -- Brazil, China, India -- with potentially new bank competitors. And consolidation of the biggest banks was shadowed by the proliferation of specialty M&A boutiques, headed by star advisers.

Many of these boutiques went public in the 2000s and elbowed onto the league tables. Boutiques such as Lazard, Greenhill & Co., Evercore Partners, Moelis & Co. and Jefferies & Co. bolstered their share of global deal volume advisory to 20.8% last year from 15% in 2003. Meanwhile, titans such as JPMorgan Chase, Goldman, Morgan Stanley ( MS), Bank of America ( BAC) (with Merrill Lynch) and Barclays saw their combined share of M&A advisory fees slip from 90.7% to 89.5% over the same period.

While bankers argue about the capabilities needed to advise on large global deals, the discussion is largely hypothetical as volumes remain anemic. Deal volumes in the first quarter were the lowest since the fourth quarter of 2011 and well below the mid-2000s, despite headline-grabbing "megadeals" and bids such as Berkshire Hathaway's ( BRK.A) $12.1 billion takeover of H.J. Heinz ( HNZ) and a $24.4 billion bid by Michael Dell and Silver Lake to take DELL ( DELL) private.

" M&A activity and the economy is picking up in the U.S., while Europe is not there yet," said Eric Shube, head of U.S. M&A practice at Allen & Overy. "But the M&A business is shrinking for everybody."

London-based Barclays itself reflects this confusing prognosis. Of the major banks, it's the latecomer to the party. Under Robert Diamond, Barclays built a fixed-income unit, then moved aggressively into M&A with the purchase of various Lehman Brothers assets after the firm imploded in 2008. But like every other major bank, Barclays has been dogged by scandal and shaken by economic uncertainties. Last year's Libor scandal ended Diamond's tenure. He was replaced by a more traditional banker, Antony Jenkins, who launched a bank-wide restructuring effort that, in early 2013, hit Barclays Capital in the U.S., Europe and Asia. Jenkins told analysts earlier this year that while Barclays' investment bank would continue to grow, "It will grow less fast ... than other parts of the group."

Ironically, that reduction came just as BarCap, the bank's investment bank, was on a roll in terms of M&A, resulting in its No. 3 perch on the first-quarter league tables. The question, as always after cost cutting, is: Will Barclays be able to hold its position with fewer bankers?

And is Barclays' ascension a sign of a coming superleague? One quarter is far too small a sample size to judge. Macquarie Group Head of M&A Jim Frawley noted there is little excess M&A capacity left. "Most firms are pretty lean at the moment and can't get any smaller. It's tough to find senior M&A bankers; there aren't enough of them," he said.

Other observers see a more complex picture. Morningstar analyst Jim Sinegal said the M&A business is likely to stay diversified, with the pullback of European banks being more cyclical than permanent. "A lot of the international banks dealt with their problems much later than the U.S. banks, which recapitalized quite quickly compared to their peers," he said. "Those banks are not down for the count or permanently out of the game. But as long as Europe has problems, clients will be a little more hesitant to deal with banks in those countries."

Another senior banker said Deutsche and UBS would likely continue to be significant players on the advisory scene, suggesting it was more RBS and the French banks -- Credit Agricole, BNP Paribas and Societe Generale -- which were suffering the most from the euro-zone crisis. However, many of these banks were never truly major players in global M&A in the first place and don't appear in the top 25 in global league tables.

King did note that a sharper focus by many banks on their home countries and specific business lines might shrink the global elite but increase the profitability of individual banks. It also should be noted that league table performance doesn't mean profitability. Many a bank has "bought" deals to climb up the tables.

Shube said many European banks would remain challenged in the short term.

"U.S. financial institutions are in relatively better shape than their European counterparts -- the European banks are bigger in relation to their economies and face more challenges," he said.

He added that major divestments by European banks had already occurred, although minor assets could still be sold. A number of European banks have unloaded U.S. and Latin American operations because of the need to repatriate capital to their home country. Wells Fargo ( WFC) earlier bought $9.5 billion of oil and gas loans from France's BNP Paribas and other assets from Allied Irish Banks and Bank of Ireland Group. Citigroup ( C) also paid $1.3 billion for a portfolio of Societe Generale-owned shipping loans last year.

Frawley believes the sale of distressed assets in Europe remains an opportunity, but that sellers still hold an unrealistic view of asset prices. Macquarie indicated it had seen a number of opportunities with U.S. corporates looking at European assets.

"These businesses are franchises that ought to be fine in five years but for now there are still concerns about their short-term performance," Frawley said. "So there isn't a wave of activity yet. It still has to be a unique situation."

Written by Jane Searle in New York

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