Looking for a financial services job with a big future? Try high yield and investment grade capital markets in Europe. Both are on a big growth trajectory according to analysts at Deutsche Bank. However, some banks will benefit more than others. If you work in debt capital markets (DCM), you need to know this:
1. European corporates are still stupidly reliant on bank loans for their debt-financing
Disintermediation is like the party guest who never arrives. Banks have been banging the drum for the concept (referring to the moment when European corporates raise debt through the markets instead of through bank loans) for years. Lloyd Blankfein predicted disintermediation would be a revenue driver for Goldman's European business back in November 2012.
And yet, 15 months later, Deutsche says European companies are still as over-reliant on banks for debt financing as they've ever been. The graph below, included in today's presentation, uses figures from 2011 for Europe, but you get the message: American corporates raise money through the markets, Europeans don't.
2. But loans are now-loss making for European banks at the margin
Deutsche says the situation above is unsustainable and that loans to large corporates in Europe have become "structurally unprofitable." Funding costs for European banks have risen long-term and loans are typically funded for banks at wholesale rates. European banks can no longer afford to keep making big loans to European corporates.
"Today, a bank issuing wholesale debt and lending to corporates at a rate competitive with the bond market would achieve a 18bp negative spread," says Deutsche.
Corporates will need to raise money by issuing debt through the markets (disintermediation).
3. Nothing will happen immediately
Don't expect an immediate rush to disintermediate, however. In the short term, Deutsche says the switch to raising money through the markets will be slowed by regulations like Dodd Frank, EMIR, and MIFID II. These all require investment and new technology, which will slow banks' ability to respond to the opportunity immediately.
4. And then, there could be a $6bn revenue opportunity
Long term, however, Deutsche thinks disintermediation in Europe will create an opportunity for banks to increase their revenues by $6bn, split as follows:
- Debt capital markets revenues of $3bn (of which 75% from investment grade, 25% from high yield).
- Secondary trading revenues of $3bn (of which most will come from trading the new corporate bonds.) - Bond salespeople and traders should also benefit.
Deutsche admits that there's a danger that if the disintermediation process occurs too slowly (say over a decade), then this revenue benefit could fail to materialize - volatility and technological change will swamp the structural growth in Europe's credit market.
5. When it happens, Deutsche Bank will be the big beneficiary
Ultimately, Deutsche's note implying there's a great future for European DCM and credit trading jobs also implies that there's a great future for Deutsche Bank. Deutsche was the leader in European non-financial corporates debt issuance last year, followed by BNP Paribas, JPMorgan and HSBC. Despite Blankfein's talk about the promise of disintermediation, Goldman ranked 8th.
DCM bookrunners: Euro zone transactions only, non-financial corporates, 2013
Source: Dealogic, via Deutsche Bank