Frankfurt For many investment bankers, government contracts are a civil obligation and a knighthood at the same time. Nicolo Salsano, investment bank board member of the German HSBC, describes the self-image of the industry as follows: “Banks are the essential partner of the debt agencies of the states.”
How smoothly the raising of new capital works was demonstrated two weeks ago when Germany launched a 15-year federal bond on the market. The finance agency, which issues bonds for Germany on behalf of the Federal Ministry of Finance, commissioned a syndicate of five banks to place the new security with investors.
The deal is considered a complete success, and the demand from investors was huge. What is striking, however, is that Deutsche Bank was not part of the consortium.
This is the second time that the largest German money house has been short of a prestigious federal government order in just a few months. Even when the finance agency was looking for a consultant for the design of the first green federal bond in February, Deutsche Bank did not get a chance. The French bank Crédit Agricole was chosen. Deutsche Bank did not want to comment on the missed government contracts.
State has to refinance record debt
In the corona crisis, the importance of trading in government bonds increases massively: Germany and other EU countries are as heavily in debt as they were last in the financial crisis. These debts have to be financed by issuing new bonds. State issuers currently have a “sharply increased financing requirement due to the crisis,” confirms HSBC manager Salsano.
Federal securities are usually distributed by auction to a group of 36 banks, which then resell these securities to their customers, such as funds or central banks. But now the finance agency has deviated from its strategy of the past few years and is backing bank syndicates for the first time since 2015.
Debt managers do this, for example, when a new product comes onto the market and demand is difficult to estimate. Adrien de Naurois, who is responsible for the syndicate business with government and supranational issuers at Bank of America (Bofa), says: “Syndicate proceedings can offer benefits to government issuers, particularly in terms of the breadth of investor distribution and the volumes that can be achieved in new segments. “
In its history, the finance agency has only tendered a syndicate seven times. For the first time, Deutsche Bank was not part of the banking consortium for the latest new issue.
This is not just a major setback for Frankfurt’s core business. It also contradicts your own self-image. On the bank’s website, it says about the business with government and supranational issuers, which is summarized under the English acronym SSA: “Deutsche Bank is an established top tier arranger of SSA bonds.”
Everyone is getting pickier
Bond trading is still the flagship of Deutsche Bank. According to the ranking of the data service Refinitiv, the money house was number two in Germany in the area of “Debt Capital Markets” (DCM) in the first quarter of 2020, under which the business is summarized. In terms of fee income, the German bankers were even number one.
According to the refinitive data, Deutsche Bank is strong in the issue business with corporate and high-yield bonds. But as a partner in the issue of federal securities, the institute has held back for years. This shows the ranking list of the bidder banks, which the finance agency publishes every six months. In 2012, Deutsche Bank was still in second place, until 2015 it was always in the top five with a few exceptions. Since 2016, Germany’s largest money house has no longer been among the top five buyers of federal securities.
The problem with this: If you gradually withdraw from these auctions, from the bread-and-butter business, because it is too laborious and does not yield enough, then at some point you will be left empty-handed with the lucrative syndicates.
Deutsche Bank is apparently now feeling this. “You don’t earn anything from the auction of government bonds and the corresponding secondary market maintenance,” explains a top banker from another house. In times of low interest rates, the business is considered to be time and labor intensive and it puts a strain on the balance sheet.
“If I steer purely profit-oriented, I just don’t do some things for the gallery anymore,” says the banker, referring to the reluctance of some competitors. In the end, however, his house decided to continue – also hoping to get involved with syndicates or other mandates from the financial agency: “Here you earn money.”
At Deutsche Bank, the weak placement in the ranking of the financial agency has contributed to the fact that it missed the entry into the consortium for the issue of the 15-year bond. A spokeswoman for the finance agency did not want to comment on details of the selection process. “But it is clear that those banks that have given the federal government strong support in the past as members of the federal government bidding group will be given special consideration.” BNP Paribas, Bank of America, HSBC, Commerzbank and – again – Credit Agricole.
Just a slip?
The participating banks are very happy about success like this. Frank Vogel, BNP Paribas board member responsible for business with corporate and institutional customers, says: “We are pleased about this positive recognition and the opportunity to be able to support the financial agency.”
The economic importance of the public sector is growing in the corona crisis. Here, the preferred position of BNP Paribas in federal emissions, where the margins are comparatively low, also act as a door opener, for example on emissions from the federal states and companies, says Vogel. For example, many federal states had not planned any bond issues before the corona crisis, and now the topic is back. BNP sees “new growth opportunities” in the bond market.
Investors, on the other hand, are noticing Deutsche Bank’s withdrawal from the government bond business. “As a counterparty, I have to say that Deutsche Bank has practically collapsed,” says a senior fund manager. The trade in federal bonds was previously a driving force of investment banking. But none of this can be seen anymore. “They have completely disappeared from the scene.”
Only a few weeks ago he had noticed that Deutsche Bank was becoming more visible again. This could also be related to personnel. Because, according to information from the Handelsblatt, Deutsche Bank recently wooed a high-ranking investment banker and expert in the business with European government bonds from Morgan Stanley. The bank was also able to place a large deal for Italy recently.
It could already be seen in June whether the missed entry into the syndicate of the finance agency was a one-off slip for Deutsche Bank. Then a consortium should find buyers for a multi-billion dollar government bond with a 30-year term.
Disgrace with the green bond
There was already a setback for Germany’s largest money house when the green federal bond was introduced: the finance agency was looking for a consultant, a so-called structural advisor, who was to work out the concept and the capital market presence.
The tasks are broad, as can be heard in financial circles. The bank therefore sets criteria in coordination with all federal ministries as to which positions of the federal budget are classified as sustainable and can therefore be assigned to refinancing through a green bond. The bank also engages one of the major rating agencies, which gives a second opinion, and documents the issue.
The fact that Crédit Agricole, a French bank, is taking on such a key role in the issue of green federal bonds is probably unique in Europe. When the Netherlands placed a state green bond worth six billion euros for the first time last year, ABN Amro was in charge. BNP Paribas and Crédit Agricole regularly monitor the green bond issues of the French Treasury.
Proximity to the state gives banks an edge over the competition in the small but rapidly growing green bond market. Last year, green bonds with a volume of EUR 255 billion were issued worldwide, as the asset manager T. Rowe Price determined. This corresponds to an increase of 45 percent compared to the previous year. Mandates for green bond issues also have the advantage that banks can position themselves as environmentally friendly pioneers.
But as a deal maker, Deutsche Bank was not well represented in the segment for a long time. Between 2014 and 2019, the German bankers never made it into the top ten when it came to accompanying green bond issues. The rankings dominate the French institutes Crédit Agricole and BNP Paribas, the Bank of America and Citi as well as the British bank HSBC.
However, a turnaround is emerging: In the current year, Deutsche Bank ranks seventh in Refinitiv’s green bond ranking. The bank benefits from its strong position among corporate customers, whose need for advice on green financial instruments is increasing. The bank also published its own framework for the sustainability strategy last week. This allows the institute to issue its own green bond at any time.
Even if the non-governmental organization Urgewald criticized loans for the oil company Exxon Mobil ahead of the Annual General Meeting on Wednesday: Bank manager Christian Sewing also committed to the topic of sustainability. By the end of 2025, the volume of financing and investments that are ecologically and socially compatible should increase to more than 200 billion euros. “This puts us far ahead in the industry – not only in terms of the total, but also in terms of the period in which we want to achieve it,” Sewing is convinced.
The bank can also continue to hope for the state syndicates: the selection process of the finance agency “also includes a rotation mechanism”, emphasizes the spokeswoman. There is therefore a good chance that Deutsche Bank will soon be able to take on a government mandate again.
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