Investment banking profits are set to be in the spotlight once again as the City watchdog launched an official probe into how they help clients raise money in the public markets.
The Office of Fair Trading yesterday announced a "market study" of equity underwriting and the services the investment banks provide, saying they had received complaints from companies in recent months. The regulator has been informally examining the issue since the turn of the year and is currently seeking advice on the scope of the formal investigation.
The inquiry will examine the operations by groups including Goldman Sachs, JP Morgan and Bank of America Merrill Lynch, the banks that have topped the underwriter rankings drawn up by Thomson Reuters for the past decade. Clive Maxwell, OFT senior director of services, said: "Economic growth and productivity rely on companies being able to raise capital efficiently for investment. We plan to study the efficiency of the equity underwriting market and identify any areas for improvement."
The Investment Management Association (IMA) recently announced an inquiry into the fees, commissioned by the Institutional Investor Council. The investigation will be chaired by the IMA's chairman Douglas Ferrans. He said the OFT's move to launch its own inquiry "underscores investors' own initial views". The IMA's move was prompted by the former City minister Lord Myners, who called on shareholders to hold an inquiry into the fees banks charge on share sales. Many companies were forced to turn to their shareholders to shore up their balance sheets in the wake of the downturn, with an estimated £70bn of equity capital raised in 2009. Others used it to fund bids. Prudential had planned a rights issue to back its acquisition of AIA but it was pulled when the bid collapsed. The insurer was forecast to spend more than $700m in fees to its banks.
Significant equity raises last year included Lloyds Banking Group, which raised £13.5bn in December. Thomson Reuters/Freeman estimated the banks charged £52.9bn for the process. HSBC raised £12.4bn last year, with the fees estimated at £339.6m.
The investment banks, which advise companies on raising equity and act as underwriters and bookrunners, were paid an estimated £2bn for their services, according to the regulator. It added: "Initial discussions have confirmed that there is some dissatisfaction with these services among corporate users of the market."
The study will start this summer, examining equity raised by the 350 largest companies listed in London "to consider whether users' concerns are justified". It will interview the banks, as well as companies and the Government. Issues to be scrutinised include how the banks provide underwriting services, including the level of competition for the work and how the advisory, arranging and underwriting services are sold. It will look at how the services are bought, and how regulation affects the market currently.
The banking community was still digesting the news yesterday, but first reactions were less than pleased. One industry insider said: "There are over 15 banks operating in the City. It is extremely competitive." The source added that fees were generally between 2 per cent and 2.75 per cent of a raising.
Another said after Lord Myners' comments meant an investigation was inevitable. "Banking is a sitting duck at the moment. There are no brownie points for trying to hug a banker."
Biggest equity fees of 2009
The UK banking group raised almost £13bn in April. It paid out £339.6m to 27 advisers that worked on the deal. It paid book runner JP Morgan Cazenove the most at £51.6m.
In June, the dual listed mining giant announced it was to turn to shareholders for $15bn to help slash its huge debts and bolster the balance sheet. It paid nine advisers £191.5m.
Lloyds Banking Group
The troubled retail bank raised £13.5bn in December. Of that £7bn was underwritten by banks which generated a fee of £52.6m paid out to 25 advisers, with six book runners getting £3.9m each.
Source: Thomson Reuters/FreemanReuse content