JP Morgan, Goldman and Morgan Stanley dominate ...

June 29 (Bloomberg) -- JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley are extending their dominance in underwriting equity offerings -- helped by the sale of shares of financial firms, including their own.
The three New York-based banks together control 42 percent of the global market so far this year, according to data compiled by Bloomberg. That’s up from 30.7 percent for the three top underwriters in the first six months of 2008 and the highest concentration for any first half in at least a decade.
“Those three firms have weathered the crisis better than anyone,” said Charles Geisst, a finance professor at Manhattan College in New York and author of a history of Wall Street. “In this market, companies will go looking for an underwriter whose financial position is better than others.”
Banks sold about $73 billion of stock globally this year, excluding rights offerings, accounting for 37 percent of the world’s $196.9 billion in equity issues, Bloomberg data show. More than $43 billion of that was by U.S. banks, partly in response to government stress tests or to meet requirements for repaying funds from the Troubled Asset Relief Program.
The U.S. sales include $5.76 billion raised by JPMorgan, equaling 19 percent of the company’s 2009 equity sales, and $6.92 billion brought in by Morgan Stanley, making up 27 percent of its total. Goldman Sachs raised $5.75 billion, or 22 percent.
The biggest bank sale was the $8.82 billion offering by Japan’s Sumitomo Mitsui Financial Group Inc. on June 15.
Recapitalizing Banks
“One trend we’ve seen and will continue to see is the recapitalization of financial institutions as they go through difficult times,” said Mark Hantho, global head of equity capital markets at Deutsche Bank AG in New York. “Many institutions still have exposure to aspects of the economy that will continue to lag. We’ll see banks needing to recapitalize to offset those assets.”
JPMorgan, Goldman Sachs and Morgan Stanley repaid $45 billion to the Treasury’s bailout fund earlier this month in a step toward ridding themselves of government restrictions on lending and pay. In addition to dominating equity underwriting, the three firms rank as the world’s top global advisers on mergers and acquisitions, according to Bloomberg data.
The gains come after Goldman Sachs and Morgan Stanley, the two biggest U.S. securities firms, converted to banks in September amid doubts about the future of a model that combined advisory work with trading and lending. JPMorgan was the only one of the five largest U.S. banks to avoid reporting a quarterly loss during the two-year economic slump.
Higher Fees
Even without selling shares for themselves, the three banks tightened their grip on the equity underwriting business as clients stuck with proven bankers following the collapse of Lehman Brothers Holdings Inc. last September. JPMorgan’s share, excluding its own offering, rose to 14.8 percent this year from 11.7 percent in the first half of 2008, Bloomberg data show. Goldman Sachs’s increased to 11.1 percent from 8.1 percent.
“We’ve seen continued growth in market share as clients look for comprehensive advice and execution across the capital structure,” Kevin Willsey, head of equity capital markets for the Americas at JPMorgan in New York, said in an e-mail.
JPMorgan earned about $910 million selling stock in the first half, up from about $710 million a year earlier, data compiled by Bloomberg show. The figures exclude self-led deals and rights offerings and are based on average global fees.
Goldman Sachs made about $680 million, compared with $490 million in the first half of 2008. Morgan Stanley’s equity-sales fees jumped to about $670 million from $480 million in the year- earlier period.
HSBC, Enel
Additional fees are being earned in Europe, where banks have increased what they charge for rights offerings by 50 percent to 3 percent, company filings show.
The prices “should be sustainable because as long as the cost of capital remains high, it will be difficult for new entrants to come in,” said Patrick Lemmens, who helps oversee about 10 billion euros ($13 billion), including investments in bank stocks, at Robeco Group in Rotterdam.
HSBC Holdings Plc, Europe’s biggest bank by market value, and Enel SpA, Italy’s largest utility, hired JPMorgan this year for the first time to arrange share sales. JPMorgan worked with Italy’s Intesa Sanpaolo SpA and Mediobanca SpA as the lone foreign firm to lead underwrite Enel’s 8 billion-euro rights offering. Spokesmen at HSBC and Enel declined to comment.
Cia. Brasileira de Meios de Pagamentos, the Brazilian affiliate of Visa Inc., raised $4.3 billion last week in the largest initial public offering in more than a year, tapping JPMorgan and Goldman Sachs to work on the deal. A spokeswoman at the company’s outside press office in Sao Paulo declined to comment, citing a quiet period during the IPO.
‘Reduced Competition’
JPMorgan also managed the $8.63 billion share sale by San Francisco-based Wells Fargo & Co. in May, while Goldman Sachs and Morgan Stanley helped Minneapolis-based US Bancorp raise $2.76 billion.
The banks are solidifying their hold on underwriting business as competitors fail or are absorbed into other firms, said Jeffery Harte, a banking analyst at Sandler O’Neill & Partners LP in Chicago, citing Bank of America Corp.’s acquisition of New York-based Merrill Lynch & Co. in January.
“It has reduced competition, and that comes from companies that have exited, but also from companies that are dealing with other issues,” he said.
A similar consolidation is taking place in Europe, where 51 banks underwrote $84 billion in share sales and rights offerings in the first half, down from 135 a year earlier, Bloomberg data show. Rights offers are share sales that give existing investors first chance to purchase the new securities.
Credit Suisse, UBS
Zurich-based Credit Suisse Group AG is leading in Europe after managing the sale of 3.5 billion pounds ($5.8 billion) of Barclays Plc shares on behalf of International Petroleum Investment Co. in Abu Dhabi. It’s No. 5 in global equity sales this year with 6.7 percent of the market, the highest of any European bank.
UBS AG, the European bank with the biggest losses from the global credit freeze, raised about 3.8 billion francs ($3.5 billion) last week by selling shares, as the Swiss National Bank increases capital requirements for the country’s largest lenders. Zurich-based UBS expects to report its third straight quarterly loss for the three months that end tomorrow.
JPMorgan, Morgan Stanley and Goldman Sachs are benefiting from an increase in stock sales in the U.S., which have surpassed those in Europe, including rights offerings, for the first time since 2004, Bloomberg data show. Companies in the U.S. also sold more shares than those in Asia for the second year in a row.
‘A Big Reversal’
Investors were willing to put money into bank stock sales since many of the early deals performed well, driving up share prices for the group, said Joe Castle, head of equities syndicate for the Americas at Barclays Capital in New York.
“There was a big reversal of fund weighting for the sector,” Castle said. “One of the best ways to quickly increase sector weighting is through a new issue, where you can buy a large amount of stock at a static price. Once the first deal gets done and trades well, then you start to anticipate other new deals.”
Shares of financial services companies sold since April 1 outperformed the KBW Bank Index by 7.6 percent as of June 22, according to data compiled by Barclays Plc. Of 182 so-called secondary stock sales, 51 percent traded below their offer price, the data show.
The stock offerings have increased investors’ confidence in the banking industry, said Paul Donahue, co-head of U.S. equity capital markets at Morgan Stanley in New York.
‘Liberate Value’
“What investors are seeing is an ability to liberate value in a stock by improving the capital structure or liquidity of a company,” he said. “While we expect equity-new-issue market conditions to improve, it’s hard to imagine the pace and volume of equity financings that we saw in April and May continuing.”
Those two months accounted for half of all global equity sales in the first half, as 326 companies raised $97.8 billion, Bloomberg data show. Only $3.1 billion of the total came from IPOs.
“The key going forward will be the market’s appetite to buy deals more than the companies’ appetites to issue them,” said Harte of Sandler O’Neill.
A 45 percent advance in the MSCI World Index from the lows of March to this year’s high on June 2 has bankers predicting the IPO market may take off in the fourth quarter after a two- year slump.
“It makes an attractive opportunity if banks are able to act aggressively and decisively,” Harte said.

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