Barclays took the axe to its ABS business last week but its apparent pessimism over the prospects for the European market left many bankers unconvinced, coming as policymakers redouble efforts to revive the sector. The bank dismantled its securitisation business due to disappointing activity in the market, a source familiar with the matter told IFR. The move affects at least four of the trading team and other members of the research and sales operations.
Bankers at other houses were surprised by the decision, although they admit that profitability remains challenged. Some of the people affected will be moved to other fixed-income credit teams, while others have been placed at risk and will most likely leave the bank, the source said. Barclays' downsizing flies in the face of attempts by European policymakers and central bankers to boost confidence in the sector.
"The move has been under consideration for the past year and reflects the lack of issuance and trading activity in the ABS market, and therefore the lack of business opportunities," the source said. "Unlike the US market, the European market never really recovered post-crisis, and despite everyone expecting it to be revitalised, it's undergoing structural changes that the group doesn't see as immediately positive." The source said those efforts had so far undershot expectations and failed to meaningfully impact the market, but some sceptics questioned the motives and the timing of the decision.
MOTIVES "It's definitely not a good headline to hear that one of the main players doesn't see value in that area," a banker said. "But I am not convinced about that argument. They're walking away from a market that one should want to be joining, if anything." Another banker thought the decision was more likely to have been driven by a change in management.
The bank is currently undergoing a business overhaul under the lead of John McFarlane, who took over the top seat in July vowing to trim down less profitable activities. Ironically, players elsewhere in the ABS market have started to raise their hopes in the past year. The presence of the ECB in the market, the European Commission's work to lighten the burden from post-crisis capital requirements, and the general rhetoric on the benefits of ABS for the real economy have slowly lifted the stigma attached to the sector. This in turn brightened the mood of the industry for the first time in years, with second-tier banks adding resources and existing players gearing up for more business.
However, new issuance is still struggling to pick up and liquidity remains limited. Around EUR80bn of ABS was placed last year, according to IFR data. Some analysts had expected EUR100bn, or more, of issuance in 2015 on expectations that the ECB purchase programme would spur originators to print new deals. But at the current run rate it will probably fall short of that. At its peak, the ABS market saw volumes of EUR1.1trn in 2008, according to research group Bruegel.
"The reality is that it's still a very niche market and it's very hard to make money there," a third banker said, pointing out that other sectors offer much easier opportunities. "The market is surely not at the stage where you need to add extra people," the first source said. "But it is an incremental business and you want to be there for its lifecycle," he said. The continued commitment to the sector by big investment banks such as J.P. Morgan, Morgan Stanley and BAML during the market's darkest days, he said, suggests it makes more sense to remain positioned for an uptick now.
REGULATORY CONUNDRUM But there's another very practical angle to the story that may actually shed light on Barclays' move, the second banker said. While politically positive, a softening of the regulatory stance is a double-edged sword for the actual ABS business, as it squeezes spreads lower and thus profits.
"The regulatory burden made the revenue potential of that market quite interesting over the past two to three years," he said. "But from a dealer's perspective, that incremental revenue opportunity is not going to be as strong now." The banker argued that during the recent policy adjustment process, traders and investors were well placed to make gains from the consequent spread tightening.
Most of the dealers who focused on more profitable segments such as non-conforming RMBS or CMBS during the adjustment phase have now shifted to loan portfolio disposals and away from bonds, he said. Critics argued that banks should take a longer-term view and a more holistic approach to the ABS business, across issuance, origination and syndication. If secondary business is weak in a certain phase, opportunities on the structuring side would, for example, offset that weakness, the first banker said.
The improving regulatory backdrop is set to bring the whole ABS business more in line with competitor markets from the capital, funding cost and liquidity standpoints. "The direction of travel is definitely encouraging," the second banker said. "But the speed of change may not be fast enough to keep dealers in," he warned. "In that sense, the commitment of ABS dealers is going to be under scrutiny," he said.
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