NatWest dumps five sovereign dealerships in rates business rethink
NatWest Markets has become the first bank in several years to take a significant step back from European primary dealerships, withdrawing as a primary dealer from Austria, Finland, Portugal, Spain and Sweden as part of a shake-up of its rates business.
The bank has experienced a declining share of underwriting in the space, sitting in 18th place in the IFR euro sovereign league table for 2021, a lower position than in any of the five previous years and extending the slide from 2020 when it finished 15th.
The move draws attention once more to the economics of sovereign dealerships, which can be expensive businesses to run, even if they have been significantly more lucrative than normal in the past 18 months due to a higher number of syndications as part of the pandemic funding response.
NatWest's decision to hand in the keys on the five primary dealerships is the most high-profile such decision since Credit Agricole pulled out of Austria and Ireland and in bills for the Netherlands in 2017.
“One person exiting is actually to the benefit of others; it is one less competitor," said a senior syndicate banker. "At the same time, if you are one of those marginal candidates asking yourself if it is worth it, it does shine a spotlight on it.”
The UK lender will retain primary dealerships with Belgium, France, Germany, Ireland, Italy and the Netherlands, as well as the UK.
One senior DCM banker said he was not surprised to see the bank pull out given the direction the business had taken over recent years with a greater focus on its domestic franchise. "Everyone has been asking for years why they had so many primary dealerships," he said.
Italy is one sovereign that has acted in recent years to reduce the burden on banks, introducing measures to increase the attractiveness of participating in primary dealerships.
“For Italy, it is not like you get actually paid to participate but there is a structure there, basically to incentivise people to stay," said the banker.
“At the end of the day, all the sovereigns that we speak to want to make sure that banks can participate from a sustainable perspective. So, if NatWest can’t do that, it is probably better off they don’t."
The decision to pull out comes less than two months after the European Union conducted the first bond auction for NextGenerationEU funding.
The supranational has adopted a primary dealership approach to help raise up to €800bn under the programme by 2026 after using purely syndications for its Support to mitigate Unemployment Risks in an Emergency (SURE) bonds.
“It is interesting to decide to do this in a year that the EU has started doing primary dealerships and auctions," said a second senior syndicate banker. "It brings to the forefront the cost of these things and I suppose it is a case of weighing up the benefit that is to be gained from potential syndications.”
NatWest remains one of the EU's 42 primary dealers.
Disappointing performance
The bank will also withdraw from euro and US dollar inflation derivatives but will maintain its presence in the sterling inflation derivatives market as well as the cash inflation market for both euros and US dollars.
Alison Rose, the bank's CEO, said on a third-quarter results call last month that while NatWest's capital markets and currency businesses had performed well and remained in line with expectations, the performance of its rates business had been disappointing.
"I remind you where we started with NatWest Markets. Too much of the capital was deployed into our rates business and therefore not focused around our key strategic priorities," she said.
A spokesperson for NatWest Markets said that rates business was still key to the bank's overall markets offering.
“It provides essential support to our corporate and institutional customers across cash and derivatives markets in sterling, euro and US dollars," the spokesperson said.
IFR understands that a small number of employees have been made redundant and that trading and DCM operations have not been impacted by these changes.