IFR National Champions of the ECM 2008

When IFR conducted a survey of British investment banking a year ago, all of the major players were in an upbeat mood. At the time storm clouds were beginning to gather over the financial markets, with the fallout from the US sub prime crisis starting to spread overseas, combined with a stalling in leveraged finance activity. Despite these worries, few expected the crisis to be as long standing or as deep as it has proved to be. "This has been the most challenging market I have seen in my career, where any improvements have been both slight and temporary," said Mark Grant, head of debt capital markets at Lloyds TSB. "The crisis caused a massive shift in how banks interact with each other and continued stresses on capital levels means funding is still a challenge for many banks."Gloom has spread from the banking sector into the wider economy and the outcome for the coming year looks uncertain at best. As a country exposed more than most the to financial sector, the UK banking industry has told more than its fair share of horror stories, of which the now nationalised Northern Rock is the grisliest. Even if the country's major banks have avoided the excesses that led to the demise of the Newcastle-based mortgage bank, share prices have been hit savagely across the board with none escaping sizable write downs.RBS has probably had the most dramatic year. It outbid it domestic rival, Barclays, in acquiring ABN AMRO with a €71bn cash break-up bid. RBS was then forced into a £12bn rights issue - the largest in British history - and reported its first ever lost with a pre-tax half year deficit of £691m. This loss was a reversal of a £3.6bn profit recorded across the same period in 2007 and came after write-downs totalling £5.9bn. In the firm's global banking and markets division – where the capital markets and investment banking activities sit – income fell by 10% before one-off items and write-downs, to £5.3bn. But losses and write-downs took the division into a loss of £3.2bn."The market is clearly pretty difficult in certain areas an we have seen significantly reduced volumes in real estate, securitisation and our leveraged finance businesses. However, notwithstanding reported writedowns our underlying business has held up well,"" said Leith Robertson, deputy CEO, Global Banking & Markets. "In the large corporate market we have been active on all of the year's major transactions in Europe, and in the the US we are now #5 in the corporate market. Our businesses in areas such as rates, currencies and commodities have all done very well and have taken market share"If RBS's woes are dramatic, they are by no means unique. After raising a £4.5bn chunk in fresh capital, Barclays reported a 33% drop in pre-tax profit for the first half of the year at £2.75bn, after taking a writedown of £2bn on the value of risky assets. At the investment bank, profits fell 68% to £524m after a £1.98bn writedown on credit market exposures net of a £852m gain on holding its own debt.Lloyds TSB also reported sharply reduced profits at the first half of the year with a 70% reduction compared with the same period last year at £585m. Given the bank's more conservative stance, it took write downs of £387m in the first quarter, on top of a £280m writedown in 2007.Despite this depressing news, British banks remain focused on their strategies and convinced that the crisis will offer opportunities to expand existing business lines."Overall market conditions are challenging, specifically in the areas that have been severely impacted by the credit crunch such as leveraged finance and securitisation," said Jerry del Missier, president of Barclays Capital. "However, in other market sectors, investors are still active and we've been well placed to take advantage in areas such as interest rates, forex and commodities.""We've been helped by the diversity of our business and though there has been a slowdown in several areas, we have been able to outperform in others," he add

At the beginning of 2007 those looking at UBS and Credit Suisse would have little doubt which institution would have survived a once-in-60-years financial crisis in best shape. UBS ran its capital markets and investment banking operations conservatively – too conservatively, many of its employees said. UBS had also steered clear of the apparently building excesses. It wasn't the most enthusiastic player in leveraged finance and punched below its weight in structured finance. Its New York traders may have built up some positions in US sub-prime CDOs but only in the Triple A stuff, and what exposure the bank had was well hedged.CS, on the other hand, was still doing its best to live down the free-wheeling, fast-living days of Credit Suisse First Boston. CEO Brady Dougan was trying to reign in any excesses but the surely the DNA of the firm had excessive risk-taking and rampant ego-led banking built in? If there was one bank that was dangerously over-exposed to leveraged finance, surely it was CS. It was also no slouch at structured finance, with a considerable business devoted to CDOs and sub-prime mortgages.Like with much conventional wisdom, the last 18 months or so have overturned these assumptions spectacularly. CS, it turns out, was the disciplined institution that had best read the runes of the approaching cataclysm. UBS, on the other hand, had bought up much of the 2005 to 2007 vintage US sub-prime CDOs with the abandon of a drunken sailor buying rounds in a waterfront bar.Looking on the bright sideDavid Soanes, UBS’ head of global capital markets in the EMEA region, is adamant that its capital markets business has been essentially unaffected by the wider damage that the credit crisis has done to UBS."It's been a lights out year in DCM. Fees are up, market share is up and we're doing a greater than ever percentage of high-value products, which means revenues are up," he said.This has been helped by the fact that the areas on which the bank has traditionally concentrated its efforts, and built up considerable expertise – FIG and emerging markets, for example – have been amongst those areas where issuance has continued to thrive.ECM-wise, Soanes identified the bank's many successes, arguing UBS has more than held its own in 2008. He is nonetheless more downbeat about the near future, in particular the prospects for issuance for the rest of the year, purely because of the likely issuance climate. It has done a good job with rights issues, he stressed – which is likely to remain a bright spot for the rest of the year – while the bank's top FIG franchise will ensure that it will still grab its share of those deals.He denied that UBS has been forced to avoid certain transactions because it simply doesn't have the balance sheet strength to compete with rivals, citing rights deals for the likes of RBS to support his case.Even the structured finance picture is not all doom and gloom: UBS ABS pros in Europe said they are as busy as ever structuring deals for banks needing eligible collateral to repo with the ECB and the Bank of England. True, such deals aren't as lucrative as properly distributed RMBS transactions – only arranging fees are paid – but they still keeps the wolf from the door.The undeniable fact that UBS has never been an institution that led with its balance sheet has also helped the firm in these tricky times. "We're well practiced in winning deals thanks to our advice – not our balance sheet. Others are not so good at that," said Soanes.Overall, he argued the crisis has provided opportunities that UBS is well positioned to take advantage of. "Clients have realised that the ability to raise money is not a commodity. And that stands us in good stead,” he said."We've never been a bull-market bank. This is our sort of market – ducking and diving, bobbing and weaving and winning deals. That's what we're good at."Talking to many at UBS it is hard to avoid the impression that they have been pleasantly surprised – if not c

Unperturbed by the global credit squeeze and choppy financial markets, Renaissance Capital, Troika Dialog, VTB Capital and Kit Finance are all planning to expand. And growth is expected across new markets and in product areas, as well as by bulking up existing businesses.Brushing off the market downturn and the increasingly bearish investor sentiment towards Russia, Troika and Renaissance are meeting the growing threat from global banks by beefing up equity teams. Both have poached senior staff from competitors, and are willing to meet fast-growing salary demands.Russia’s share market defied the global trend until May this year, when it collapsed from its peak on the back of falling oil and government assaults on steel maker Mechel, and British-owned company TNK-BP, by its Russian joint venture partners. The benchmark RTS index is now down 40% from its May peak, stirred on by the conflict in Georgia.The result: Russian equity issuance has all but disappeared. The volume of IPOs in the first half of this year plunged to just over US$400m - one deal - against 10 IPOs worth US$15.83bn in the first half of 2007, according to the PBN Company.Even secondary offerings by Russian companies have been hit: only US$3bn was raised in the first half of 2008, 69% less than the US$9.6bn raised in the same period last year.Meanwhile, Ukraine’s national investment banking leader, Dragon Capital, said it’s planning to ride out the storm of plunging markets, equity and debt issuance in the former Soviet country. Only three Ukrainian companies braved plunging investor sentiment to list a total of US$540m in shares on the LSE in the first half - beating the total out of Russia for the first time.Despite the financial market wobbles and the resultant effect on capital markets, none of the investment banking giants of the former Soviet Union have revealed plans to scale back yet.A temporary setbackAccording to Ruben Aganbegyan, the CEO of Renaissance Capital, Russia’s most successful, home-grown investment bank, the fundamentals of the Russian economy are unchanged. The current fall in issuance is only a temporary phenomenon, he said. Renaissance plans to continue increasing its equity and research businesses, despite the market downturn, in response to the fierce competition for talent from international majors.The bank’s strategy now is to focus on maintaining its lead in equity sales and trading, ECM, and M&A advisory, while simultaneously pushing into new areas, he said. These include structured debt, derivatives, and what he terms “complex corporate solutions” - such as providing financing to M&A clients. “Equities has always been a strong business for us, right from the start. We were involved in 12 of 22 deals in Russia last year; M&A has also been strong for us, as well,” said Aganbegyan.“We are developing further our debt business – that is our priority. Plain vanilla and also structured debt [are] areas of growth for us. DCM is another area where we are active, but we want to be doing more, once the market returns, in rouble bonds, credit lined notes.”Yet it may take a long time for capital markets to bounce back. “ECM will continue to grow as companies will continue to grow, and debt won’t be able to accommodate all of it,” he said. “There will be a lot of secondary offerings, and companies coming to the market anew.”M&A business was plentiful last year, but has currently – though, he said, temporarily – dried up. It hopes to stave off foreign competition by maintaining a lead in its on-the-ground presence. “The key in the business model is local presence - where clients are located,” said Aganbegyan. “When Russian companies want quick access to capital markets, who do you turn to? Someone who lives in NY, or someone who lives in Moscow? A lot of people have started to grow their businesses here, but I think it’s not that easy ... there’s a limited supply of professionals, it’s not easy to build a team.”From debt to equitySecond-tier b

Deutsche Bank is the German capital markets leviathan. Its dominant position in the country looks set to increase now that Commerzbank is expected to close down much of the investment banking activities of Dresdner Kleinwort following its acquisition of Dresdner Bank from Allianz.Deutsche has also weathered the credit crunch storm better than many of its global peers. Based on a bearish call on US housing issued by one of its analysts ahead of the rest of the Street, the bank positioned itself well for the early stages of the crisis. But it was subsequently caught out, ending up overloaded with positions in super senior tranches, contributing to a €1.56bn loss in fixed income trading in the third quarter of last year. It recovered that position somewhat in the fourth quarter of last year, however, and notably recorded no writedowns for the quarter. That meant that the bank managed to record a 5% increase in annual pre-tax profits, to €8.7bn, although profits fell 22% to €4.2bn in corporate banking and securities – the division that contains the corporate and investment bank’s trading and origination activities.Conditions again worsened after that, with more writedowns on Deutsche’s leveraged loan positions helping to take it to its first quarterly loss at group level for five years in the first quarter of 2008.Its corporate banking and securities division lost €1.6bn in that quarter, after writedowns of €2.7bn, taking the entire bank to a pre-tax loss of €254m. CEO Josef Ackermann described conditions as “the most difficult in recent memory”, and said that the quarter had seen the most intense pressure on the banking industry since the credit downturn had begun.That worsening assessment has had a sharp impact on the bank’s share price, which had until this year held up reasonably well through the second half of last year (see accompanying chart). The stock is now trading at levels last seen in late 2004.The second quarter of this year saw the bank record a loss of €311m in its corporate banking and securities division after writedowns of €2.3bn, although at a group level the firm reverted to profitability. And client flows and trading performance – especially in FX, money markets and rate products – have started improving again, as well as results in prime broking.Ackermann has remained bullish on the firm’s prospects, based on its ability to record a profit over the course of the first year of the crisis. “A year has now passed since the beginning of the credit downturn, and over this period, Deutsche Bank has earned a total of €3.1bn in net income,” he said in his Q2 2008 message to shareholders. “We have shown our strength in difficult conditions.”Formidable in bondsThe bank has remained a formidable force in the euro bond markets. As of late August this year, the bank had retained its first-place rankings from last year in all international bonds, all bonds in euros and all Euromarket issues, according to data from Thomson Financial league tables.Debt bankers at the firm said the message internally from the very first day of August 2007 was that the world had changed: all work was to be done on new assumptions – meaning the firm often appeared to be more bearish than rivals. In particular, deals it led for Nationwide and HBOS in September, as well as several issues in its own name, attracted criticism for pricing wider than initial guidance or for appearing to be out of line with the market. Nevertheless, bankers involved in those transactions said they have not tightened since, and now look very rich. They argued that it was others’ perceptions of what the market would bear at the time that were out of line.Bankers at the firm said there has been a huge focus on the debt side of the business on making sure that clients – both issuers and investors – have a proper understanding of the nature of the crisis and of what market conditions will allow. "A high priority for us was education. Keeping on top of what the changing co

Market leaders BNP Paribas and Societe Generale, along with smaller rivals Natixis and Calyon, have enjoyed differing fortunes since the credit crisis began. It appeared SG might be first to fall in January, when it uncovered a €4.9bn trading scandal and lay the blame at the door of Jerome Kerviel. In the days that followed, most observers expected SG to be acquired, with arch-rival BNP Paribas named as the frontrunner. In the event, SG was probably saved by adverse market conditions and a French President unwilling to sanction the inevitable job losses that would have resulted from an all-French tie-up. Banks appeared to have had their fill of acquisitions. The bid battle for Dutch bank ABN Amro had only just finished, and the perception was that the winning bidder, Royal Bank of Scotland, had scored a pyrrhic victory with its massive cash bid in the middle of the credit crisis. No bank had the stomach and few the resources, to launch a bid and besides, chief executives were more interested in assessing the damage in their own trading books than carrying out due diligence on others. One of the few banks with the firepower was BNP Paribas, SG’s bitter rival. Despite weeks of speculation, no bid materialised, and SG set about repairing its reputation following a successful emergency rights issue. SG’s smaller rivals Calyon and Natixis have failed to exploit its weakness because of problems of their own, with both recording massive losses. Calyon’s CEO Marc Litzler – one of the derivatives wizards who shot to fame at SG – resigned in May, as his division lost €795m (US$1.2bn) in the first three months of the year. The French bank said it was forced to take a further €646m of writedowns against its credit holdings. Both Calyon and Natixis have taken further losses. Litzler was soon joined by former colleague Jean-Pierre Mustier, who stepped down as head of corporate and investment banking. France has an unrivalled reputation for producing top equity derivatives bankers, and the departures of Mustier and Litzler represent a blow to its pride. Before the credit crisis took hold, the biggest challenge facing the four French banks was the continuation of their international expansion. Calyon and Natixis have since retrenched and will spend the rest of the year cutting costs and implementing new strategies. This leaves the two market leaders, BNP Paribas and SG, fighting to deliver on their strategic promise of further international expansion and cross-selling. Your loss, my gainBNP Paribas, France’s biggest bank by market value, fell under the spotlight when the credit crisis reached Europe last summer, after suspending valuations of three investment funds it managed, citing the impossibility of valuing the underlying assets with the ABS market closed. Since then, BNP Paribas has proved one of the banks least affected by the crisis. Along with Goldman Sachs, BNP Paribas is the only investment bank not to have made a quarterly loss since the crisis began. Jacques D’Estais, head of corporate and investment banking at BNP Paribas said: “A year ago, we held an investor day where we outlined our strategy and our aims have not changed. We have not had to re-think our business model.” However, the bank abandoned targets set this year for its investment banking business, saying “visibility” was too low given challenging financial market conditions. The bank said during the first quarter that its CIB business would surpass the record €8.3bn revenues of 2007. The CIB business rebounded in the second quarter, when revenues of €1.9bn were down 24.5% compared to the record level in the second quarter 2007, but up 41.3% compared to the first quarter 2008. The bank took a €542m hit to cover counterparty risk to monoline insurers, which sent revenues in the fixed income business spiralling to €389m, although the bank said it posted record revenues in interest rates, foreign exchange and commodities. The financing business posted record revenues o

The global credit crisis has hit banks in the Benelux region hard. Such is the extent of the interconnection between national capital markets, even players like Dutch bank NIBC, with its traditional focus on domestic corporate lending, lost heavily through their subprime exposure. Approximately two-thirds of NIBC’s trading book losses were a result of subprime exposure. Yet Dutch banks have, on balance, remained relatively insulated from the global problems, said Claire Curtin, an analyst at Standard & Poor’s in London covering banks in The Netherlands. Aside from the top two or three, most institutions are domestically focused in their business. The impact has therefore been felt predominantly in terms of their limited access to wholesale funding.“It’s still tough to get that funding, so banks have looked to create liquidity on their balance sheets in different ways,” Curtin said.With liquidity hard to come by, it has been a slow year for capital markets activity of any kind. In the Benelux region, as elsewhere, equity issuance has been very modest, limited to companies that needed to recapitalise, said Han de Jong, global head of research at Fortis. With the region’s equity markets heavily weighted towards financials, that made it especially tough in Benelux. “However, if you look at where banks are trading now in terms of their P/E ratios, it would seem that a lot of the bad news has been priced into these markets,” de Jong said. “But the uptrend for the markets and the Benelux banks depends on the outlook for global picture.”Despite the wider credit crunch, debt issuance in Europe – Benelux included – has maintained a decent pace this year. Benelux banks have followed the general European trend: focusing on lending to their regional corporates. The banks with the stronger connections in this space – such as NIBC, which has always focused on middle market Dutch companies – have done well. ING, too, has gravitated toward domestic corporate lending. “This now makes up about half of the bank’s profits,” S&P’s Curtin said. According to central bank statistics, bank lending numbers throughout Europe remain fairly strong, particularly loans to the corporate sector. But future debt underwriting by the banks will depend on the rate of corporate defaults, which many expect will rise significantly. Benelux banks need funding to finance future capital markets activities, and that will depend largely on their deposits. Thus far, retail banking in the Netherlands hasn’t suffered to the same extent as it has in the UK, said Curtin. She predicted the region will remain robust on the retail front.For capital markets business generally, experts envisage things remaining muted – in Benelux and beyond – for some time, as banks struggle to regain both balance and financial flexibility. Fortis – which is still digesting its ABN AMRO acquisition – lost a whopping €41bn in its structured credit portfolio. Yet the broader picture was more upbeat, as the group recorded revenues of €268m at the end of the second quarter – a two percent increase from Q1 – despite the difficult market conditions and the negative impact of the liquidity crisis. “This highly seasonal client-driven business entails very limited credit and market risks and continues to benefit from increased volumes,” Fortis stated in a press release issued at the end of Q2.On the credit portfolio management side, the bank recorded a positive revaluation gain of €183m in the first half of 2008 (compared to a €37m negative revaluation in H1 2007), resulting from widening credit spreads in the first quarter. Despite highly volatile spreads during the second quarter, active portfolio management substantially contained the negative revaluation, Fortis said. Its credit portfolio management team converted the entire hedging portfolio into single-name credit default swaps in the last quarter of 2007. This covered an average total notional amount of €13bn and was divided between counterparties

The Spanish economy has ground to a halt. After a 13 year stretch of continuous growth, second quarter GDP slowed to a paltry 0.1% quarter on quarter (QoQ), led by the construction sector, which contracted by an eye-watering 2.4% QoQ. With the worst yet to come, banks will be looking to batten down the hatches. Domestically, the emphasis is on what areas to invest in, rather than prioritising which business lines should be cut, and by how much. "Right now we are playing very defensively" said Carlos Stillianopoulos, head of origination at Caja Madrid. It is hard to imagine any bank, Spanish or international, acting differently.Nonetheless, those that have a global reach, like Santander, have been very active over the past year. Since the onset of the crisis it has acquired Banco Real in Brazil for €11bn, sold Antoveneta in Italy for €9bn and acquired consumer finance assets like GE and RBS. It has also launched a recommended offer to buy the UK mortgage lender Alliance & Leicester. Besides its acquisitions, the bank has also intensified credit monitoring procedures, said the global head of credit at Santander, Ignacio Domínguez. Because the amount its Spanish clients can borrow is now more limited, "in some respect we are a global bank and our clients in Latin America (Brazil and Mexico) and Europe (Italy and France) have compensated,” he said. Yet Santander’s modus operandi has not changed that dramatically. "We do deals with the names we know well and in that respect there is little need to shed risks, as the ones we have are the ones we want to keep," Domínguez added. In fact, with its massive balance sheet, Santander is now well placed to capitalise on the less crowded competitive landscape. “18-months ago global corporate lending was much more competitive," Dominguez said. "Now many of our competitors have disappeared, so this crisis has presented [us] with an opportunity to gain ground." Santander is playing a senior role in some major loan syndications with its bigger clients, including Gas Natural, BHP Billiton and Inbev. It also has two to three other large deals in the pipeline that are likely to be announced over the course of this year. Funding sortedYet this is not the main problem: "The main issue we, and all other international financial institutions are having right now, is funding," said Stillianopoulos. After setting up an MTN programme for the first time, Caja Madrid has issued close to €2bn in private placements this year, along with several senior unsecured deals amounting to nearly €3bn. "All in all we have done close to 80% of our funding this year, it hasn’t been easy, but we can still raise money," Stillianopoulos added. Caja Madrid is a net lender in the interbank market, to the tune of €4bn. It has €10bn deposited with the Bank of Spain, available to be pledged as ECB repo collateral in case of emergency. Since its funding need for the next 18 months is €12bn, it has secured its requisite near-term foreseeable liquidity needs. Caja Madrid also has a formidable retail funding platform, something that has done much to support its Double A ratings. "Liquidity is mainly supported by a stable retail deposit base, which accounted for 54% of total lending," Fitch said, recently. Like many banks across Europe, Spanish institutions have sought to expand their retail franchises, something that Santander – Spain's largest bank – had started to do well before the crisis broke out. Its efforts have been most noteworthy in Spain, particularly through its “we want to be your bank” programme, which provides free banking services to linked customers. But the Santander Group has also embarked on many comparable projects elsewhere, to bring new participants – both individuals and SMEs – into the banking system for the first time.Moreover, the firm has raised €18bn in medium and long-term debt during the first half of 2008, according its CFO, Jose Antonio Alvarez, putting the bank “on track” in terms of its funding

Inevitably, the profitability of most Nordic financial institutions has been eroded in line with the times, said Miguel Pintado, an analyst at Standard & Poor’s in Stockholm who covers regional banks. Yet no single bank has supported any major losses, Pintado said, as none had direct exposure to the subprime market. Unlike banks in the UK or elsewhere in Europe, Nordic banks haven’t been forced to increase their capital reserves, and none have experienced a significant loss in revenue. So while Nordic banks have not been totally immune to the credit crisis, they have certainly had an easier time of it than much of the rest of Europe.“Of course, capital markets activity has been quiet, and you can see that in the top revenue line of most banks as they have had to face some mark-to-market losses,” Pintado said. “But this hasn’t been to the extent that there is any implication on bottom line profitability, and while banks have tightened their underwriting criteria, the economic prospects in the Nordic region tend to be more stable than in Western Europe.”The relatively stronger position of the Nordic banks vis-à-vis their European peers will enable them to take advantage of the opportunities that come about as the credit crisis dissipates, said Henrik Schmidt, an analyst covering Nordic banks for Keefe, Bruyette & Woods. For the most part, the Nordic banks have strong capital ratios, and some have already leveraged the benefits: Nordea, with its strong balance sheet and credit rating, has played a significant role underwriting European leveraged syndicated loans this year, both within the Nordic region and outside it. Iceland’s Kaupthing bank is also gearing up to exploit new opportunities. Its negligible exposure to the structured credit market has allowed it to preserve its Tier One capital ratios and maintain strong liquidity, said Thordur Palsson, managing director of business development for Kaupthing.“It’s difficult to say for how long this crisis will continue and we are prepared for it lasting a long time,” Palsson said. “But we believe that as the dust settles, those banks that are in the strongest position will profit and we want to be one of those.”Nevertheless, Iceland’s banks (Kaupthing included) are highly leveraged and wholesale funded, said Schmidt, and this is causing problems. The inability of these banks to fund themselves in either local or overseas markets could have an impact on their ability to do business going forward.As is the case elsewhere in Europe, Nordic capital markets activity – the underwriting of bonds, loans and equity, domestically – has been quiet. Many companies in the region are themselves wrestling with macro factors like high commodity prices. The economic slowdown in the Baltics is another factor, particularly for banks like Swedbank and SEB, both of which have a large exposure to the region. Economic deterioration there would likely be mirrored by the quality of their loan books.There are also increasing concerns about the covered bond markets in Denmark and Sweden, which both enjoy deep and liquid mortgage bond markets. Covered bonds constitute a large part of the bond portfolios of Danish and Swedish banks. In the case of Danske Bank and SEB, covered bonds fund their entire mortgage book, S&P’s Pintado said. Until recently there has been no problem; even in the worst of times, when it was virtually impossible for anyone to issue senior debt anywhere, the Danish and Swedish covered bond markets remained very liquid.“Most of the investors that invest in those bonds are local domestic pension funds, so there hasn’t been a single default in Denmark on the mortgage side for over 75 years,” Pintado said. That might be about to change. The Danish housing market is starting to look shaky. In August, Denmark’s central bank bailed out Roskilde Bank for US$7.43bn, on account of the poor quality of its real estate loan portfolio. Deteriorating house prices in Copenhagen mean it is likely other ba

The Eurozone’s third largest economy has often been a laggard in the region over the last 10 years. Since it plunged into negative growth in 1999, the Italian economy has been struggling to get out of first gear. Just as things were starting to look up in 2006 and 2007, global credit woes dragged Italy back into the doldrums again. Economists now expect Italy to sink into recession after the government reported a surprising 0.3% contraction in the second quarter of the year from the quarter before. As a sign of the economic malaise afflicting the country, output in the second quarter of 2008 was zero – the lowest figure since the first quarter of 2003. The International Monetary Fund forecast in July that the Italian economy will grow at a slower rate than the rest of the world’s advanced economies. If Italy’s economy continues to contract in the third quarter as economists now expect, it will mark the country’s fourth recession in just 10 years.For the capital markets, this paints a bleak picture. The shaky conditions in the local economy had already forced a shake-up of the corporate and banking sectors in recent years. Following a series of mergers and acquisitions, there are now just a handful of players in the investment banking industry with any clout. Unicredit Group dwarves its rivals. Business in the domestic market has been sluggish, even for the top banks. Issuance has been hit this year as liquidity dried up across markets and investors stayed sidelined. In the corporate bond market, issuance in the first eight months of 2008 was a measly US$4.5bn, compared with 2007, when issuance reached $56.5bn – a 213% rise on the previous year. Things look similarly miserable in the IPO market: having topped just over $7bn in 2006 – a 126% increase from the year before – IPO issuance slipped to $5.6bn in 2007. In the first eight months of this year just $185.4m of IPOs had been issued in the market. Bankers said they expected it to get a lot worse before it gets any better.“It is a very, very difficult marketplace,” said Piergiorgio Peluso, head of investment banking for Italy and co-head of the entire investment banking unit at Unicredit Group. “The corporates are not spending money. If they are lucky enough to have low leverage, they will want to keep it low. If their leverage is high, they will want to try their best to postpone refinancing.”At Unicredit, the worst hit sectors of its investment banking business have predictably been securitisation, ECM and leveraged finance. Italian corporates have not only been affected by the slowdown in the local economy and the adverse credit conditions, but also high oil prices. But, unlike other Italian banks, Unicredit derives almost half of its revenues from other shores; Unicredit has identified Central and Eastern Europe as important regions for its expansion, and has already established a footprint across countries as diverse as Turkey, Bulgaria, Serbia, Poland and Russia.Respite from abroadAgainst a backdrop of tough local conditions, Unicredit’s strategy of overseas expansion is paying off. The group reported a 10% drop in second-quarter earnings this year, compared with the same period a year ago. By comparison, its subsidiary in Serbia, Unicredit Bank Srbija, reported a healthy 41.6% increase in profits in the first half of the year, versus the corresponding period in 2007. Italian corporates keen to establish their presence in the growing economies of the Central Eastern European block continue to provide business and opportunities for the bank, according to Peluso. Unicredit has forecast economic growth of around 4% for the Central Eastern European region for 2008-2010, which will likely outstrip that of Western Europe. M&A is likely to be especially strong in that part of the world, the bank predicted.“In the eastern region, Russia, Poland and Turkey are probably the most active markets right now,” Peluso said. “There are still some cross-border deals, in terms of Italian