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Primary dealership in spotlight as Credit Agricole backs off
January 13, 2017 / 4:38 PM / a year ago

Primary dealership in spotlight as Credit Agricole backs off

* French bank halts market making in Austria, Ireland

* Bankers say primary dealership uneconomical

* Austria shrugs off loss of bank from roster

By Michael Turner

LONDON, Jan 13 (IFR) - Credit Agricole has joined a growing number of banks exiting eurozone sovereign primary dealerships, putting the economics of the role under the microscope again.

The French lender has thrown in the towel on its primary dealership for Austria and Ireland and in bills for the Netherlands, and bankers say that more could follow.

Banks previously fought hard to gain sovereigns’ favour and get appointed as primary dealers in the hope that they would be rewarded with lucrative mandates for syndications and other business in the country.

However, the appeal has eroded in recent years, with changes in the way banks are regulated taking their toll on the attractiveness of the role.

“No one will say this but no one thinks primary dealerships are a good business,” said a DCM banker away from the French institution.

“It doesn’t make any money and uses up a load of balance sheet. It should be the jewel in the crown of the fixed income business but it isn‘t. The timing surprises me but not that they’re pulling out.”

Credit Agricole reviewed its government bond business to take account of the impact of new regulations on banks’ balance sheets and profitability, a spokeswoman for the bank said in an emailed statement to Reuters.

“I guess they won’t be the last ones,” said one SSA banker, who added that it was “always a hard fight” to pull out of a primary dealer position after spending money and time to establish it.

Another banker agreed this could be the beginning of more of the same.

UBS shocked the market back in 2012 when it shut its sovereign, supranational and agency business.

However, since then, banks have gone the same way and beyond with RBC exiting unprofitable European government market-making in 2013 and a spate of banks quitting primary dealerships in 2015.

Credit Suisse pulled out of the majority of European countries, ING quit Ireland, Commerzbank left Italy, Societe Generale stopped its UK government dealership, and Belgium did not reappoint Deutsche Bank as a primary dealer and dropped Nordea as a recognised dealer.

“When these things come, they tend to come in groups,” said another banker at a European bank. “The same regulatory pressures are on all of us.”

Credit Agricole remains committed to the government bond business and the activity is part of its fixed income franchise, the spokeswoman told Reuters.


Credit Agricole’s move will not convince Austria to sweeten terms for its primary dealers, according to Christian Schreckeis, head of capital markets at the Austrian debt management office.

“It doesn’t change the way we work with our primary dealers,” he said.

“Austria’s primary dealer panel for government bonds consists of 20 banks. Furthermore there are nine more dealers for Austrian Treasury Bills. This is a rather broad panel, also relative to comparable sovereigns.”

But bankers argue that the time is ripe for sovereigns to consider the cost of market making on their primary dealers.

“ have this view that primary dealerships have rebalanced between the cost of entry and maintaining with the revenues banks make, but that’s simply not true,” said the first banker. “And things will get worst when the leverage ratio is fully implemented.”

As far as Austria is concerned, no more banks are looking to follow Credit Agricole out of the door, said Schreckeis.

“We are in constant dialogue with our primary dealers and have had no indication that more are considering it,” he said.

Secondary market liquidity is likely to see a “minimal” effect from Credit Agricole’s exit, Schreckeis added.

Two bankers said that this is mainly because Credit Agricole was not a big player in the market anyway.

“They did the right thing though and should be congratulated, but yet they will be criticised,” said the DCM banker. (Reporting by Michael Turner; editing by Helene Durand and Julian Baker)

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