Fees for initial public offerings in Europe slumped to a record low as investment banks including JPMorgan Chase & Co. (JPM) and Credit Suisse Group AG (CSGN) chased deals in a shrinking market.

Banks earned an average commission on IPOs in Europe, the Middle East and Africa of 1.88 percent this year, the lowest since Bloomberg started tracking the data in 1999. The average initial stock sale of more than $1 billion in Europe used eight banks, compared with five a year ago, the data show.

“There’s massive margin pressure in IPO fees due to overcapacity,” said Viswas Raghavan, the London-based head of international capital markets at JPMorgan. “Fees have fallen a lot, which makes it harder to be profitable.”

A total of 89 banks in Europe managed at least one IPO this year, compared with 35 in the U.S., Bloomberg data show, with new entrants including Barclays Plc (BARC) and Moscow’s VTB Group pushing into an already saturated market. At the same time, concern about the sovereign wealth crisis forced companies to pull or delay at least 24 IPOs, the most since 2008.

Credit Suisse, the No. 1 arranger of European initial offerings this year, got an average fee of 1.63 percent, down from 1.8 percent in 2010, according to Bloomberg data. Milan- based UniCredit earned the lowest average fee of the top 10 underwriters at 1.04 percent. JPMorgan got 1.32 percent, a drop from 2.36 percent last year, when it was in first place.

Spokespeople at Barclays, Credit Suisse and JPMorgan declined to comment. Spokespeople for VTB Capital and UniCredit weren’t available to comment.

‘Tipping Point’

Banks struggle to make a profit on initial share sales when fees are lower than 2 percent because that’s roughly the cost for due diligence, research and marketing, according to Arif Khurshed, a senior lecturer at the Manchester Business School.

“We are close to the tipping point,” said Khurshed. “It makes no sense for them if it’s not profitable at all.”

IPOs in Europe generate the lowest fees of any major IPO market in the developed world, Bloomberg data show. U.S. companies paid underwriters 5.4 percent on average, while companies holding IPOs in Hong Kong paid 2.2 percent. The global average is 3.8 percent.

Competition in Europe increased as some banks seized on the opportunity provided by the financial crisis to get into the market. After years of focusing on fixed-income, London-based Barclays began building an equities business in Europe after its acquisition of Lehman Brothers Holdings Inc.’s U.S. business gave it a foothold in the market. The investment-banking unit added 1,800 employees last year as it expanded in equities and advisory outside of the U.S.

Local Players

VTB and Troika Dialog of Russia are both building investment banks from scratch, while the world’s biggest securities firms also face competition as local players in Germany, France, Italy and Spain -- from Banco Santander SA, Commerzbank AG to Intesa Sanpaolo SpA (ISP) -- vie for deals.

Having more underwriters on an IPO may hurt the performance of an offering because banks are less incentivized, said Chris Wheeler, a banking analyst at Mediobanca SpA (MB) in London and a former IPO banker.

“It’s not a business where you get safety in numbers,” said Wheeler. “You want to minimize the number of banks involved to get them to work harder.”

At least 67 IPOs in western Europe are trading below their initial price this year, or about 62 percent of the total, Bloomberg data show. Glencore International Plc, which used 20 banks for its $10 billion dual listing in London and Hong Kong, has dropped about 15 percent since its debut, the steepest decline of any IPO in the region that raised more than $1 billion. Glencore paid underwriters about 1.75 percent of the amount raised.

Global Volatility

While the volume of IPOs completed in Europe this year has risen to $37.1 billion from $24 billion a year ago, deals stalled in August as the global economic recovery deteriorated and concern grew that Europe’s banks may need more capital. IPOs raised $190 million in August and September, the smallest amount for the period since 2003, Bloomberg data show.

Implied volatility for European equities climbed to the highest level since 2008 this month, as traders hedge against a potential debt default by Greece. The VStoxx Index (V2X), which measures the cost of options protecting against Euro Stoxx 50 Index losses, surged 7.5 percent to a 32-month high of 53.55 on Sept. 12.

Deals Shelved

Siemens AG (SIE) said on Sept. 14 it’s postponing the IPO of its Osram lighting unit, joining Evonik Industries AG, a German specialty chemicals company, which will probably push its listing to the end of the year or the start of 2012, people familiar with the plan said earlier this month. Russia’s OAO Mechel (MTLR) yesterday delayed a planned $2 billion IPO of a mining unit, while Ziggo BV, the cable-television company owned by Warburg Pincuss LLC and Cinven Ltd., may postpone its IPO until next year, said people familiar with the matter.

The biggest IPO currently proceeding is the 7 billion-euro ($9.6 billion) sale of Sociedad Estatal Loterias & Apuestas del Estado SA, Spain’s national lottery operator. The company, which began sounding out investor interest this week, hired six banks, including Goldman Sachs Group Inc. (GS), JPMorgan, UBS AG, Credit Suisse, Banco Bilbao Vizcaya Argentaria SA (BBVA) and Banco Santander SA as lead managers, along with three joint bookrunners.

Advisers on Spain’s last IPO, the 3.1 billion-euro sale in July of Bankia SA, earned a 1.2 percent fee, Bloomberg data show. Bankia shares are trading 4.4 percent below the IPO price.

“If you keep cutting underwriting fees, there will be fallout somewhere,” said Manchester Business School’s Khurshed. “IPO managers are taking a big hit.”

Bloomberg