Awards for Excellence 2014: Best emerging markets investment bank

Best emerging markets investment bank:

Citi

ECM fee compression, modest M&A volumes in the second half of last year and the fact that DCM – the only asset class where the share of wallet has outpaced 2007-era levels – remains a low margin business, have all added to the earnings challenge for investment banks in EM.

Against this backdrop, Citi remains the undisputed emerging market investment banking champion with a strong advisory and origination business across the world, backed by its status as a market leading trader with a diverse global corporate banking presence.

Citi, over the past year, has led some of the largest, most innovative and important transactions across the world, buoyed by European bank retrenchment and, like HSBC, thanks to efforts to maximize the wallet share of corporate clients through more effectively connecting its corporate banking franchise to capital financing.

In a volatile period for dealflow, Citi’s sheer sprawl across geographies and across products stood it in good stead. Over the past year, the firm turbo-charged its Latin American franchise, leading DCM with a 10.6% market share, and giving JPMorgan and Credit Suisse a run for their money in ECM and M&A, respectively, backed by its presence in 24 countries in the region.

Its strength in CEE debt markets proved a buffer for its regional investment banking business – due to weakness in ECM and M&A volumes across the board with regional volatility – given the issuance volume of $113 billion over the awards period.

In a year of ECM fee compression in Asia, the firm posted pole position in Asia-Pacific international G3 bonds, with a 10% market share, with 213 deals executed in 11 countries, from the Republic of Sri Lanka’s $1 billion deal to the $800 million credit enhanced notes for Citic Securities, while arranging 55 M&A deals. Citi sharpened its transaction banking offering in Asia, led the $400 million sale of Damac Real Estate Development in June 2013, which was the largest IPO from the Middle East since 2006, and, in aggregate deal value terms, posted its best ever year in Africa.

Given its historic presence in local rates, credit and FX, which typically contributes 30% to 40% of the group’s FICC revenues, the sheer diversity of Citi’s capabilities, from multi-currency payment facilities, risk advisory to equity underwriting, remains unmatched.

Competitive dynamics

Its weakest spot in Asia remains offshore renminbi issuance, where HSBC is uniquely positioned. But, while its universal banking proposition echoes HSBC, it remains much stronger in the traditional investment banking and advisory business of ECM and M&A akin to Goldman. Nevertheless, while Goldman has made concerted attempts to grow its global DCM business – no mean feat given fee compression and its modest balance sheet as a broker-dealer – Citi continues to rival the might of HSBC in DCM volumes and towers over Deutsche Bank in ECM.

The changing competitive dynamics of EM investment banking also boost Citi’s relative position, even though the bank has also cut back consumer operations in a clutch of frontier markets in recent years.

Tyler Dickson, global head of capital markets origination at Citi, says: “Post credit crisis, many of our competitors have reduced their footprints to their core product or regional strengths, changing the dynamics of emerging market banking. Meanwhile, Citi continues to operate in over 90 DM and EM markets with a unique global perspective. Importantly, major banking clients’ need for global/cross-border perspective, advice, and execution has never been higher. This is occurring at the same time that the market’s appetite for EM exposure is changing more quickly – with risk on and risk off cycles accelerating. In this environment, Citi is uniquely able to read DM to EM flows, and vice versa, and work with issuers and fund managers to structure attractive financings and distribute EM deals effectively.”

That said, EM still-represents a modest proportion of the balance sheet of global banks ex-Citi and ex-HSBC, while regulatory and FICC earnings challenges have yet to constrain the appetite of some competitors. Despite group level challenges, Deutsche still sees the EM advisory and origination space – seemingly in contrast to Barclays – as a priority business, while eyeing greater risk advisory as well as sales and trading opportunities.

What’s more, Goldman has braved the cyclical volatility in equity deal flow through growing its DCM business, diversifying its regional footprint, sharpening its China franchise, and eying new business streams, such as margin financing. Bank of America Merrill Lynch will also be an interesting competitor to watch in the years ahead, as it recalibrates its EM focus while boasting balance sheet capacity. Citi, however, remains the undisputed market leader across products.

In fact, if it weren’t for the rise of local financial intermediaries, it might be feared Citi posed systemic risks to emerging market corporations and governments, given its large market share in trading and origination that is so vital in supporting economic growth.