Investment banks can no longer chase rainbows in EMs, such as Brazil; Justice in Brasilia pictured here
The past few years have been a reality check for investment banks chasing rainbows in emerging markets, amid modest M&A volumes, fee compression in the equities business, macro volatility, and stubborn competition.
Fewer houses have the wherewithal to target top five league table positions across DCM, M&A and ECM in emerging markets. Instead investment banks should get smarter by eyeing opportunistic higher margin business, from event-driven financing, complex trades, to the private placement market.
Despite seesawing sentiment, net revenues from EM investment banking, according to Dealogic, have been largely stable at around $11.8 billion in 2012 and 2013, respectively, and $5.52 billion for the first half of this year.
But market shares in ECM and M&A are less concentrated, given volatile deal flow and the large number of arrangers challenging monolithic houses. Investment banks’ net revenue from EM also remains too dependent on low margin DCM, with bookrunners generating $1 billion in the second quarter of this year, roughly the same as ECM, while M&A net revenue was a pitiful $383 million.
Nevertheless, greater EM volatility should yield benefits by helping FICC sales and trading teams to maximize client revenues and innovate new products in risk advisory. Meanwhile, the likes of HSBC, Deutsche Bank and Citi have boosted collaboration between their corporate and investment banking franchises.
New bond issuance volumes and a decent number of regular high grade borrowers have provided bookrunners with an increasingly stable revenue stream, further justifying the costs associated with large scale global DCM franchises.
EM shops have also been forced to diversify product offerings, with Goldman’s franchise looking more evenly balanced from DCM to IPOs to margin financing, boosted by an ever-expansive regional footprint.
These developments are healthy but big challenges remain for bookrunners in Asia, Latin America and EEMEA, which are still arguably over-investment banked, relative to dealflow.
As a capital-light business, M&A is one are where competition between global houses, which face questions over the future of their investment banking businesses, has remained strong, with Credit Suisse, UBS and Morgan Stanley jockeying for advisory positions. But if ECM fee compression in Asia, and the nascent trend among large corporates to use their own in-house M&A expertise continues, it’s not clear how pure advisory shops will cope.
With a handful of IPOs and M&A deals taking place in the Gulf over the past year, European banks that have divested from the region, relying instead on London-based bankers, might also miss out to the US firms when deal flow picks up.
The likes of HSBC, Citi and Deutsche have ridden the EM rollercoaster well in recent years, thanks to the diversity of their business. But all investment banks face headwinds to profits and they need to get smarter – fast.