In the 10 years between 2003 and 2013, annual investment banking fees in Latin America surged from $665 million to $2.1 billion, according to data from Dealogic. Brazil was the cause of most of that growth and it is easy to see why, with that kind of spurt, international banks invested in opening offices in the region – and particularly in São Paulo.
But recently the commodity-filled bubble has burst. Last year fees declined to $1.8 billion. That was just a taster: year-to-date fees in the region are just $718 million and Latin America is on course to have the same total fees as in 2005.
With a decade of growth blown out in a couple of years, banks are asking themselves what strategy should they take to the region? Even during the rapid growth in fees, international banks struggled to develop profitable franchises due to the surprisingly vigorous competition from local banks and high costs of talent and operations.
ECM fees started falling first – from $619 million in 2013 to $350 million in 2014 and just $118 million so far this year. But at least DCM was holding up. No more: $608 million last year has fallen to $284 million YTD 2015.
Next year looks worse as volumes may stabilize but issuance will pretty much rely on sovereigns and high-grade corporates – neither of which pay well. The high-yield and debut issuers will be few and far between. M&A is also surprisingly depressed – FX volatility is probably the cause – with fees falling from $551 million last year to just $200 million YTD.
At least M&A might pick up next year but it is a very specialized area and shifting bankers from ECM and DCM isn’t easy – nor is developing capability and credibility in this area which is necessary to win mandates. Banks may be able to reallocate some human resources and eke out some decent fees from restructuring work, which will likely pick up, but the question is do banks try to keep teams pretty much together in the hope of fees picking up in 2017 or do they retreat?
Shelly Shetty, Fitch Rating’s Brazil analyst, might have pointed the way. In a conference in September Shetty said long-term GDP growth in Brazil – traditionally around half of all capital markets activity – is now 2%, and even that very modest level of growth is going to take a long time to return to.
Add in increased regulatory and compliance costs – and the increasingly dispersed nature of LatAm’s shrinking fee base, both geographically and by asset class – and it wouldn’t be surprising if we see some international investment banks starting to cut and run.