Given how smart the people running investment banks are supposed to be, the pro-cyclical strategy they apply to their businesses is always something of a surprise.
Clearly capital markets activity – and therefore fees – are directly correlated with economic activity, but waiting for economic growth before entering new markets tends to make international banks late for the party. Take, for example, Goldman Sachs’ reputation in Brazil: the bank tried repeatedly to move onshore when the economy enjoyed optimistic forecasts, only to pack its bags when it failed to deliver the desired revenues or the economy faltered.
Coming and going is expensive: start-up investment costs in many markets are huge, and multiply if you are trying to recruit just when the talent market heats up.
Leaving isn’t cheap either: disposing of human and physical resources always incurs pay-offs and write-offs.
The list of the latest banks to exit or retrench from Latin America should probably come as no surprise. Bank of America Merrill Lynch has reportedly cut its teams in Colombia and Brazil. The bank has shifted its equities brokerage to New York. Deutsche Bank recently said that it would cover the region from New York – as did HSBC in Brazil; as did Barclays.
It’s the new model – at least until there’s an upturn, and banks find they are losing mandates to those with origination teams on the ground. And then back they go, trumpeting onshore hires as a signal of their commitment.
While there is nothing inherently wrong with a suitcase-banker approach, its flaw is glaring when management tries to toggle between it and an onshore strategy as the business cycle waxes and wanes.
Surely it is much better to commit through good times and bad – and hope clients reward your consistency in the good times with a market share that compensates for high fixed costs in a downturn? Or maintain a strategy of flying in experts in good times and bad – and play to the structuring, execution and investor-coverage strengths of offshore teams to get into deal syndicates?
A mixture of tactics risks getting the worst of both.
This time, though, it could be different. The recent rush of international banks out of the region is nothing new – banks have exited in crises before, only to return. But this time the poor economic climate is being reinforced – and in some cases superseded – by the costs and the risk impact of regulation and compliance.
Also, the growth in the size and sophistication of local banks’ investment banking franchises means they have both credibility and the need for diversification to take advantage of any gaps when international banks pull back – making any potential return for the international banks all the harder.