Last year was a very good one for investment banks in Latin America. Data accumulated by Dealogic show that net fee revenues for the year were up by more than 30% on the previous year. Net revenues from all public deals in equities, debt, loans and M&A reached $1.37 billion last year, compared with $1.04 billion in 2005.
The difference is even more striking when the figures are compared with 2002-04, when average net revenues for each year were just $639 million.
Between 2002 and 2005, the biggest revenue earner among banks in the region was either Citigroup or JPMorgan. This was not surprising given that both had (and still have) strong debt capital markets franchises and that DCM was by far the most prosperous area to do business.
Last year, however, there was a big turnaround. The two banks perched at the top of the table were Credit Suisse and UBS. The former generated $235 million of net revenues and the latter $163 million. Citigroup and JPMorgan followed behind in third and fourth place, with $121 million and $92 million, respectively.
What was the reason for the Swiss banks success? The simple answer is their dominance of Latin Americas equity market. Last year, for the first time in at least five years, fees generated in the regions equity capital markets outshone any other sector, reaching 32% of total net revenues, compared with 24% in 2005. By contrast, the level of fees generated in the debt markets was just 26% of total net revenues, compared with 36% the previous year. Net revenues earned in M&A stayed static at 25%.
There are several conclusions to be drawn from these figures. The first is that the debt capital markets business has diminishing marginal returns. For many years bankers have complained that fees made on transactions are shrinking rapidly, often to single-digit basis point levels, especially in the sovereign world.
The one area of DCM where banks can still make decent money is credit, particularly high yield. Morgan Stanley, which has arranged several high-yield transactions over the past 18 months, was the biggest revenue earner in DCM last year. The emphasis on the junk bond market is symptomatic of the benign economic conditions. Also investors are willing to take on ever-greater risks in their search for yield. If the economic environment turns sour, however, expect the high-yield market to shut very quickly.
Meanwhile Latin Americas equity capital markets, which were quiescent following the technology and telecoms crash at the turn of the century, are resurgent. Financial institutions, technology companies, real estate firms, airlines, commodity-related companies all have sold shares in the past 18 months. Whats more, these companies are now more willing to issue on domestic stock exchanges than in New York.
Moreover, much of the equity issuance is emanating from Brazil, where Credit Suisse has a particularly strong franchise thanks to its purchase of Garantia in 1998.
Last year, UBS followed its Swiss rival with the acquisition of Banco Pactual. At the time some critics reckoned that UBS, which could end up paying as much as $2.6 billion for Pactual, was mugged at the top of a bull market. Its still too early to tell whether that forecast will prove accurate but as Credit Suisse proved with Garantia, short-term pain can lead to long-term gain. Meanwhile, other banks are trying to find a way to play catch-up in this key market.