On Wall Street the backstabbing has started, and with good reason – bonus season has arrived. While Latin American bankers watched their counterparts in the structured finance world write down billions of dollars in losses, they, by contrast, quietly brought in good profits.
Profits doubled at Merrill Lynchs Latin American business. JPMorgan expanded its operations rapidly, with high-profile clients at the forefront of its growth. Regional heavyweights UBS and Credit Suisse continued to perform well, driven by the Brazilian IPO boom, and Citis Latin American operation grew by about 60%.
But as Merrill Lynch, Citi and UBS continue to announce large write-downs on their credit businesses, their competitors are left wondering what level of compensation these banks can afford to pay. Will it be sufficient to hold on to the talent needed to continue the success of their Latin banking operations?
At Merrill Lynch, the senior management made it clear during an analysts call that they intended to pay the business areas according to their achievements, and at higher levels than in the past. If this is the case, Merrills Latin American employees stand in good stead. But rumours are rife about whether the US bank will be able to live up to some peoples bonus expectations, especially considering the aggressive salaries it apparently offers when recruiting. "Earlier this year I saw some of our youngest guys go over to Merrill for more than three times the compensation," says a Wall Street banker.
Jimmy Quigley, vice-president and head of Latin America at Merrill Lynch, says: "Our people will be paid competitively to ensure we retain the best."
Another issue is whether Stan ONeals successor as Merrills chief executive, John Thain, will continue to support an already aggressive Latin American operation. Quigley is confident about the future. "[In mid November] the Latin American operating committee at Merrill Lynch met in Santiago and put a three-year growth plan in place," he says. "We plan to increase our revenues for the combined wealth management and institutional business by two-and-half-fold by 2010. There is nothing that has happened since then that has led people to tell me to change that trajectory of growth in the region."
He adds: "We have risen up several league tables in 2007. For example, we are now number two for debt underwriting when we were number 10 at the start of 2007, so you can imagine why the competition want to try to derail Merrill Lynch right now."
Attention is also focused on Deutsche Bank. In 2007, the German bank had revenues and profits in Latin America slightly below the levels it achieved in 2006. Pablo Calderini, global head of emerging markets at the bank, says: "We put together a very ambitious plan for this year . In the first half of the year we were well on track with record returns but the credit crunch made debt and currency volumes drop in the second half. Though we are finishing ahead of plan in equities, we are not going to meet our ambitious targets for debt."
Deutsche Bank is not alone the whole market suffered a rapid drop-off in debt volumes in the second half of 2007. But one positive could emerge from this. Many bankers now expect fees in debt capital markets to rise and for there to be fewer quotes driven by a desire to improve league table positions. In 2007, Citi, among others, was rumoured to have completed deals with fees of just one to two basis points. After legal fees had been paid, profits would have been minimal, if anything at all.
Few expect this type of league table-driven tactic to be feasible in 2008. "For example, Citi has just issued a convertible bond at 11% and are financing themselves for 10 years at 195bp over treasuries it is hard to imagine they are going to lend to someone at 150bp and also get basically no fees for it as well," says a banker. Citi declines to comment.