Emerging markets are fast losing their shine for the world’s biggest investment banks. Faced with falling fees from fewer deals – and bleak prospects ahead – many have put the brakes on a decade-long expansion, with some cutting jobs and shutting offices.
Subdued deal activity has meant there are fewer dollars for banks to fight over: fees in the first quarter were 18% down on a year earlier at just under US$3bn, according to data compiled by Thomson Reuters and Freeman Consulting. It’s the second-worst start to any year since the crisis – after 2012.
But unlike in 2012, when activity quickly snapped back after a poor start to the year, bankers fear activity will remain subdued for a prolonged period. Many are overhauling their operations to ensure they remain profitable in a more sluggish environment.
“We have now got to a point where almost everyone is retrenching”
“EM is tough at the moment – the whole sector is facing challenges: recessions, politics, sanctions, oil prices,” said Chicco di Stasi, head of emerging markets at UBS. “A lot of investors are staying on the sidelines, appetite is quite low.”
“EM once offered investors a bit of extra yield, but dislocations in other markets such as high-yield and contingent capital means they can find similar yields elsewhere – without political and other risks that come with EM,” he said. “It has created illiquidity.”
The Swiss bank, one of the top EM fee earners last year, has responded to the slowdown by restructuring its business. It plans to create a new EM financing division that will bring together debt, equity and loan bankers who currently sit in different parts of the business. Di Stasi hopes what he calls the “EM financing hub” will spawn more cross-product and creative solutions to help UBS win a bigger share of the fewer deals coming to market.
Office closures
Others have responded by closing overseas offices, flying in bankers only as and when required in a bid to bring down costs. Deutsche Bank has shut most of its Latin America offices, while Barclays has reduced its Asia physical presence from 12 to five countries. Both have shut investment banking operations in Russia.
The moves mark a shift in the attitude of banks towards EM. For years, many threw money at regions such as Asia despite high costs and low returns. A trebling of the fee pool to over US$17bn in the decade running up to 2014 – and a promise of more to come – helped justify that.
But fees could fall below US$13bn this year if current levels of activity persist, putting pressure on bosses to cut costs. Almost all global banks earn less in EM fees than they did before the crisis, Thomson Reuters data shows.
“Less than 10 years ago, every investment bank was talking about expanding in the BRIC countries,” said Riccardo Orcel, deputy CEO of Russian bank VTB. “We have now got to a point where almost everyone is retrenching.”
According to bankers, although the longer-term potential remains for EM, the cost of continuing to operate during leaner times is just too much at a time when group-wide returns are suffering.
“Global banks have gradually realised they can’t serve clients across every geography and product – it requires too much capital and infrastructure,” said Orcel.
The retrenchment of global banks is playing into the hands of some local players, which have no option but to stay put. Although VTB has cut its presence outside Russia, it says it has won some big mandates at home that previously would have gone to larger global rivals.
EM-focused HSBC says it too has benefited from the pullback of rivals. Last year it was the top EM fee earner globally, pulling in US$500m. It was 10th in 2007.
“Asia is our heartland, and we still see strong opportunities in the region,” said Stephen Williams, head of capital financing for Asia-Pacific at the bank. “The competitive environment is certainly moving more in our favour.”
Barren quarters
The problem for banks that rely mainly on investment banking fees in EM is that deals are notoriously lumpy, making a barren few quarters very painful indeed. Those with more diversified operations in EM – including, for instance, retail banking – say they feel less pain.
“If you have a broad set of businesses with cross-selling potential then you can make local investment banking presence work, but if you are reliant on a couple of investment banking products, local presence can be costly,” said Enrico Minniti, head of corporate and investment banking for Central and Eastern Europe at UniCredit.
UniCredit has a significant retail presence in countries such as Hungary, Romania, Russia and Serbia, with 2,500 branches across Central and Eastern Europe.
Still, banks are trying to hang on where they can.
“If banks exit markets when business experiences a cyclical drop, their prospects for participating in future transactions are substantially diminished,” said Vikas Seth, EM investment banking head at Credit Suisse. “We have to work harder and be more creative to originate and close transactions in this challenging environment.”
It isn’t all bleak. While equity fees fell by a third in the first quarter, and loan and advisory fees slumped more than 25%, bond fees rose.
Chinese ECM follow-on activity was strong too, although most of the resulting fees went to domestic Chinese banks (the top 10 global EM fee table year-to-date includes the six Chinese banks that dominate local ECM transactions), largely bypassing global players.
Yet some bankers are optimistic activity will snap back. Even in the medium term, some see fresh fees coming out of commodity restructurings, continued outbound deals from China, the opening up of Argentina, and big-ticket IPOs coming from big clients such as Saudi Aramco. One deal could be the difference between profit and loss.
“Things will come back,” said Gergely Voros, EM investment banking head for EMEA at Morgan Stanley. “You can’t look at your business on a one-year horizon. Long-term there are many opportunities and we have to remain in position to act on them.”
| Top EM fee-earning banks in 2015 | |||
|---|---|---|---|
| Total investment banking fees | |||
| Fees (US$m) | Deals | ||
| 1 | HSBC | 507 | 1,021 |
| 2 | Citic | 502 | 730 |
| 3 | Morgan Stanley | 495 | 266 |
| 4 | Citigroup | 435 | 478 |
| 5 | Deutsche Bank | 385 | 354 |
| 6 | JP Morgan | 361 | 296 |
| 7 | BAML | 353 | 279 |
| 8 | Credit Suisse | 346 | 198 |
| 9 | Goldman Sachs | 335 | 200 |
| 10 | UBS | 286 | 177 |
| Total | 15,345 | 22,896 | |
| Source: Thomson Reuters | |||
| Top EM fee-earning banks in Q1 2016 | |||
|---|---|---|---|
| Total investment banking fees | |||
| Fees (US$m) | Deals | ||
| 1 | Citic | 128 | 473 |
| 2 | Guotai Junan Securities | 97 | 256 |
| 3 | Haitong Securities | 95 | 53 |
| 4 | Morgan Stanley | 91 | 44 |
| 5 | Bank of China | 84 | 265 |
| 6 | Citigroup | 76 | 110 |
| 7 | Goldman Sachs | 67 | 34 |
| 8 | JP Morgan | 65 | 76 |
| 9 | China Securities | 62 | 294 |
| 10 | China Intl Capital | 61 | 56 |
| Total | 2,990 | 5,111 | |
| Source: Thomson Reuters | |||
