Several international banks have expanded operations in India, the lone bright spot in Asian investment banking this year, but narrow margins and competition from local banks remain key challenges.
Year-to-date investment banking fee income in India is up 31% to US$1.1bn, according to LSEG data. South Korea is the only other major market in the region where fees have climbed so far this year, edging 3.7% higher from the year-ago period. Meanwhile, fees in China, traditionally the region's biggest source of investment banking fees, are down 6.2%.
Some global and regional banks are actively expanding their footprint in India, which remains one place as yet untouched by widespread layoffs in Asia Pacific investment banking.
“Asian banks such as HSBC, DBS, and MUFG have been hiring aggressively in India,” said Avinash Bhatia, Coalition Greenwich's head of competitor research for banking in India.
However, bankers and analysts say that while deal activity is robust, fees remain low.
“The involvement of global investment banks in India has increased over the past few years. The big reason is the amount of money they are seeing in the market. But with every bank doing much more in India, there is a lot of fee pressure,” Bhatia said. “As these banks are getting into a space that local banks dominate, they need to work on very thin margins and they may need to do four deals instead of one.”
But it is not just about numbers and margins. India’s fee wallet has typically been thin for fundamental reasons. For instance, the biggest corporates such as the Tata, Birla, Adani and Reliance groups have large in-house teams with merger and acquisition expertise. Bankers say these houses only call in advisers at the last minute and pay low fees.
“When a client has an in-house M&A team and most of the work is done by them, but a bank is needed to do some number-crunching or support a local bank could get mandated for a low fee,” a Mumbai-based banker with a global bank said. “India has been an overbanked market, but the men and boys are getting separated now and so are fee levels.”
Bond market deals present their own set of challenges.
“The fees for state-owned issuers are abysmal, less than 0.05%,” the head of DCM at a private domestic bank said. “For private corporates the fees are 0.25% to 0.4% at best. For structured debt transactions, the fees are 0.5% to 0.75% and upwards.”
Foreign banks will only work on transactions that pay a fee of 0.5% to 0.75% or more, the banker said.
The National Stock Exchange's and BSE's electronic bidding platforms for debt issues, which were launched in 2016, have been “a killer for fees,” the banker added.
“Once you upload the bond offering on EBP, anybody in the market can come and bid, there is no need for market making and underwriting. So that came and killed the fees in the high-grade bonds,” the DCM banker said.
Many non-banking financial companies also have their own DCM teams and do not need to hire bankers for deals, two other Mumbai-based DCM bankers said.
Staying power
Bankers at domestic and international banks agree that participating in a market like India is not straightforward.
"To compete in the Indian market effectively, you need to be a full-fledged universal bank delivering end-to-end solutions to clients," said Debasish Purohit, co-head of India investment banking at Bank of America. Besides navigating local market nuances, "Indian investors are keen to understand global themes, like rate cycles, inflation inflection points, geopolitics that would impact businesses they invest in. So, if an institution has the expertise to help clients make sense of these complexities and support them through challenging periods, you have a right to win however competitive the playing field may be."
Banks also need to make a long-term commitment to the market.
“India is a very sophisticated market, and a very compelling story over the next three to five years. The challenge is that to do well in India you need to be on the ground in India and take a longer-term view,” said a Singapore-based banker with an Indian bank. “Many international banks tend to go in and out of India. Some have been there for a while, but many have not committed to India in a big way.”
Another factor making things difficult for international banks in India is a preference among some corporates for local banks.
“What a local bank brings to the table is consistency of coverage, larger teams on the ground and a better track record than many international firms,” the Singapore-based banker said.
There is an element of loyalty. Cash management, lending and commercial loans are important for Indian corporates, and local banks are better positioned to handle those than global banks.
“A big international bank won’t be interested in a Rs100 crore (Rs1bn, US$12m) loan, but they lose on relationships like that,” a Mumbai-based analyst said.
“Local bank outreach is much more advanced. They have an edge when it comes to relationships and loyalty with several Indian corporates,” Bhatia at Coalition Greenwich said.
The Mumbai-based banker with an international bank said that when medium-sized conglomerates do carve-outs or reorganisations, local banks that have been with that company or family business for years will often get mandated.
Bankers agree that domestic banks, with more resources on the ground, are also often better equipped to deal with regulators like the Securities and Exchange Board of India.
“In an IPO, where the left lead is someone that has to coordinate with Sebi and go through documentation with lawyers, that may be quite laborious for a foreign bank to have a full team doing this. In that scenario, a local bank will get mandated,” the Mumbai-based banker said.
International advantage
Even so, bankers say there is plenty of room for growth for international banks, especially as deals become more complex and sophisticated and require more tailoring.
“With the economy booming and the advent of boutiques and unicorns, investment banks also have a lot of options for customisation,” Coalition Greenwich’s Bhatia said. “Companies that are domiciled in India are increasingly looking to buy or buy into foreign companies, and Indian corporates tend to reach out to foreign banks for this.”
For instance, late last year, a unit of Indian drugmaker Biocon bought the global biosimilars business of Nasdaq-listed Viatris for US$3.3bn. Earlier in 2022, Adani Group bought a controlling stake in Swiss building materials firm Holcim’s cement businesses in India.
Fees from mergers and acquisitions in India are US$393.5m year to date, making up 35% of the fee wallet, LSEG data show.
"In an otherwise tentative and uncertain global landscape, India presents a pocket of relative stability. While optimism is high, execution of deals is taking time as bid-ask spread remains high, and CEOs and boards are taking a fairly calibrated approach given the broader global uncertainty," BofA's Purohit said. "Deal activities will pick up in the medium term for private equity and strategic interest in India remain robust."