Global investment banking revenues – $84 billion in 2007, according to Dealogic – are still predominantly generated in the US. But emerging markets are growing in importance. Europe, the Middle East and Africa accounted for a third of 2007 revenues and Asian countries generated the remaining 15%. In response, emerging market investment banks are also growing. While their share of global investment banking revenues remains only 2%, it has increased seven-fold since the beginning of the decade. There are several reasons for their success – from the commodities boom to the deepening of local stock and bond markets, Financial Times reports.
China’s fast-expanding equity markets explain the growth of the country’s investment banks – and the reason why emerging market banks took a relatively large 6% share of global equity capital market (ECM) revenues. Chinese banks are helped by rules favouring domestic firms – only Goldman Sachs and UBS were allowed to invest in mainland joint ventures able to underwrite initial public offerings or trade A-shares before the ban on further foreign investment in 2005. But if China remains essentially closed to all but locals, other fast-growing markets are not. India generated investment banking revenues in 2007 of more than $1 billion, according to Dealogic, compared with $150 million in 2003.
Which emerging market banks will take advantage of these trends? China’s giants – Bank of China, Industrial and Commercial Bank of China – are well recognised. Even excluding ECM, China accounts for four of the top 10 emerging market investment banks by revenues. Others, though, such as India’s ICICI or Russia’s Renaissance Capital, are snapping at their heels. The question is whether local expertise and presence will help the savviest move up to the top table.
The step from local to international investment banking is a large one. Emerging multinational companies, such as Brazil’s Vale, use the globally dominant US banks for their foreign deals. Dubai’s DP World hired local banks for the retail portion of its initial public offering in 2007 – but Deutsche Bank and Merrill Lynch for the international segment.
The largest emerging market investment banks have all grown in strong domestic markets – mainly China, India, Brazil and Russia.
China’s investment banks have grown fat on the surge in their protected equity markets. But they appear to lack ambitions overseas. Brazilian banks have tended to pair up with western peers, such as Pactual with UBS, rather than go it alone. Russia’s Renaissance Capital is expanding in Africa but is focused more on principal investing than investment banking services.
Breaking out of domestic markets is a challenge. Skills honed at home and local contacts are not necessarily easy to transport elsewhere. India’s ICICI, for example, would struggle against the global experience of, say, Goldman Sachs. Many investment banks in international markets combine M&A advisory services with lending to clients – something most emerging market rivals lack the capital base to do. One exception is South Africa’s Standard Bank, which has expanded across the continent and recently sold a 20% stake to the deep-pocketed Industrial and Commercial Bank of China.
Indeed, rather than the emerging market investment banks going it alone, more combinations between them are likely. Meanwhile, there are other tantalising possibilities as US and European banks try to expand in fast-growing emerging markets. Buying, say, Russia’s Troika Dialog could be tempting for one of the smaller global firms, such as Lehman. After all, what better way to leapfrog effortlessly up the league tables?