Global investment banks based in Europe and the U.S., facing regulatory and cost-cutting pressures at home, are losing market share in emerging economies to smaller domestic competitors.
Credit Suisse Group AG, Morgan Stanley and Citigroup Inc. are among Western securities firms seeing the biggest erosion in some developing markets, according to data compiled by Freeman & Co., a New York-based consulting company. Their share of investment-banking fees is being diluted by local banks including Brazil’s Grupo BTG Pactual SA, Russia’s VTB Capital and China’s Citic Securities Co., the data show.
The share of fees for U.S. and Western European firms in Latin America, the Middle East, China, India, Russia and Eastern Europe plunged to 43 percent last year from 69 percent in 2005, according to Freeman. The shift coincides with a decline in lending by European banks in emerging markets, making it harder to compete for assignments, the data show.
“It’s always the case in banking -- as one set of players goes off the pitch because they’re injured, you get another set of players who come on to try and play the same game,” said Paul Skelton, HSBC Holdings Plc’s Dubai-based regional co-head of global banking in the Middle East and North Africa. The rise of regional investment banks “has coincided with some of the international firms looking at this part of the world and asking themselves whether it makes sense.”
Stagnant revenue growth, job cuts and pressure to shrink quickly and curb compensation have weighed down banks based in London, Zurich and New York. U.S. and Western European firms’ share of emerging-market fees has been less than 44 percent in each of the past three years, after never dropping below 59 percent in the decade ended in 2007, according to Freeman data that goes back to 1998.
Counterparts in developing economies have gone public to fund expansion, hired bankers from larger firms and exploited contacts with governments and companies on their home turf.
Banco Itau BBA SA, which handles the investment-banking business of Sao Paulo-based Itau Unibanco Holding SA, has hired financiers from Credit Suisse and UBS AG and is considering expanding into Mexico, said Candido Botelho Bracher, chief executive officer of the division. Itau BBA transferred its European operations to London from Lisbon to improve distribution of Brazilian shares and bonds, he said.
VTB Capital, the securities arm of VTB Group, Russia’s second-largest lender, added 100 bankers last year and expanded in New York, Eastern Europe and Asia, the company said.
The push by local firms occurred as ING Groep NV, the biggest Dutch lender, closed its Russian equities unit, and Milan-based UniCredit SpA announced it would shut its securities operation in the country. Credit Suisse, Switzerland’s second-largest bank, is moving its Russian capital-markets and advisory businesses to London to cut costs, two people with knowledge of the matter said.
“The biggest financiers in the emerging markets had been European banks, who are now retreating given their capital and funding constraints,” said Eric Wasserstrom, an analyst at SunTrust Robinson Humphrey Inc. in New York. “That’s creating an opening. Local players, who had been shut out because they didn’t have all the resources and capabilities necessary, are filling that opening.”
Even as their market share shrinks, Wall Street and European banks are competing for a diminished pool of fees from arranging mergers, stock and bond sales and loans in developing economies. Investment-banking fees derived from emerging markets fell 20 percent in 2012 to $9.8 billion from a year earlier, compared with a 2 percent increase to $73.2 billion in developed nations, including the U.S. and Canada, the data show.
Morgan Stanley, Citigroup, UBS, Credit Suisse and JPMorgan Chase & Co. each have seen combined fees from emerging economies fall by at least 50 percent from their peaks, driven by market-share losses and a decline in dealmaking, according to Freeman.
“It’s not a question of whether the global firms will pull back, but can they afford the investment to be competitive with the regional players?” said Huw Jenkins, a former UBS investment-bank chief who’s now a managing partner of BTG Pactual in London. “The initial public offering of BTG and capital-raising by Citic Securities, together with the acquisitions that they have made, means that these firms have sufficient capital strength and global reach in terms of securities distribution of the global firms.”
Western European banks, struggling to recover from the region’s sovereign-debt crisis, have seen their share of investment-banking fees slip as they reduce lending to emerging markets. The firms’ portion of syndicated lending commitments in Latin America dropped to 38 percent last year from 67 percent in 2008, according to Freeman. Their slice of fees fell to 31 percent from 45 percent in the same period, the data show.
Banks based in Western Europe also cut their portion of lending to the Middle East to 21 percent last year from 61 percent in 2005, coinciding with a decline in share of investment-banking fees in the region. Local firms, including Riyadh-based Banque Saudi Fransi, increased their portion of lending to 63 percent from 20 percent during the same period.
“The primary reason behind the retreat from emerging markets was the shortage of liquidity at the beginning of the crisis, which meant resources were repatriated to domestic markets and marginal overseas franchises were neglected and then sold,” said Simon Maughan, a banking strategist at Olivetree Securities Ltd. in London. “This was compounded by the creeping introduction of new capital rules that require higher weightings on emerging-market risks.”
BTG Pactual, led by Brazilian billionaire Andre Esteves, won the largest portion of investment-banking fees in Latin America last year, 8.1 percent, up from 6.2 percent in 2011, according to Freeman. Credit Suisse, still the region’s top fee earner over the past eight years, had the biggest market-share decline in that period, dropping to 6.4 percent in 2012. The figure was as high as 14.1 percent in 2007, the data show.
BTG, Brazil’s largest stock underwriter, said in November that investment-banking revenue increased 59 percent to 148 million reais ($75 million) in the third quarter from a year earlier. The company went public in April, selling shares in Sao Paulo, where it’s based, and Amsterdam.
The firm, along with Itau BBA, Banco Bradesco SA and Rothschild, worked with Cosan SA Industria & Comercio last year in the purchase of a $1.8 billion stake in Brazilian gas distributor Cia. de Gas de Sao Paulo, according to data compiled by Bloomberg.
Brad Webber, co-head of Africa corporate finance at Johannesburg-based Standard Bank Group Ltd., said companies increasingly are using local firms along with international banks to provide advice on transactions. He cited Standard Bank’s joint book-runner and underwriting role with JPMorgan, Citigroup and HSBC in an $817 million rights issue last year by Lonmin Plc, the London-based platinum producer.
“In the past, a large equity-capital markets deal might have only involved bulge-bracket banks from the U.K. or U.S.,” Webber said. “It is now rare to see only these banks on a trade. More often than not you will see at least one local bank on the deal.”
Citic, China’s largest brokerage by market value, agreed to buy CLSA Asia-Pacific Markets, the Hong Kong-based securities unit of France’s Credit Agricole SA, for $1.25 billion last year, joining banks across Asia in acquiring assets from troubled European firms. Citic generated most of its fees in 2012 from equity issuance and bond sales, the Freeman data show.
Citic, founded in 1995 and controlled by state-owned Citic Group Corp., grabbed the biggest share of investment-banking fees in China last year, 8.5 percent, up from 4.6 percent in 2011 and 0.3 percent in 2005, according to Freeman. Morgan Stanley, based in New York, had the biggest decline since 2005 to 1.3 percent in 2012 from 11.8 percent.
A dearth of large IPOs in Hong Kong and mainland China last year also meant global brokerages had fewer deals to work.
In Russia, Western banks are pulling back as VTB and OAO Sberbank expand. Sberbank, once the Soviet Union’s state-owned savings bank, last year bought Troika, the country’s oldest brokerage, for at least $1 billion to compete with VTB Capital and foreign firms in bond underwriting and stock trading.
“The global investment banks are not naturally at an advantage in the fast-growing emerging economies,” said Tom Kirchmaier, a lecturer in business economics at the U.K.’s Manchester Business School. “The majority of deals are local deals where local banks have superior knowledge, better networks and long-established client relationships.”
As Citic and VTB Capital expand, Citigroup is scaling back in countries previously part of its growth strategy.
Citigroup CEO Michael Corbat, who took over in October, plans to eliminate about 11,000 employees and withdraw from some emerging markets, undoing part of the expansion initiatives of predecessor Vikram Pandit, according to a December statement. Corbat, 52, said the bank would close or divest operations in Pakistan, Paraguay, Romania, Turkey and Uruguay.
Still, European and U.S. banks said firms in emerging markets can’t compete outside their home countries because they’re too small. The global banks remain the biggest earners. HSBC, Europe’s top lender by market value, took in the most fees in the Middle East last year, and Zurich-based Credit Suisse was No. 1 in Latin America over an eight-year period through 2012, Freeman data show.
Credit Suisse said it was first in global capital markets and mergers in the developing economies the firm covers, with a 7.5 percent share of fees from 2005 to 2012, citing numbers from Dealogic, a London-based consulting firm.
“Our focus is on the largest, most complex, cross-border and regional transactions, where we can add the greatest value to our clients,” said Vikas Seth, head of investment banking for the Middle East, Turkey and Africa. “We generally do not pursue smaller mandates, which have characterized much of the activity in the Middle East in recent years.”
Spokesmen for New York-based Citigroup and Morgan Stanley declined to comment.
The drop in market share and the pullback by some Western banks may be hard to reverse, said SunTrust’s Wasserstrom.
“Many of these institutions are facing pressure to cut compensation and overall costs, simplify their business lines and address capital and funding issues,” he said. Emerging markets “present great growth opportunities, but some of the largest banks won’t be able to participate in that nearly as much, if at all. This may not be the case forever, but certainly for the foreseeable future.”
The following table shows the decline in share of investment-banking fees in emerging markets earned by banks based in Western Europe and the U.S., according to data compiled by Freeman. The shares represent the portion of total fees earned from clients in that region, and the percentages may not equal 100 because of rounding.
Latin America U.S. Banks 36% 31% Western European Banks 40% 31% Latin American Banks 12% 26% Others 12% 12%
Middle East U.S. Banks 14% 12% Western European Banks 47% 28% Middle Eastern Banks 25% 47% Others 14% 13%
Russia and Eastern Europe U.S. Banks 24% 24% Western European Banks 51% 38% Russian and E. European Banks 9% 23% Others 15% 15%
China U.S. Banks 34% 8% Western European Banks 24% 16% Chinese Banks 23% 69% Others 19% 7%
India U.S. Banks 39% 11% Western European Banks 22% 14% Indian Banks 19% 62% Others 20% 13%