Banks fall out of love with emerging markets

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Emerging Markets (EMs) 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 percent down on a year earlier at just under $3 billion, 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.
“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 leading Swiss bank. “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.
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$17 billion in the decade running up to 2014 – and a promise of more to come – helped justify that.
But fees could fall below $13 billion 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.

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