The investment banks of the future

A dozen firms have dominated investment banking for the past generation. They’ve taken their core strengths in their own domestic markets and built global franchises. They’ve been the top firms wherever they have gone: especially in emerging markets. Is that about to change? These same firms now face unprecedented challenges. They are being forced to re-evaluate their business models in the aftermath of the financial crisis. They are burdened with not just costly new rules on capital, but also beginning to consider the enormous cost of maintaining an infrastructure that can enable them to advise and trade for clients across the globe.

Inevitably, all but the strongest firms are beginning to retrench from those markets where they are struggling to make ends meet – no matter how much potential those markets might have.

As Charon Wardini Mokhzani, deputy CEO of Malaysia’s banking champion CIMB, and head of its corporate and investment banking business, says: "I don’t want to sound like a vulture fund taking advantage of other people’s weaknesses, but you would imagine that as people have issues in their core domestic markets, they would retreat to some extent from Southeast Asia. There will be opportunities for Southeast Asian banks to step in."

Since the crisis, most talk of potential growth in investment banking has centred on developing markets. Top of almost every list are the Bric countries, but the opportunities go much further.

Of course, wiser heads have cautioned that growth in these markets might not live up to expectations. Which is just what happened in 2011. Of the Bric countries, only Russia generated a rise in fee income compared with 2010, of 28% according to Thomson Reuters; fees in core investment banking fell by 25% in China, by 30% in Brazil and by 33% in India.

Despite that note of caution, the trend is clearly one of increasing trade involving and between the developing – or, as the optimists would term them, growth – markets.

And those running investment banks based in these countries or regions see a unique opportunity to build their franchises over the coming years, as business grows and the international firms that have scooped up much of the high-profile deal flow in the past retreat.

What connects many of these firms is that they are not hell-bent on becoming big, global investment banks. They may want to be the Goldman Sachs at home, but they do not aspire to be a Goldman equivalent around the world.

The strategy is to build on a strong domestic franchise – which, of course, is what the likes of Goldman, Morgan Stanley and Merrill Lynch did many years ago.

As Mary MacLeod, deputy CEO of ICBCI, the investment banking arm of the big-five Chinese banking group puts it: "We aren’t trying to turn ICBCI into a western investment bank. Our aim is unquestionably to build a global investment bank with Chinese characteristics."

In Brazil, which has arguably the most developed capital market of the growth countries, the top three local investment banks are already beating off their international rivals in the league tables. They believe this can only continue. As the co-head of Bradesco BBI, Luiz Galvão, says: "Obviously we will continue to see some companies that like to have international banks for balance and it is important to keep in mind that the market will grow a lot so there will probably be space for many banks. In Brazil we have 450 listed companies and we could easily have between 1,000 and 2,000 and who is going to capture most of this business? The Brazilian banks, and especially those with strong relationships with these companies."

Outside their domestic markets most of these aspirants speak in terms of working alongside their domestic clients as they expand their global needs, or helping those outside the country to invest in it.

As Atanas Bostandjiev, head of the international business at Russian-based investment bank VTB Capital, describes it: "The second phase is to become a global emerging markets-focused bank, specializing in particular on intermediating trade and investment flows between Russia and the CIS, and the rest of the emerging world. That second phase is happening now."

These bankers won’t need reminding that the road to investment banking success is littered with the carcasses of those firms that never made it, and lost vast quantities of money along the way.

Many of those dead bodies were part of big commercial banks where management became convinced they could not fail to succeed in leveraging their balance sheets and corporate relationships into fee-paying advisory and capital markets businesses. How wrong they were.

Will it be any different for the firms Euromoney profiles on the following pages, many of which are looking to grow out of a big, successful parent bank?

Some will no doubt fail. They’ll spend far too much money hiring expensive bankers who cannot deliver. They’ll invest in the wrong markets or products. They’ll fail to create a culture that can deliver. And of course these are vital markets for the international investment banks, which the latter won’t cede without a fight.

But others will surely make it. They are not weighed down by the same regulatory and capital burdens as their developed market competitors. And they have some natural advantages to bring into play.

Sometimes it is as simple as geography. As Ilhami Koc, CEO of Is Investment, Turkey’s leading investment bank says: "Istanbul can and will be a regional financial centre," he says. "Between Frankfurt and Singapore, there is nothing else. We have the human resources, the legal systems, developed local capital markets."

This will all take time. But over the coming months and years, expect to see some changes. Gone are the days when a client in a developing market chose only the big international players to assist it with its financing needs. There won’t be as many of them. And there’ll be plenty of options closer to home ready and willing to step in.