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IB revenue steady, awaits market clarity

Oct 1, 2013

LatAm bankers are earning roughly the same in fees as a year ago, with ECM activity compensating for lower M&A. Much depends on stability in the markets ahead.

The earnings of investment banks in Latin America's capital markets have remained stable over the past year, despite a sharp rise in US Treasury market volatility and against a backdrop of flagging regional economic growth.

The overall resilience of the main business lines has helped prop up fees, even though the sources of revenue have changed.

The fee pool for LatAm investment banking - combining revenue from DCM, ECM, M&A and loans - had reached $1.43 billion this year through September 27, according to Dealogic data. This was up from the $1.33 billion earned during the corresponding period in 2012.

Equity capital market activity picked up pace this year, helping compensate for a slump in M&A volume. Despite uncertainty over the direction of interest rates, debt capital market revenue is down only slightly on last year, tracking overall volume.

Credit Suisse led the table with $136 million, or 9.5% of the market. Citi and JPMorgan are in second and third, respectively.

"The competitive environment continues to rise," said Lisandro Miguens, co-head of corporate and investment banking for Latin America at JPMorgan. "Some international banks came back strong after the 2008 crisis, local banks continue to strengthen their investment banking practices and some local banks are expanding their investment banking franchises regionally. All of this is putting some pressure on fees."

Mexico has been the busiest area in the region's equity markets. It has driven an ECM market that has earned $478 million in fees in the region through September 27, up from $244 million in the corresponding period in 2012.

"In an economy like Mexico, with a lot of change, there will be continued equity issuance activity," said Mark Rosen, head of Latin America investment banking at Bank of America Merrill Lynch. "We don't see that slowing in the next 12 months."

Earnings from M&A transactions, however, have taken a turn for the worse this year. Deals had netted LatAm bankers $319 million through September 6, down from $506 million in the same period in 2012. This is on the back of $105 billion in announced volume, down from $134 billion.

"M&A activity in Latin America is strongly correlated with the commodity cycle," said Hernan Rissola, head of Latin America M&A at HSBC. "Commodities have weakened, and Brazil has weakened. This has meant a significant deceleration in activity."

Rosen noted a strong pickup in M&A dialogue in last few months, however, which he says could mean more activity into next year. "M&A has been very slow in Latin America," he said. "You could see a change to that in the next six to nine months."

A market shutdown amid US Treasury volatility in June and July raised the prospect this year of less active debt capital markets following record issuance in 2012. Fees, however, remain stable from last year. Banks have earned $484 million from DCM deals this year, compared to $467 million in the corresponding period of 2012.

But whether issuance will top last year's record will depend on the market openness over the remainder of the year and volatility in the US Treasury market. Concerns over an unwinding if the US Federal Reserve's monetary stimulus continues to dog borrowers and investors, while the US government showdown this week has also unnerved markets.

Market participants said they expected a higher cost of funds ahead. LF


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