They have come in all shapes and sizes: big, mid-sized, small, boutique etc. But does India need so many investment banks?
The CEO of a large investment bank in India says the answer is a big No. “The capacity (of investment banks) is too large and utilisation too low. This is just not sustainable,” he says, adding, “look at the top 20 investment banks in India. Only four or five have been making money. The others are living on hope and are losing money like anything because of their high cost structure.”
The investment banker may be exaggerating to drive home a point, but the fact is he is not off the mark. Most big boys in investment banking are taking the easy steps of freezing recruitment, slashing bonuses, handing over pink slips and chopping discretionary spending as it’s hard to cut audit, risk management and compliance teams because of regulatory issues. And some of them are getting into competition with smaller, even boutique rivals for business from companies they have avoided for years.
While Indian investment banks and boutiques still have a chance as investment banking is all about relationships and -- more importantly -- their cost structure is low, the marquee global names need to seriously look at consolidation, as years of unbridled expansion and big-bulge salaries are unsustainable as too many firms are chasing a smallish and shrinking revenue pot.
And it seems these bankers didn’t learn from the lessons during the Asian crisis of 1997 and the 2008 slowdown. The moment things looked up a bit, pure greed took over and the big investment banks went back to the old formula: hire 20- or 30-somethings from the top B-schools, pay them sky-high salaries and commissions and enjoy the party. The only problem is the hangover has been severe.
Given their cost structures and scores of partners, associates and what-nots, it doesn’t make sense for most of these big investment banks to do deals which are less than Rs 500 crore. That is where the boutique banks are taking over, doing deals of less than even Rs 75 crore. Unfortunately, in an uncertain market, that is where the real action is. Realising this, many Indian investment banks are going down the ladder and doing much smaller deals, putting pressure on the boutiques – many of whom belonged to the big boys earlier.
It’s not that all big investment banks are going through this terrible phase. The top four or five remains busy, cornering all the big deals that have come into the market. But the next 15 finds themselves caught in a cleft – they can’t compete when it comes to big deals and they can’t go down to the level of smaller investment banks as the cost-expense ratio is skewed against them. That things are really tough is evident from the fact that in the equity capital market segment, the fee pool is down by over 70 per cent. As it is, competition in the capital markets had driven down fees to the point that banks often agree to work for next to nothing on bond or equity mandates.
Very few are delivering returns above their cost of equity, a closely watched measure of profitability, with back-office functions and equities and advisory units most ripe for the knife.
While many of these big investment banks still put up a brave façade by saying things have to eventually work better as companies have to raise money and can’t remain shut for ever, it is quite likely that the current market turmoil could lead to fewer players and the market gravitating towards integrated corporate and investment banking models.
