Where are the growth markets for investment banks now? Back in May, HSBC's results suggested Asia was where the growth was going on. Morgan Stanley's head of emerging markets implied in a recent book that Turkey, Poland and South Korea are the places to watch. However, third quarter results from both Citigroup and JPMorgan suggest US investment banks have been achieving most of their growth in Latin America.
As we noted last week, JPMorgan's Latin America investment banking revenues were up a massive 79% year-on-year in the third quarter. In Asia Pac they were down 29%. Similarly, in the first nine months of this year, revenues at JPMorgan's investment bank increased 14%, but fell 26% in Asia Pac. In other words, Asia Pac really doesn't look like a growth market - or at least it doesn't look like a growth market for JPMorgan.
Citigroup's Q3 results also seem to suggest Asia Pac isn't where it's all happening. Asia Pac revenues in Citi's Securities and Banking (investment banking) business fell 5% in the first nine months of this year vs. 2011. They also fell in North America (down 32%) and in EMEA (down 15%). In Latin America, on the other hand, Citi's investment banking revenues rose 29%.
Citi helpfully breaks out the profitability of each of its investment banking markets by region. Here too, Latin America appears to offer the booty.
So far this year, Citi's Securities and Banking margins are: 18% in North America, 22% in Asia and 24% in EMEA. In Latin America they are....45%.
If you're a US investment bank, the Latin American market looks doubly appealing: it's fast-growing and it's highly profitable.
Why does Latin America seem to resemble the promised land for US banks?
It's not necessarily market growth. Dealogic says Latin American-targeted M&A only rose 3% in the first nine months of 2012 vs. the same period of 2011. ECM volumes fell 41% over the same period, although DCM had a good third quarter.
Ralph Silva, a financial services analyst at SRN says US banks' success in Latin America is mostly about a lack of competition.
"It's not that the Latin American market is growing in size," says Silva. "It's more that the number of participants in the market has decreased - local firms are less interested in investment banking activities than in retail banking activities and we are seeing a very significant preference for using a few large international banks when it comes to syndicating deals.
"In Asia it's almost the opposite," says Silva. "Having a large US bank leading a syndicate isn't seen is a good thing. Asian clients are much more likely to spread a deal between a large number of local banks."
Latin America is a profitable market because it's a risky market, says Silva. "In Asia deals are often well-protected from a regulatory point of view. In Latin America they're less well-protected and the margins tend to be higher."
Dealogic suggests Citigroup was the leading bank in Latin American ECM this year, with a 9.9% market share. In M&A JPMorgan, Bank of America and Deutsche were top in LatAm. Although US banks are big across ECM as a whole in Asia, figures from Dealogic show that local banks dominate the IPO market - Guosen Securities, CITIC and CIMB Group led Asia's IPO rankings in the first nine months of 2012.
What if you want to move to Latin America? Silva says many of the bankers covering the region are still based in New York. If you want to work on the ground Latin America is dominated by Brazil and Brazil is notoriously hard to penetrate. Locals are preferred. Portuguese is usually a must. However, in yesterday's conference call Vikram Pandit said the key growth markets in Latin America are now Mexico and the West Coast - particularly Columbia and Peru, meaning Spanish will be helpful too.