Emerging MarketsThe opportunities for investment banks

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Executive SummaryFor the past five years Accenture has tracked the operational efficiency and productivity of a wide range of developed economy investment banks. We are now extending our coverage to key emerging markets investment banks.

As always with our benchmarks, we are only considering investment banking operations and wherever possible we have separated out geographic revenues to concentrate on activities within emerging markets. We use the most disaggregated data available from public sources: annual reports and updates and investor presentations.

Our initial new coverage list includes:

•The UK headquartered, but emerging markets focused Standard Chartered1

•Asia: Malaysia’s MayBank and CIMB, and Korea’s Shinhan Bank, China’s Citic Securities

• India: ICICI and Kotak Mahindra

•Latin America: Banco Do Brasil and Itau Unibanco

•Africa: Standard Bank, First Rand, Investec and ABSA Capital

•Russia: VTB.

Our findings:

•Corporates in emerging markets remain disproportionately dependent upon bank debt and other traditional forms of financing.

•Developed market investment banks have come to dominate the top of emerging markets financing league tables. In 2011 they underwrote 51% of equity financings and 45% of bond issues and in 2005 their share of equity issuance was just 22%.

•The fastest growing emerging markets have seen a surge in companies turning to capital markets financing, a trend we believe will lead to emerging markets banks emulating the offerings of more established developed market banks.

•High performance in operational efficiency is much more dependent upon the individual bank’s operating model than it is to geography.

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1Moved from our developed country investment banking benchmark

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Developed market investment banks have had a torrid few years. Returns in the order of 20% are as long gone as generous bonuses. If there is to be any hope of the former (leading, with a bit of luck, to the latter), new sources of revenues and profits must be found. Those developed economy investment banks that are in a position to expand, have all made the logical conclusion that emerging markets offer the greatest hope of underlying economic growth and a consequential need for investment banking services.

Within every emerging market there are of course a host of local banks meeting businesses financing needs. Already we have seen that one of the characteristics of successful emerging markets is the efficient delivery of the financial services. In order to follow how these services are delivered, Accenture is launching a bi-annual benchmark of emerging markets investment banks. The data we collect is directly comparable with the operational efficiency data we have collected for a number of years on investment banking in developed markets.

The mix of business undertaken by emerging markets investment banks, unsurprisingly, reflects the very different historic business structures found in the underlying economy.

How rapidly businesses in emerging markets will move away from a ‘corporate lending and bank debt’ dependant model, towards a financial model where wide range of capital

markets options are considered, remains an open question. Data over the past few years indicates that corporate lending in emerging markets has continued to grow rapidly, up by 48% in 2010 and 30% in 2011. This raises the possibility that many companies are reluctant to move away from a financial model which has served them well.

That said, we believe there are four reasons why emerging markets companies are likely to continue to move towards a capital markets funding structure:

1. Others will follow the path of success. The rise in equity market capitalisation seen across rapidly growing emerging market economies points to larger companies embracing capital markets financing solutions.

2. Intra-regional competition requires capital. Companies from South Africa and China are racing to become early leaders in the next wave of emerging markets such as sub Saharan Africa.

3. Bank balance sheets cannot take all the strain. Emerging markets banks do not have the balance sheet strength to support the range of companies needing finance, a problem that becomes more acute as economies grow.

4. Alternative paths can be successful, but they are slow. While many G7 and developed economies have achieved high GDP per capita without relying upon capital markets, their time to double GDP can be measured in decades, the desire for rapid growth points to a capital market financing.

Emerging Markets IB’s come of age

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Figure 2: Stock market capitalisation and GDP per Capital

Figure 1: Business Mix. Developed vs. Emerging

Source: Company reports, Accenture Research

Corp lending58%

Generic IB25%

Equities T 0%

Corp Fin 2%

FICCT 0%

Principal T 0%

ECM 0% DCM 0%Privatebanking 5%Transaction

services 7%

AM 3%

Corp Fin 5%

Principal T 3%

ECM 2%

Corp lending 5%

Equities T 11%

FICCT 21%

Privatebanking 19%

Transactionservices 9%

AM 9%

Generic IB13%

DCM 3%

00%

20%

40%

60%

80%

10,000 20,000 30,000 40,000 50,000 60,000 70,000

100%

120%

140%

160%

180%

200%

Stock market cap/GDP

GDP per Capita

BRIC & Tigers

Developed

EconomiesWorld

G7

Other Develping

Source: Bloomberg, IMF, Accenture Research

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It is notable that only 51% (by value) of capital markets equity financing with emerging markets was conducted by developed market banks in 2011. For emerging markets bond issuance, the market share for developed market investment banks underwriting drops to 45%. Unsurprisingly, by number of deals, there are a considerable number which are too small to be of interest to large international developed market banks, as these banks only funded 31% of the equity underwritings and 30% of debt underwritings.

The fact that key bulge bracket global investment banks continue to dominate the upper end of the league table has diverted attention from the rise of a wide range of regional banks who have made serious inroads into capital market issuance. To date, very few of these emerging markets banks have established any significant presence outside their home market or region.

What is even more remarkable is how developed market investment banks have come to dominate emerging markets over the last decade. In 2005, the total amount of equity raised in emerging markets was USD $131 billion; of this sum, 22% was raised by developed market banks. By 2011 the amount of equity capital raised had risen to USD $686 billion, with 51% of the capital being raised by developed market banks. Clearly the services of developed market investment banks are in demand.

Figure 3: Emerging market equity capital raising, 2011 (USD $bln)

Source: Bloomberg, Accenture Research

2,000

0

4,000

6,000

8,000

10,000

12,000

14,000

Top 100 Global Banks

M Stanley

Goldman

UBScs

BAMLDB

JPMCiti

CICC

DM banks

EM banks

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US and European banks have come to dominate the top end of financing in emerging markets over the past decade

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How efficient are emerging markets banks when compared to their developed market counterparts? In order to answer this question, Accenture has compiled data on investment banking activities from a wide range of banks.

Efficiency (cost to income)

The average cost efficiency for 2011 in a developed country investment bank was 71%, but 2011 was a poor year for many banks and cost to income ratios could be expected to be high as a result. A marginally better measure is the cost to income ratio over the last decade, excluding the crash, where the average ratio has been approximately 65%. For emerging markets investment banks, the average cost to income ratio has been rising rapidly from 44% in 2008, to 60% in 2011. Given the importance of staff salaries and bonuses in an investment bank’s costs, and the fact that emerging markets investment banks have a far lower staff cost base, it might be expected they would enjoy a significantly lower cost to income ratio.

These charts also reveal that there are a number of developed market investment banks whose cost to income ratios are a good deal better than a number of banks based in emerging markets. Our conclusion is that high performance in operational efficiency is much more dependent upon the individual bank’s operating model, than it is upon geography.

Turning from cost to income averages to the performance of individual banks. Data drawn from the last three years shows there is a greater degree of variance between individual emerging market banks than is seen between developed market counterparts. Most banks in emerging markets have seen their cost to income ratios rise over the past three years, driven by steady rises in staff costs and a dramatic fall in revenue in 2011.

Any bank will see its cost to income ratio shoot upwards when revenues fall away as even the most nimble cannot cut staff numbers and fixed costs as rapidly as revenues can fall. This is of course a healthy situation. Targeting a cost to income ratio in light of cyclical revenues would result

in companies forever hiring and laying off staff, with detrimental effects to staff morale, let alone to their ability to build an effective team.

Examining developed versus emerging markets investment banks performance on a cost to income basis over the past few years, reveals clearly that developed markets have had a difficult time (2007 data is not included as outliers significantly skew results). This is unsurprising as such results simply reflect broader macro-economic trends and the wider credit crisis. What is notable is that staff costs in emerging markets have been rising by 15% per annum since 2007.

Key performance indicators

Figure 4: 2011 Investment Banking Efficiency - Developed vs Emerging Market Banks

Source: Company reports, Accenture Research

120%

100%

70%

60%

40%

20%

0%C/I Staff C/I Non S. C/I

Average

Previous year average

120%

100%

70%

60%

40%

20%

0%C/I Staff C/I Non S. C/I

Average

Previous year average

Range of outcomes

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Source: Company reports, Accenture Research

Figure 5: 2011 Emerging Markets Investment Banking Efficiency

Average

StandardChartered

MayBank

CIMB

Itau Unibanco

Banco do Brasil

VTB

Shinhan Bank

Investec Ltd

Absa Capital

First Rand

Standard Bank

Citic Securities

ICICI Securities

Kotak Mahindra

0% 20% 40% 60% 80% 100% 120%

2011

2010

2009

Figure 6: Historic Cost to Income Ratios - Developed vs. Emerging Market Banks

Source: Company reports, Accenture Research

150%

100%

50%

0%

-50%

-100%20102009200820072005 2006 2011

AveragePrevious year average

120%

100%

80%

60%

40%

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0%

-20%

-40%

-60% 2011201020092007 2008

AveragePrevious year average

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Figure 7: 2011 Investment Banking Productivity - Developed Market Banks ($Mln)

Source: Company reports, Accenture Research

1.80

1.60

1.40

1.20

1.00

0.80

0.60

0.40

0.20

0.00NSC/HeadSC/HeadRev/Head Cost/Head

AverageRange

Range of outcomes

Productivity (revenue and cost per head)

We regularly look at efficiency ratios in our benchmarks of developed markets investment banks. However, very few emerging market banks give any detail of their staff numbers, meaning what productivity data we have collected does not give a statistically significant result.

The information we have been able to gather suggests staff costs in emerging markets are running at half the rate of staff costs in developed markets. Given that cost to income ratios are surprisingly close, we have to conclude two things: emerging markets investment banks have been undertaking significant investment in order to upgrade older legacy systems, and that revenue per head figures in emerging market investment banks continue to lag those of many developed market investment banks.

Disaggregated data

Developed market banks generally release data down to the level of: debt capital markets, equity capital markets, debt trading, equity trading, principle trading, prime brokerage services, and revenues from asset and wealth management. Emerging markets banks by in large do not yet release as much detailed data, and where such data does exist, it does not tend to be available in a historical time series. We will continue to monitor this situation and report data as and when it becomes available.

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Conclusion

For many developed market investment banks seeking to meet their battered return on equity targets, emerging markets are the great opportunity. But it is not an opportunity without challenges and competition. These economies offer the very real prospect of substantial economic growth and the consequential need for investment banking services ranging from advisory, to wealth management, to sales and trading, all taking place in markets which have yet to have investment banking margins crushed through competition and commoditisation.

For those interested in emerging markets, an understanding of the operational strengths and weaknesses of emerging markets banks is an absolute prerequisite.

Contact informationJames Sproule Global Head of Capital Markets Research Accenture Growth and Strategy james.r.sproule@accenture.com

Yusof Seedat Capital Markets Research, South Africa Accenture Growth and Strategy yusof.seedat@accenture.com

Kapil Chawla Capital Markets Research, India Accenture Growth and Strategy kapil.chawla@accenture.com

About AccentureAccenture is a global management consulting, technology services and outsourcing company, with more than 246,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$25.5 billion for the fiscal year ended Aug. 31, 2011. Its home page is www.accenture.com

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