Showing posts with label Investment Banking Fees. Show all posts
Showing posts with label Investment Banking Fees. Show all posts

Tuesday 3 August 2021

MENA IB Fees by Country - Bring Out Your LHC

Just the Equipment to Detect Small Amounts or Particles

 

In my previous post, I showed that MENA IB fees are pretty much a rounding error in relation to global IB fees.

I thought it would be interesting to use the estimates in the Refinitiv MENA IB reports mentioned in that post to take a look at the “major” countries in this rather “minor” total amount of fees.

Just a short technical note.

Refinitiv estimates total IB fees for a country, a regional area, and globally. 

The free reports that I am using here and in the previous post are summaries. 

Full details are available from Refinitiv for a modest fee.

I’ve prepared two tables:

  • USD amount of MENA IB fees by identified countries.

  • MENA IB fees by country as a percentage of global IB fees.



In my illustrious career on the sellside, I have worked on single transactions that generated fees equal to these yearly fees.  Often multiples.


Note that the amounts above are expressed as percentages.  The decimal equivalent of Saudi IB fees for FY 2020 is therefore 0.0030.

A stark and bleak picture.

Dreams of IB fee “riches” in Saudi or the UAE seem a rather a long distance off.

Vielleicht am Tag danach Sankt Nimmerleinstag.

For the other countries even further in the future.

MENA Investment Banking Fees Still a Sideshow

Aisle 3 for MENA IB

Back in 2017, I posted that the prospect of “rich” Saudi investment banking fees would remain a prospect not become a reality for some time. And quoted some rather minuscule numbers for KSA fees as support for that contention.

In 2018, I took a look at 2017 MENA IB fees and noted that at US$ 912 million they were an estimated 0.88% (0.0088 in decimal terms) of global IB fees of US$ 104 billion. What might be charitably described as a rounding error. 

It’s time to revisit the topic to see what’s happened since then. 

Summary

The picture above tells the story.

  1. In terms of IB fees and transactions, MENA IB remains a rounding error in the global IB market.

  2. It is not currently particularly remunerative for major global investment banks. It’s more a hobby business or “dabbling”.

Source and Technical Note

I am using Refinitiv’s (in a previous incarnation owned by Blackstone and Thomson Reuters) reports.

You can access these reports here for the price of giving them your email address and some bits of personal data.

Note that these reports are based on R’s analysis and estimates.

On the latter point, take a look at the 2019 Global IB Report, that year’s fees are some US$ 100.974 billion. In the 2020 Report, 2019 fees (the comparative figure) are USD 107.762 billion.

Due no doubt to additional data available to R.

I have estimated 2018 MENA and Global IB fees using 2019 Reports and the percent changes shown from the past year (i.e., 2019). So an estimate of an estimate.

The same with individual bank fees.

So the usual caution about the numbers in those reports and in this analysis.

While they look precise, they aren’t. More directional than locational.

Analysis

MENA IB Fees Still a Rounding Error

In the first chart, a comparison of MENA versus Global IB fees.



Small beer.

But are there IB areas where MENA fees shine?




Not really.

Relatively and charitably speaking, syndicated loans are a “brighter” spot.

But that’s not more than just saying that a 10 watt light bulb is “brighter” than a 5 watt one.

The MENA IB landscape reflects

  • the state sector’s dominant role in regional economies – a sector that has both economic and non economic drivers, with the latter often being more important in motivating corporate actions than the former

  • a generally risk adverse rentier/comprador mentality in the private sector

The results are

  • a greater orientation to debt (syndicated loans and DCM) than equity (ECM)

  • a limited market for corporate control (M&A)

  • the state sector’s ability to command low fees

The above are broad generalizations. One could respond that these conditions exist in other markets.

Indeed!

But in the most significant markets there are sufficient other customers to generate transaction volume at relatively higher fees.

In MENA this is not the case.


Importance of the MENA Market to Global Banks

In regard to Global M&A MENA is a small fish.

Clearly, for regional banks it is an important market not only because it is part of their natural market, but also because the fees represent significant earnings.

But what about the big boys?

I’ve selected four global banks based on their consistent position at the top of Refinitiv’s MENA IB fee tables.

Three of the banks typically are also in the five top positions in the Refinitiv’s Global IB tables. They are JPMC and Goldman Sachs who generally trade places in the top two slots Citi which is typically in the top five.

The final bank, HSBC, is typically in the third tier global position: ranking eleven to fifteen. Within MENA it has a stronger position. most often in the first position.





From the charts above, it’s clear that MENA is a hobby business for these banks.

HSBC as a third tier IB is no doubt happy to take IB fees wherever it can.

In my two earlier posts, I mentioned the drivers of IB participation in a market:

  • Fees – Not only for the IB and its bankers’ remuneration but also as a “marker” of IB prowess in sales pitches.

  • Transaction Volume – A similar market prowess badge for one’s pitchbook.

  • Market Development – The hope that today’s loss leader will lead to a higher volume of higher priced transactions. Dream on in MENA.

  • Global Positioning – Using transaction expertise/presence in one market with clients from another.

    • We are a global firm with experience and knowledge across the globe”.

    • We can help you in the UAE, KSA, etc.”

  • Inward Marketing – Using one’s position in a market to sell product (debt, equity, etc) into that market.  

These factors probably explain the continuance of the MENA hobby.

Friday 12 January 2018

2017 Middle East Investment Banking Fees -- Get out Your Microscopes

Researchers at Arqala University Help AA Find MENA IB Fees

AA had a moment of near total shock as I read the headline Middle East investment banking fees total $912 billion in 2017” in the 10 January edition of AA’s newspaper of record the Gulf News.

Quite a change from 2016 or so it would seem. 

It only took the first paragraph to dash AA’s fervent hope for “investment bank fee riches” in MENA much less in Saudi Arabia to come crashing to the ground.   USD 912 billion quickly turned into USD 912 million. 

Thompson-Reuters estimate that global investment banking fees total some USD 104 billion in 2017.  MENA  fees  at USD 912 million are some 88 basis points of the total. 

AA’s point in writing this isn’t GN’s editing mistake, but rather to use it point out once again that in the grand scheme of matters financial MENA IB fees remain miniscule, more a rounding error that meaningful.  A hobby rather than a mainframe business.

Wednesday 22 March 2017

Saudi Investment Banking Fee Riches – Just How “Rich”?

Happy Banker Counts His Legendary Saudi Fees

March 16 Bloomberg reported that Saudi Fee Riches Will Keep Citicorp and Credit Suisse Waiting.  Bloomberg didn’t say how long but the article implies it could be a bit of a wait.
AA thinks it will be even longer before banks get “rich” off Saudi or MENA fees.  (Editor’s Note:  With this post SAM has adopted the Spicer Style Book convention on the use of quotation marks.) 
"Rich” is a relative term.  A chap or chapette with US$10,000 equivalent in Pakistan is doing quite well.  That same amount in Luxembourg not so well.   AA is assuming talk of “riches” is in relation to the latter, though ...
The 2015 net income figures cited by Bloomberg in the article for net profits at HSBC KSA and  JPMorgan KSA (respectively US$75 million and US$10 million) indicate just how far there is to go.   For these banks this is "hobby" not mainframe LOB income.   
A few quotes from the Bloomberg article to set the stage.
Saudi Arabia and its ambitious reform plans are the focus of all the hype in Middle Eastern financial circles these days, but it’s still in the United Arab Emirates where banks are earning most of their money.

Investment banking fees paid to lenders in the U.A.E. were 45 percent higher than in the kingdom last year, according to New York-based research firm Freeman & Co. Saudi Arabia has trailed the U.A.E. for fees earned from merger and acquisitions, equity capital market and financing deals since 2011, and is off to a slower start this year, according to the data.

Global banks are investing in Saudi Arabia in preparation for an expected fee bonanza.
Sounds fantastic.  45% higher.  Fee bonanza, albeit “expected”.
There is no sweeter song to banks and bankers than of outsized fee revenue which carries the happy implication of the bonuses such flows imply.  Think on average near to 50%--at least in happier days—shared with self-professed hard working and “savvy” bankers.
But let’s take a closer look.
First at the quantum of fees as per Bloomberg.
Banks earned $237 million in investment banking fees in the U.A.E. last year, compared with $164 million in Saudi Arabia, the Freeman data shows. Lenders secured $154 million from financing deals in the Emirates, compared with $121 million in Saudi Arabia, even after the kingdom raised $17.5 billion in the largest-ever emerging-market debt sale. M&A fees in the U.A.E. were $70 million, almost triple the $24 million earned in Saudi Arabia.
Just how big are these numbers in the global context?
Charitably speaking, rounding errors.
Thomson Reuters (TR) estimates that global investment banking fees in 2016 were approximately US$85 billion.   The fee rich geographical areas are USA and Europe (primarily Western Europe). As per TR’s report roughly US$45 billion of the US$85 billion related to US deals.
On that basis, parsing UAE and KSA fee levels either individually or in total is like analyzing the relative positions of Sunderland and Middlesbrough.  Which is the better team?  Which of the two  will take home silver next season? 
If that US$85 billion total hasn’t already well and truly taken the luster off talk of KSA IB fee “riches”, or for that matter UAE or MENA IB fee riches, let's drill down a bit further..
The charts below are compiled from Thomson Reuters individual LOB reports on estimated full-year 2016 global investment banking fees for just three IB revenue streams so they don’t total to US$85 billion mentioned.  Just three to provide a bit more granular detail on where MENA fits in the global fee picture.
2016 Estimated Investment Banking Fees
Billions of US Dollars
M&A 

$30
Debt Capital Markets

$24
Global Syndicated Loans

$16
Total

$70

MENA Share of Estimated Global Fees
M&A 

0.083%
Debt Capital Markets

0.517%
Global Syndicated Loans

0.500%

Note: 0.083% is 0.00083 in decimal terms.  
MENA fees at their highest don’t reach 1% of total global estimated fees in any of the categories above.    
Side note:  You can sign up for free copies of TR’s reports (which are quarterly) if you have a corporate email or so AA has been told.  Disclosure:  I didn’t hear this from a Fox News commentator, but the information is almost certainly as, if not more, credible, if you can believe that.
Seems to AA that not too many banks or bankers are going to get rich off this level of MENA fees. 
These MENA M&A fees are less than the fees for some single deals in the USA or Europe.  Profit-oriented banks and bonus-hungry bankers are likely to focus elsewhere, particularly where the same or similar templates can be applied to a greater flow of transactions.
Typical AA Irrelevant Aside:  Once some years ago in one of our weekly deal review meetings with some of the highest life forms in the firm present ethereally electronically as befits their exalted existence, one of my colleagues began touting a deal with $6 million in revenue.  A rather distraught team leader jumped in to minimize embarrassment by noting the deal was significant for “potential market development”.  An unfortunate turn of phrase.  The “big” man or others of nearly the same rarefied stature would periodically ask how PMD was coming along when they wanted to tweak a tail.  PMD thereafter became a sort of tag line in the group to justify “certain” behaviors.  There was the case of a rather large beverage expense incurred with several colleagues that AA successfully explained as “PMD brainstorming”.   
What could change to propel MENA into relevant fee territory?
Fees are the product of volume and pricing.  (Math pun intended).
US and Europe have volume.  MENA doesn’t have the volumes.  Even with KSA’s economic plans sustained volumes at the US/Europe level are unlikely.
But there’s another problem.  Low fee levels, particularly in KSA, as Bloomberg notes.
Banks and advisers working on Saudi Arabia’s $6 billion National Commercial Bank IPO, the world’s second-largest IPO in 2014 after Alibaba Group Holding Ltd., received about $6.7 million in fees, or about 0.1 percent of the offering’s value. By comparison, Credit Suisse and Morgan Stanley took about 1.2 percent of proceeds on the Alibaba sale.
"The Aramco IPO is likely to have fees hugely squeezed," said Emad Mostaque, chief investment officer of emerging market hedge fund Capricorn Fund Managers.

One might argue that MENA fees are depressed now because current clients are predominantly public sector entities that generally pay lower fees.
Indeed.
What are the prospects for a local private sector Alibaba (other than the one pictured above) and the sort of private sector deals we see in the USA or Europe?
Off in the distant future if at all.
After the successful National Commercial Bank IPO, KSA state entities retained some 60% of the bank.  The planned Aramco IPO targets placing a whopping 5% of existing shares, leaving 95% in government hands.  In neither case are private sector fees likely to apply to follow-on deals.  And if the initial performance holds (NCB was wildly oversubscribed and Aramco is likely to be as well), market demand will bolster client demand for lower fees. 
That doesn’t mean that foreign banks will shun Saudi or other MENA deals.
Fees aren’t the sole criterion for participating in a deal. 
Sometimes “maintaining relationships” or “creating” them is a compelling motive.  The mantra goes: Do a cut-price deal, gain admission to the client’s magic circle of favored banks, be repaid many times with  subsequent richly priced deals.  But often the subsequent “rich” deal is a mirage.  If the client is used to “cut rate” prices, future transactions are likely to be just as “fee skinny” as the entrée deal. 
Or if the deal is strategically important to the country, your reward will be a fast track to a banking license in the country where you can earn above average profits from private sector clients. That’s the theory, though this also often doesn’t work out in practice.
Banks have other motives, e.g., doing deals to enhance league table position to bolster their image and marketing.  That’s why you’ll see more than the necessary number of banks on very large or very prestigious deals often working for a song.  But without sustained substantial fee revenue such efforts come to naught. 
Also sadly, as history shows, despite self-proclaimed “smarts”, IBs are prone to fads, fashions, and, yes, hype.  See Lehman, Bear, Citi, et al.  Or dotcoms,mortgages, whales, etc.  If the music is playing, there is a strong compulsion to get up and dance.