India is flavour of the month – rapid economic growth, booming stock markets and surging valuation multiples – but can international investment banks make decent money there? And can they rely on India to offset the decline in fees from China?
A look at the numbers suggests that the answer – at least at the moment – to both questions is “no, not really”.
In the first half of 2024, according to LSEG statistics, India investment banking fees were just US$530m – around a 10th of the US$5.6bn IB fees in China and only 1% of global fees.
Even Japan has a much bigger investment banking fee pool than India at US$2.3bn, up 7% on the year in the first half.
In fact, despite the booming stock market, the India IB fee pool has been rangebound at US$450m–$600m for the last seven years.
In contrast, the China IB pool has been above US$5bn every year since 2016 and peaked at almost US$10bn in 2021.
Digging deeper
To size the relevant market opportunity for international banks in India it is best to dig a little more into the details.
In China and India, DCM and syndicated lending are dominated by local institutions – in both countries all the top 10 banks in terms of fees for bond deals are domestic players. But there’s a significant difference: in China debt deals made up 83% of the IB revenue pool; in India it was just 35%. In other words, international banks are scrapping for around 17% of the fee pool in China, and 65% in India. That fee pool is essentially ECM and M&A.
So that should be good news for Western banks in India – if they get paid properly. The problem is, they don’t.
According to LSEG statistics, first-half 2024 ECM underwriting revenues in India were US$243.8m – up 127% on the year – while China’s ECM underwriting fees were down 75% but nonetheless much larger at US$645.8m.
The gap reflects the fact that banks get paid much more for working on deals from Chinese issuers, including those listed overseas or in Hong Kong, than those from India.
In China, those ECM fees came from US$26.6bn of deals. In India, its ECM fees came from US$29.5bn of deals. In other words, banks got paid 2.43% in fees for money raised via ECM for Chinese issuers, and just 0.83% for those from India.
That is in part a reflection of the deal mix, with activity in India dominated by follow-on offers while China saw several large convertible offerings for dual-listed companies. It is also a cultural preference in India towards having skin in the game – in terms of banks providing financing – as opposed to paying high fees for investment banking advice.
Even when it comes to IPOs, the simple story of deal volumes from China falling 82% and those from India nearly doubling disguises the fact that funds raised via IPOs of Chinese companies at US$5.8bn were higher in the first half than funds raised by Indian IPOs at US$4.4bn.
And that is despite Indian stock markets being up considerably and trading at more than twice the price-to-earnings multiple of Chinese stock markets and even as, according to Fidelity, eight of Asia’s 20 most dramatic trading debuts in the first half were in India, with the average Indian IPO rising by 61% on the first day of trading.
India bulls will suggest that the wild success of these mid-sized listings is likely to encourage a host of US$1bn-plus IPOs, particularly as private markets are not awash with cash.
The first of these big-ticket IPOs was Ola Electric Mobility, which listed on August 9 and like most other Indian IPOs this year had a huge first-day pop, rising 20%.
What the market is really waiting for, though, is Reliance Industries and the IPO or spin-offs of the huge Reliance Retail and Jio mobile empires. Both businesses have had valuations of around US$100bn and a host of high-profile international investors from private equity and sovereign wealth funds to tech giants. Investment bankers are of course positioning themselves for these potential 2025 events.
Going global?
The other part of the non-debt fee environment is M&A. Here too, those getting over-excited about India need to look at the numbers. Completed M&A advisory fees of US$90.8m declined by 47% in India in the first half. Part of this is related to when fees are booked, with India-related activity relatively flat over the period but it is nonetheless far worse than the 26% decline in China to US$264.5m where M&A volumes have been trending downwards for almost a decade and are one-third of the average level between 2015 and 2018.
The higher valuations of Indian companies give them a strong acquisition currency and we may find them not just buying locally but going global – that will be good news for international banks. The fee pool in Indian M&A is also well distributed across industries. And yet for international banks to make decent M&A fees in India, high-margin client segments like private equity will have to recover – and there’s little sign of that happening. In fact, as private equity has pivoted away from China in the past two years, it was not to India but to Japan.
Not just fees
Even if the animal spirits of the Indian stock market keep motoring, the business case for international investment banks in India cannot be justified by fees alone.
There has to be something more. So how about this? The key is a phrase straight out of the marketing department’s vernacular and one that makes a generation of financial journalists roll their eyes: “the one-bank strategy”.
Banks have chased that dream in various places across the world for years – ending up with the kind of weird incentive structures that did for Credit Suisse – and yet there is some logic to that strategy in India.
India is the land of the tycoon and family businesses. Strong relationships in one business area could be leveraged in other areas: investment banking, transaction banking, corporate lending, margin loans and offshore private banking. Bringing those strands together could be lucrative for banks who can manage it.
Those only chasing one-off deals, on the other hand, are doomed to work hard for very little reward.
Rupak Ghose is a former financials research analyst