Asia’s share in global corporate and investment banking revenue will rise to 45% in 2015 from about one-third now, said a report by consulting firm McKinsey and Co., Asia: The Future of Corporate and Investment Banking.
This growth will be driven by India and China, where large companies are buying firms overseas, while others are raising money both locally and overseas leading to growth in both the mergers and acquisitions (M&A) and equity capital markets.
The report, released on Tuesday, said India’s banking revenue will grow at 15-17% annually over the next four years, a rate somewhat close to nominal gross domestic product (GDP) growth, among the fastest in the region.
“By 2010, Asia’s risk-adjusted core investment banking (CIB) revenues had already reached nearly $442 billion, for just under a third of the global total. Notwithstanding recent market volatility, probable macro-economic scenarios suggest that this revenue pool could rise to about $790 billion by 2015,” the report said.
This optimism comes at a time when core investment banking activities—M&As, equity and debt capital markets—have been muted so far this year. According to data from Dealogic Plc, an investment banking data provider, core investment banking revenue for 2011 in India is down nearly 30% to $467 million.
The three major factors for growth in Asia are the rapidly growing mid-corporate segment (companies with revenue between $50 million and $125 million), a potential inflection point in the growth of Asia’s capital markets, and the continued expansion of regional transaction banking.
The global consultancy firm expects each of these three opportunities to offer a 2015 revenue pool in excess of $150 billion. According to the report, by 2015, revenue from Asia’s mid-corporate segment will nearly double to $308 billion, driven by the underlying economic expansion of India and China, and the growing importance of those two countries’ medium-size companies.
“Today, mid-cap companies are on the prowl for acquisitions as they are in the phase of inorganic growth,” said R. Satish Kumar, senior vice-president, Centrum Capital Ltd. According to him, the number of opportunities in mid-cap companies outstrip those in large-cap companies and, therefore, even global banks today are ready to enter the mid-corporate segment. “Even if the acquisitions don’t happen, many times these companies’ balance sheets are under stress and require restructuring...which is also a good opportunity.”
While India’s wholesale and investment banking revenue today is relatively small compared with that of China, this growth will dramatically increase India’s relevance. By 2015, this revenue could become as large as Australia’s, according to McKinsey. “We expect continued large-scale investment in infrastructure, a vibrant mid-market client base, and the growth of Indian MNCs (multinational corporations) to be major revenue drivers,” the report said.
“Currently, the Indian core investment banking (equity and capital markets and M&As) wallet size is modest,”said Gunit Chadha, India chief executive officer and a member of Asia-Pacific executive committee at Deutsche Bank Group in India.
“But if you add revenues from adjacent global markets’ businesses—equity and fixed income sales and trading, forex and commodities—then the full pot becomes very significant. As Indian financial markets relative to GDP growth, cross-border flows increase on both debt and equity, and newer products are introduced (credit default swaps, mezzanine and acquisition debt, etc.), the market wallet is expected to significantly expand, in the years ahead,” he said.