The year 2012 promises to test the mettle of even seasoned investment bankers. With expectations of fewer initial public offerings (IPO) and slowed M&A action this year, the industry may be set for challenging times.

A downward pressure on investment banking fee, high competition and consolidation appear to be the way forward. While a section of the industry could benefit from the growing demand for bond offers and inbound acquisitions (foreign companies buying up Indian ones), most investment bankers will find themselves in a tough spot.

Note that investment bankers typically earn a percentage commission on the equity and debt financing deals as well as the M&A (merger and acquisition) deals they help transact.

Vanishing offers

Initial public offers, once a sure-fire way to earn commissions, have been hard to come by in recent times. Though equity markets have revived from their lows this year, corporates still aren't very confident of testing the IPO markets.

In a sign of the times, the first public offer of 2012, the Rs 62-crore IPO from Goodwill Hospital and Research Centre, had to be withdrawn as it failed to attract investors. More recently, others such as Tara Jewels, Pride Hotels, Bitul Oil and Micromax also decided to abandon their IPO plans after filing draft prospectuses.

This translates into missed revenue opportunities for investment bankers. “In the Equity Capital Market (ECM) segment for investment bankers, the fee pool is down by over 70 per cent”, said Mr Sanjay Sakhuja, CEO, Ambit Corporate Finance. He expects the current year to be challenging as last year.

The IPO market, incidentally, has been weak since the second half of 2011. According to SMC Global Securities in 2011 alone some 28 companies called-off their initial public offerings, amounting to Rs 32,200 crore.

Weak M&A appetite

With financing costs shooting up, Indian corporates have become cautious about their M&A aspirations too. “A number of banks are sitting on a significant M&A pipeline. While many of these deals should have happened in 2011, they are on hold now,” said Mr Anjani Kumar, Head of Corporate Finance, RBS India.

Unlike 2008, Indian and global corporates now have deleveraged balance-sheets and are sitting on large reserves of cash. Even so, they have turned very cautious.

“Banks are under tremendous pressure for volumes and are increasingly looking for hard numbers. Just having a strong pipeline isn't good enough any more”, added another banker, on the condition of anonymity.

Early 2011 had seen quite a number of new entrants offering various products. With banks trying to acquire market share, there was tremendous pressure on fees. This led to a 50 per cent drop in fee pool in the M&A market said industry sources.

Consolidation on cards

As a result, domestic investment banks with limited scope or foreign ones that aren't very committed to having a local presence have already started winding up their operations.

“The current market turmoil could lead to a landscape involving fewer but stronger players in the industry. We may also see the market players gravitating towards integrated Corporate and Investment Banking models”, said the head of a foreign investment bank.

Sliver of hope

The going may not be as challenging for investment banks that specialise in inbound deals. “International players who don't have a significant enough presence or operations here continue to find India attractive,” explained Mr Topsy Mathews, Managing Director of M&A at Standard Chartered Bank. With India-bound deals likely to see sustained action, not all banks will be as parched for growth. That in 2011 alone, inbound deals worth $29 billion were struck may help put the growth prospect in perspective.

The increasing popularity of bond offers too could be a saving grace for the industry.

While on the one hand, retail investors have taken to debt instruments quite well, on the other, strong issuers are using the opportunity to diversify their liability profile.

Depending on the issuer, ratings, tenor, need for underwriting and structure, fees for institutional placement of debt ranges between 0.25 and 1.25 per cent of the amount raised.

Hope on second half

While the first half of 2012 may be tepid, bankers expect the second half to be more conducive, helped by a cooling off of local inflation and interest rates.

But not all bankers are as optimistic. “If markets remain like this for more than two quarters, then I won't be here to talk to you,” said an investment banker.

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