Capitalizing On Adversity

The best banks see falling stock prices as an opportunity to finance takeovers with debt and sell bank equity to please regulators.

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The capital market turmoil that started in China last summer and continues to rattle the rest of the world does not bode well for global investment banks. Those with big credit trade books that grew during a prolonged period of low interest rates—like Goldman Sachs, known for high-yield bond trading, credit default swaps and leveraged lending—are now struggling with rising interest rates.

But some investment banks that were leveraged to foreign exchange, like Citi (regarded as a high-stakes FX player) benefited from a combination of normalizing interest rates in the US, volatility in emerging markets and the resulting swings in exchange rates.

Other investment banks in the US and Europe are withdrawing from emerging markets to focus on their corporate clients and institutional investors at home. They will have a hard time regaining access to those markets. But smart banks have maintained a high profile in the most promising emerging markets in Latin America and Asia through the lean years since 2008. They were still able to compete with dominant local banks on those continents for equity, debt and M&A deals last year—and the rest of this year looks promising for them.

“Post-financial crisis, banks have been more selective about where they invest,” says Brian Kleinhanzl, an equity analyst who covers investment banks for Keefe Bruyette & Woods in New York. “You’ve seen bigger banks pull back into developed markets. But people who maintained a strong presence in emerging markets did much better.”

That’s why Citi and its Latin American subsidiaries climbed the league tables last year. In China, where global investment banks are wary of putting client money at risk, local banks top the charts.

Some banks, notably UBS, are sacrificing higher margins to win IPO deals with relatively low fees. The Swiss bank, which Global Finance named world’s best investment bank this year, took advantage of closer scrutiny by banking regulators to raise capital for financial institutions on the stock market.

In the US, some banks were quick to see the bright side of the stock market crash. It triggered bargain hunting by investment-grade corporations that raised debt at relatively low rates. Bank of America Merrill Lynch underwrote four of the five largest M&A-related bonds issues in a bumper year for takeovers.

In compiling this year’s rankings, Global Finance editors considered a wide spectrum of factors, including knowledge of local conditions, responsiveness to the needs of corporate clients and reputation from a regulatory perspective. Judges factored in data from Dealogic, Thomson Reuters, Greenwich Associates, and dozens of banks around the world in formulating this year’s prestigious list of winners.