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An Indian summer for Wall Street banks

(ATF) For some of the Wall Street banks, 2020 is shaping up to be a heyday for fee income.

Some of the major lenders’ business in India, according to a Reuters report on Thursday, raked in their second-highest fee income since the global financial crisis in the first nine months of this year.

This “payday bonanza”, driven by a flurry of private-sector deals despite the coronavirus pandemic could be a “rare” phenomenon, as well Reuters said.

Yet, as India Inc. wakes up to the importance of mergers and acquisitions (M&A) for growth, and the pipeline starts filling up with a slew of potential deals, it may well be the beginning of an extended Indian summer for not only foreign banks, but local rivals too, say experts.

Reuters reported that five US banks including Morgan Stanley and Goldman Sachs earned $170 million in investment banking fees in January-September, the highest for that period since 2018, according to Refinitiv data, putting them on course for one of their most profitable years.

In 2018, those five banks earned $176.5mn in Indian fees in the first nine months of the year, which was the highest for the period since 2007.

A new era for M&A

The bonanza comes as India’s economy shrank by nearly a quarter in April-June with the country becoming one of the worst hit by the coronavirus pandemic.

Still, India saw a slew of multi-billion-dollar transactions over those months. Corporate giants like oil-to-telecom conglomerate Reliance Industries, and GlaxoSmithKline embarked on a fund-raising spree.

Asian topmost billionaire Mukesh Ambani’s Reliance Industries, for instance, raised more than $20 billion from investors including Facebook, Alphabet’s Google, KK and Silver Lake Partners this year, which was the largest private equity deal in a single company.

Similarly, GlaxoSmithKline’s offloading of its entire 5.7% stake in Unilever’s Indian business for $3.35bn in May was the country’s largest block trade.

“This year will mark the start of a new era for M&A’s in India,” Anirudha Jain, the M&A practice head of Pune-based management advisory firm HU Consultancy told ATF.

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“Indian businesses have started realising the importance of M&A for growth, and the enormous wealth it can create. Consequently M&A is now considered as essential for all growth-oriented companies,” he added.

According to Jain, while M&A was hitherto used as a tool primarily by big companies, following the recent deals, smaller and medium sized companies (called the MSME sector) are waking up to the M&A potential too.

“This year we are seeing a tremendous interest from international investors across sectors in India – in tech, real estate, financial and consumer sectors,” said Dieter Turowski, Asia Pacific investment banking chairman at Morgan Stanley.

“In aggregate, the quantum of capital raising will continue but it’ll be more diversified next year. The pipeline is stronger than six months ago,” he added.

Momentum to continue

India saw $16.8bn of M&A in its technology, media, and telecoms (TMT) sector between January and mid-October, up 62% percent from the same time last year, according to Refinitiv data.

The momentum would gather steam in 2021, according to sources, when a series of technology companies such as e-commerce firm Flipkart plan for listing domestically or overseas.

Raj Balakrishnan, Bank of America’s head of India investment banking, also predicted consumer-tech as a big deal driver for the country going forward with more consolidation and initial public offerings (IPOs) in the offing.

“But not only big companies, local medium and small companies are evaluating strategic opportunities with western companies too,” said Jain adding that simultaneously, local family-managed companies are considering M&A as a tool for family settlements and streamlining internal structures.

“Continued deal flow will (also) come from financial sponsors, conglomerates strategically redefining and optimising their portfolios, and consolidation in tech and consumer sectors,” said Sonjoy Chatterjee, the bank’s head of India.

Dominance of foreign banks?

Nevertheless with almost all major deals struck by US-based private equity funds, while it is a small wonder that Wall Street banks were the carpetbaggers, local rivals are catching up too, say sources.

US and European banks received 41.9% of the total investment banking fees earned in India in the first nine months of 2020, up from 37.2% last year, even as some European banks’ retreat in recent years has helped Wall Street banks increase the share of fees they earn, bankers said.

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Morgan Stanley took home a record $65mn in the first nine months of this year, topping India’s M&A league table, thanks to its role as Reliance Industries’ financial advisor in the fundraising for its digital and retail units, Reuters said.

Separately, Goldman had earned nearly $30mn in fees this year as of end-September, its highest since 2018, as it got the advisory role on a $7bn rights issue for Reliance Industries, the largest ever such deal in India.

The lofty returns were indeed a pleasant surprise for the foreign investment banks which have long complained the miserly fees they earn on Indian transactions.

“However, Indian banks are catching up in the space quickly too,” says Jain. “They have started realising the importance of these value-added services and some of the local private banks are now chasing big deals.”

“Besides, as the pipeline fattens and more and more Indian banks enter charging competitive fees, local banks may start grabbing a larger share of the future M&A deals,” Jain added.

  • With reporting by Reuters

Indrajit Basu

Indrajit Basu is an India-based correspondent for Asia Financial and wears two hats: journalist and researcher (equity). Before joining AF he reported on business, finance, technology, wealth management, and current affairs for China Daily, SCMP, UPI, India Today Group, Indian Express Group, and many more. He is also an award-winning researcher. If he didn't have to pay bills, he would be a wanderer.

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