Banks look east to expand

THE INVESTMENT-banking battle has moved east as banks seek to capture liquidity and market share in the emerging economies of Europe, the Middle East and India.

These economies have moved to the top of investment banks\' agendas as they strive to increase revenue in the fallout from the credit crisis.

\"It is clear most investment banks will see a drop in financial-sponsor activity this year, and everyone is looking to emerging markets for growth,\" said Jitesh Gadhia, managing director at Dutch bank ABN Amro Holding NV. \"China, India and emerging Europe will show the most growth in mergers-and-acquisitions volumes.\"

Since the start of 2005, investment-banking fees from Central and Eastern Europe and the Middle East have tripled to $3.5 billion. Some banks estimate those regions, with India, could provide 30% of European revenue this year, a proportion that would cover the anticipated shortfall from a drop in revenue from private-equity firms.

Institutions have redrawn the European investment-banking map, broadening the boundaries to encompass the new pools of liquidity, and have appointed executives to manage the expansion. Morgan Stanley has moved Walid Chammah, its top banker, to London from Wall Street and made him chairman of its international business.

Morgan Stanley created a position of head of international investment banking, a territory that includes Eastern Europe, Africa, the Middle East and India. While Western European countries such as the U.K., France, Germany, Italy and Spain will continue to drive investment-banking revenue, fee pools are growing faster in eastern markets.

\"European investment banking is broader than it was and the amount of ground to cover is more significant,\" said Gavin MacDonald, global head of mergers and acquisitions at Morgan Stanley.

\"There is a twin-speed global economy. While the U.S. and Western European economies will slow down, if not enter a recession, emerging markets will continue to grow,\" Mr. Gadhia said.

Ten years ago, the emphasis of growth by investment banks in emerging markets was to identify opportunities for their big Western clients. This time, they are positioning themselves to serve local companies that want to tap capital markets and advisory expertise to expand abroad.

\"We have seen much activity between emerging markets, such as the purchase by Industrial & Commercial Bank of China of a stake in South Africa\'s Standard Bank\" said Philip Southwell, head of Central and Eastern Europe, the Middle East and Africa for Deutsche Bank AG. \"Other notable transactions include the acquisition of Dubai-based Investcom by Johannesburg-listed MTN.

Banks spent last year strengthening in Russia and are building their teams in Kazakhstan and the Ukraine. Last month, Goldman Sachs Group Inc. bought a stake in Dragon Capital, a Ukraine investment bank. Goldman said it views its stake as a financial investment but is likely to seize the opportunity to broaden its presence in the country.

Investment banks are operating in these markets through a combination of sector coverage out of London and local presence. The trick is to target the source of liquidity. In Russia, this commonly means oligarchs who run big companies. In India, big companies are often controlled by families -- known as promoters -- that own substantial minority stakes.

Mittal Steel Co. completed Europe\'s biggest M&A deal with its $32 billion purchase of Paris-listed rival Arcelor SA. Tata Steel Ltd. bought Anglo-Dutch steelmaker Corus Group PLC for £8 billion ($15.8 billion), while Indian metals group Hindalco Industries Ltd. paid $5.7 billion for Novelis Inc. of the U.S. In 2006, the value of M&A involving Indian companies more than doubled to $52 billion, and last year it hit $58.9 billion, according to Dealogic, an investment-banking data provider.

In the Middle East, coverage revolves around sovereign funds, which are investing in public companies and, in some cases, making full acquisitions.

Last year, the Qatari Investment Authority came close to acquiring U.K. retailer J Sainsbury PLC, but it pulled out because it couldn\'t come up with an extra £500 million in equity following the credit crisis.

Morgan Stanley covers some Middle Eastern funds through its venture in Saudi Arabia, with executives regularly flying out. It covers Temasek Holdings Pte. Ltd., the Singapore state investment company, through its Chinese office. Banks have differing risk appetites to countries, and those that were under strength are building rapidly. Lehman Brothers Holdings Inc. is expected to hire 60 people for its Moscow investment-banking operation eight years after returning to the country, having left following the Russian debt crisis.

Lehman also has been building in Turkey, where it has acquired two brokerages. Morgan Stanley is set to enter Romania with the acquisition of HTI Valori Mobiliare, an equity broker-dealer. Goldman Sachs is looking at acquisitions in Egypt.

Deutsche Bank AG has built its emerging-markets business through a combination of organic growth and acquisitions.

The challenge for investment banks in emerging markets is risk management, and they are trying to strike the balance between going for growth and not overstretching themselves, given the uncertainty over how long the credit crisis will last.

Banks also face competition from international rivals and local specialists, such as Renaissance Capital, an emerging-markets investment bank that is looking to double the staff in its African and central Asian operations this year to 260 bankers.

Renaissance, which expanded to Africa last year, is recruiting an additional 100 bankers for its sub-Saharan hub in Lagos, Nigeria, and its offices in the Kenyan capital Nairobi. The bank is also establishing a full-service investment bank in Kazakhstan\'s financial center of Almaty as a launch pad into other central Asian markets such as Uzbekistan. Staffing in Almaty will be doubled to 60