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Investment Banker Pay Squeezed As Fees Slump

14 May, 2009
The number of well-paid investment bankers in India is getting harder to justify. Many more will likely see their salaries slashed or lose their jobs.
Excessive pay is under scrutiny at banks around the globe, but nowhere in Asia is the downward pressure on salaries stronger than in India where deal flow has almost completely dried up.
The downturn has widened the already large gap between investment banking costs and fees in India. Competition for deals is fierce and companies are not willing to pay the 3 to 4 percent commissions common in Hong Kong or Singapore.
Credit Suisse, Merrill Lynch, Morgan Stanley and other Western investment banks are expected to be the hardest hit, having expanded more rapidly than the scores of domestic banks in Asia’s third-largest economy.
“Ultimately there are only so many companies that are looking at M&As, fund raising and PE. And to top it up, Indian firms are very tight with their fees,” said Chaitanya Kumar, an ex-Lehman Brothers banker and founder of The School of Investment Banking in Mumbai.
In the first quarter, India investment banking fees came to a mere $107 million, on pace to end the year 50 percent lower than in 2008, according to Thomson Reuters and Freeman Co. data.
That compares with $1.8 billion in the rest of Asia-Pacific, much of which was generated in a few major centres such as China and Singapore. Asia-Pacific brought in $9.9 billion in banking fees last year, while India earned $847 million, the data show.
Freeman compiles fee data through an algorithm based on traditional fee percentages. Most fees are undisclosed.
The top investment banks in India brought in, on average, anywhere from $80 million to $120 million in revenues in 2007 alone, according to bankers and executive search professionals.
Those days are long gone.
“Year to date, I’ve seen one bank with $20 million in revenue, and others who will be happy to get to $20 million by year end,” said an executive search source, who works with Wall Street and European banks in India.
Bankers hope that the upcoming Indian election results will establish a sense of stability, opening up the pipeline for initial public offerings, bond and merger deals that have been shelved due to the financial crisis.
But even if that does happen, experts say, it’s still hard to justify the high salaries being handed out to the legions of bankers competing for a dwindling pool of fees.
“Some investment banks may have over committed to India. The number of firms that are considered bankable by global firms is quite small and competition is very stiff,” said Kumar.
Western investment banks aggressively built-up teams in India, aiming to capitalise on one of the world’s fastest growing economies. Most Western banks went from a few people to around 25, with some adding more than 40 bankers in barely a year.
Now there is an oversupply of bankers and fees are sliding.
“Unfortunately, since there are so many bankers chasing the same deals, you tend to undercut on fees, and when you undercut, nobody ends up making much money,” said Timmy Kandhari, executive director and corporate finance team member at PricewaterhouseCoopers.
Despite lower fees, a lot of India’s bankers enjoy high salaries.
On Wall Street, a managing director (MD) in a typical year gets roughly $200,000 in salary, and at least $1 million in bonus. And in a bull market, it’s not unheard of for an MD to haul in several millions to tens of millions of dollars.
India MDs have earned around $2 million in salary and bonus in recent years, with some directors earning $1 million, and vice presidents making around $750,000, sources say.
The sources who spoke about pay did not want to be named because of the sensitivity around the issue.
As a result of the high cost base, investment banks are likely to cut more amid the economic slowdown, even though they have, in some cases, halved their staff strength.
India remains a promising market for investment banks over the long term. Strong economic growth rates have created huge amounts of wealth and there was a flurry of home-spun IPOs and cross-border acquisitions up until late last year.
But India is a developing economy with many banks. Fierce competition for deals pushes fee payouts deeper down the scale.
Case in point: Reliance Power’s $2.9 billion IPO last year had ten banks managing the offering.
A deal that may generate a 3 percent to 4 percent fee in Hong Kong or Singapore, is more likely to get around 1 percent in Mumbai, experts say.
Banks also rarely get retainers in India, meaning they could put a lot of work into a deal and get zero in pay if it fails.
All of these factors are leading some to say that India banks need to change the way they operate.
“We may see some movements into fixed pay, and the right to claw back bonuses if business is harmed over the long term,” said Namrita Jhangiani, who heads the financial services practice at placement firm Egon Zehnder International in Mumbai.


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Investment Banker Pay Squeezed As Fees Slump

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