Wall Street banks should sharpen their knives

epa03529181 (FILE) A file photograph dated 25 April 2007 of Morgan Stanley corporate sign in front of the company's Japan headquarters in downtown Tokyo, Japan. According to media reports on 09 January 2013, US bank Morgan Stanley plans to lay off 1,600 workers in its investment banking unit worldwide.  EPA/EVERETT KENNEDY BROWN


In Asia, Western banks need to understand that small is beautiful. They need to be more nimble and focused, and accept that some things are best left to the locals. They should also focus on what pays: The multinational clients that were once their top customers and the private-equity firms that provide recurring fees
are a lot more loyal than the average Chinese company.
Even as many aspects of investment banking get squeezed, overall fees in the region rose thanks to yuan bond sales, which is where Chinese institutions dominate. Note issues in the Chinese currency accounted for 75 percent of the region’s total bond-underwriting fee pool this year, according to data from Freeman & Co., and a fifth of Asia-Pacific investment-banking fees, including Japan and Australia.
It used to be that taking state-owned Chinese companies public in Hong Kong was the big money spinner, but again, competition from mainland banks has been chipping away at that for a while.
Even the boom in Chinese acquisitions offshore isn’t a clear-cut winner, although Wall Street does still reign when it comes to advising Chinese corporations on their hunger for overseas assets. Serial shoppers like Fosun International Ltd. and Dalian Wanda Group Co. now have in-house banking teams and increasing protectionism in the U.S. could hobble much of the activity altogether.
Until foreign investors get into Chinese bonds in a serious way, Western lenders won’t have much of an advantage on the mainland. At the very least, they should wrest control of their Chinese joint ventures, and if they can’t, call time on an expensive proposition that’s yielded few rewards. JPMorgan Chase & Co. said in October it was looking to sell its stake after six years as a minority partner, while a proposal by HSBC Holdings Plc for a majority-owned venture in the free-trade zone of Qianhai in Shenzhen is being watched closely as one potential way to control wayward partners. Currently, China limits foreign interest in securities firms to 49 percent.
It’s not to say Western banks don’t have an edge in the region. Japan was a big source of deals this year, reaping rewards for Morgan Stanley, which topped M&A league tables.
Private-equity firms, flush with cash, have also been a steady source of M&A work. Increasingly, they’re partnering with Chinese players, as McDonald’s Corp.’s pending sale of part of its China business to Citic Group Corp. and Carlyle Group LP shows. They pay much higher fees than many companies in Asia, too.
Underwriting IPOs in Hong Kong isn’t necessarily a lost cause either, especially when banks can get themselves a senior or sponsor role that pays more than a run-of-the-mill bookrunner gig. And there are some transactions that pay up, no matter how many financial institutions are onboard. There’s hope a Hong Kong listing by Ant Financial, also known as Zhejiang Ant Small & Micro Financial Services Group Co., may replicate Alibaba Group Holding Ltd.’s bumper debut, for example. Even China’s clampdown on capital outflows, while hurting M&A, could hold a sliver of good news. Facing a depreciating yuan, ambitious Chinese companies looking to expand are candidates for international equity raisings or dollar bond sales.
Since the 2008 financial crisis, many Western banks have shrunk their footprint in Asia, but job numbers still reflect the good old days when China’s state-owned enterprises provided a steady drip drip of share sales.
Headcount at 12 banks in the Asia-Pacific region surveyed by Coalition, which includes equity and fixed-income trading in its numbers, fell almost 10 percent to 11,200 at the end of the third quarter from 12,400 as of Sept. 30, 2015. Revenue fell even more. In the nine months to Sept. 30, Asia-Pacific investment-banking revenue, including equity and fixed-income trading, was $20.7 billion, down almost 15 percent from $24.3 billion in the same period of 2015, the Coalition data show.
It’s a safe bet, therefore, that neither Barclays Plc nor Goldman Sachs Group Inc. will be alone in trimming staff numbers as 2017 rolls out. There’s room to do a lot more.
— Bloomberg

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter

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