Competition hits Asian banks’ fee income

Investment banking in Asia is overcrowded, with too many institutions putting too much pressure on fees, according to senior bankers, giving the industry a longer-term problem than the fall in market activity at the end of 2011.

There are growing questions over how long institutions are prepared to hold out for the promise of greater growth while continuing to take lower fees on capital raisings and other work than they would in their domestic markets of the US, Europe, Australia or Japan.

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“Running an investment banking business in Asia is costly because of the region’s geographical complexities,” said Gaby Abdelnour, Asia-Pacific chairman and chief executive for JPMorgan. “Typically, the cost structure for a newcomer into the industry will be a lot steeper than someone who’s already established.”

Some bankers say that the significantly lower staff costs of Chinese banks are behind their ability to undercut rivals from other countries when pitching for investment banking work. But others say it is simply the number of players in a region that has seen relatively little consolidation.

Fees for initial public offerings in Shanghai recovered last year to an average of 2.5 per cent from 1.6 per cent the year before when Asian listings excluding Japan hit record volumes, according to data from Thomson Reuters.

Hong Kong listing fees meanwhile were flat at 2.8 per cent on average, but this is less than the 3 per cent typically seen in western Europe or the 3.6 per cent in Australia and way below the more than 6.5 per cent average for the US, according to Thomson Reuters.

IPO fees can differ widely between different deals, but they are a good indication of the level of competition in Asia, according to senior bankers. That includes fees for sales and trading, where banks typically make the majority of their revenues.

Competition has increased in recent years as banks from Japan, South Korea and China invested in building regional investment banks, while Australian, European and US banks expanded in the region.

Some blame the lower cost of staffing among Chinese banks on the mainland for adding pressure. “When it comes to deals in China, the banks there pay their guys 50 per cent less than we do, which makes it impossible to charge a proper fee,” said an executive at US bank in the region.

A rival senior banker at an Asian institution disagreed, saying: “Mostly it is just that there are too many banks in the region, too many getting on to every single deal and that is just competing the fees away. They may pay less on the mainland, but in Hong Kong everyone is on similar scales.”

Few banks break out revenue numbers for their regional investment banking business, but JPMorgan and Citigroup, which both give some detail, saw declines in Asian revenues. Dealogic estimates that for Asia as a whole, revenues for the second half of last year were only marginally better than the first half of 2010 and worse than the second half of 2009.

This has led to disappointment at this year’s bonus rounds and job cuts in the financial centres of Hong Kong and Singapore.