Making Asia the seat for a top investment banking role with global responsibilities is a clear statement of intent for JPMorgan, which named Jeff Urwin as its new head of the region this week.
In a similar vein, Gary Cohn and Lloyd Blankfein of Goldman Sachs both travelled to the region again this month, visiting the bank’s operations and talking to regulators about the development of capital markets particularly in China.
Attracted by the region’s rapid growth, fuelled by China’s rise as an economic superpower, global and local investment banks have spent heavily on Asian operations, opening offices in new countries and hiring thousands of people.
But after a decade of turbocharged expansion, Asia-Pacific still counts for only about a fifth of global investment banking revenues, according to a report by Oliver Wyman and Morgan Stanley.
Greater China including Hong Kong has made up an ever growing share of that business, increasing from half of Asia ex-Japan revenues to two-thirds, according to Macquarie.
With China slowing down, more people in the industry are asking whether it is time to take a more realistic approach to the region.
“China growing at 8 per cent a year is still growing faster than the rest of the world and given the size of the economy creates a big opportunity for us,” says David Ryan, president of Asia-Pacific ex-Japan at Goldman Sachs.
“Two to three years ago, there was a certain degree of intoxication with the macro growth story across the industry – I think people have now got more balanced in terms of ensuring their businesses deliver in the near term.”
The past year has been an unsettling experience for investment banks in Asia. The steep drop-off in market activity in the second half of 2011 highlighted that business in Asia does not even provide an uncorrelated buffer against the travails of the West more than four years after the onset of the financial crisis.
The first quarter of this year – in spite of a dearth of stock market listings and limited merger and acquisition activity – has seen some recovery as bond issuance has soared and sales and trading of currency, interest rates and securities products have picked up. But the start of the year has brought mixed fortunes for banks.
Morgan Stanley enjoyed its strongest regional growth out of Asia with revenues more than double the same period last year, while Citigroup’s securities and banking business recorded top-line growth of 17 per cent. Both are better than the 32 per cent fall witnessed in JPMorgan’s investment banking arm in the region.
The mixed performance shows it is still too early to crack open the champagne. The industry as a whole has invested heavily in building its Asian operations for several years with some – such as Barclays of the UK – still building now.
Since last year’s slowdown, many have been making job cuts or at least paying minimal bonuses, while a few have been scaling back their ambitions in the region, such as Daiwa of Japan, South Korea’s Samsung Securities and Royal Bank of Scotland of the UK, to name three smaller players.
Crucially, however, many of the exits have involved teams or businesses being simply sold to or picked off by another bank, which means that the industry’s capacity has not greatly changed and this is keeping up pressure on profitability.
Christian Edelmann, an Asia financial services partner at Oliver Wyman, says this can be seen in the deteriorating cost-income ratio for investment banks across Asia. “Pre-crisis it was somewhere in the 60 per cent region, but now the median is at about 80 per cent,” he says.
Bankers have different views on whether or where there is overcapacity in the industry in Asia, though most people agree that the frontline equity markets that deal with new listings and other share sales are overbanked.
However, the industry in Asia is carrying less flab than in Europe, according to a recent study by Oliver Wyman and Morgan Stanley. Returns in Asia are accruing more to those banks with an onshore presence that brings funding and deeper access to local companies and institutions, the report said, and much less to the core investment banking services, such as advising on mergers or raising money, which can be done from offshore.
Stephen Bird, chief executive of Citigroup in Asia, says the bank’s first-quarter results in Asia show that “we have a model for all seasons”. Across all its business – consumer, commercial, investment banking and transaction services – Asia was the group’s strongest growing region. Insiders say it makes $10 in its corporate bank for every dollar in the investment bank.
Yet it is not certain that more corporate relationships lead to a less cyclical investment banking business. Data from Dealogic used by Macquarie analysts show that both HSBC and Standard Chartered have gained little advantage in investment banking activity from their long-held commercial relationships in Asia.
But the real question is whether Asia’s importance in investment banking terms can rise to equal its importance in gross domestic product terms – and that depends on the development of capital markets. With Asia excluding Japan accounting for about 10 to 15 per cent of global securities, according to bankers, that still looks some way away.
Get alerts on Investment Banking when a new story is published