For all Asias promise, investment bankers in the region face a host of challenges. Asian investment banking is unhealthily tilted towards equity capital markets, making it especially vulnerable to times such as the seven months until late March when those markets are closed. Its also far too focused on China. Competition from local houses is growing; fees, already under pressure, are being sliced by an irksome trend of issuers putting as many as nine bookrunners on a deal; and headcount costs are stubbornly high for good people at exactly the time that banks are being told by head office to slash bonuses.
A detailed study by Euromoneys partner, Dealogic, allows us to paint an accurate picture of investment banking revenue in Asia.
Its true that, over the past seven years, Asias contribution to investment banking revenue has grown, from 5% of the global pie in 2005 to a peak (so far) of 14% in 2010, before sliding back to 10% this year. Its worth remembering, though, that the rising Asian percentage of global fee wallet really reflects the state of the rest of the world more than anything else: global fee revenue in 2011 was almost $10 billion lower than it was in 2006. Banks need do little more than stand still to shine in such an environment.
Its also true that Asian fee revenue has rebounded from the global financial crisis much faster than anywhere else but it fell further along the way. US and European revenue figures peaked in 2007 and have not come very close to those levels since. Asias investment banking revenues halved in 2008 a worse percentage fall than anywhere in the west before their recovery.
But the bigger issue with Asia is just how heavily reliant on equity it is. "There isnt a single person who doesnt think ECM is the basic engine of profitability in investment banks in Asia," says one of the regions leading headhunters. "Look at the recent changes at Goldman," he says, referring to the appointment of Dan Dees and Matthew Westerman as joint co-heads of ex-Japan Asia investment banking, both of whom have ECM backgrounds. "When ECM markets are quiet, its a big problem for everybody."
When markets are rolling, the dominance of ECM is just fine, and this is when Asia really does make a meaningful contribution to that global pie: 27% of global ECM revenue in 2010, a year in which it outpaced Europe by generating $5.6 billion of revenues. But the problem is, markets arent always rolling, and Asia with relatively young and volatile markets, prone to fickle capital flight to the west is vulnerable when things slow down. Asian ECM revenue in 2008 didnt even hit $1 billion for the entire street: the $973 million of fees was a fourfold decline on the previous year.
"Asian markets are much more centred on ECM product, which is 70% of the street revenue opportunity," says Matthew Hanning, head of investment banking, Asia Pacific, at UBS. "If you are very dependent on ECM and markets are difficult, then business is difficult."
|Matthew Hanning, head of investment banking, Asia Pacific, at UBS|
The picture varies from house to house. Based on public data available to Dealogic, some names do look particularly reliant on ECM. It accounted for 71% of Morgan Stanleys revenue in 2010, and 64% in 2011, despite the new-issue market shutting down halfway through the year. Goldman Sachs looks similar: 69% in 2010, 52% in 2011. After that, the concentration gradually dilutes: UBS (65% 2010, 51% 2011), JPMorgan (64% 2010, 41% 2011), Deutsche Bank (58% 2010, 57% 2011), Credit Suisse (64% 2010, 41% 2011).
Why is it so high? "I dont think that people focus on originating ECM activity because its a better fee pool and dont focus on M&A or DCM," says Hanning. "People chase whats there."
Dees at Goldman Sachs agrees. "I dont think the reliance on ECM historically has been a misguided strategy for the street," he says. "Because the other drivers of the banking business debt capital markets, M&A and derivatives were so nascent in their development, ECM was the dominant business. As a result, the business out here has risen and fallen based on the state of ECM in the past decade.
"Nobody had a strategy that isolated their whole business as ECM. Its a function of market activity levels and the stage of DCM and M&A development."
Intended or not, thats what has happened. So with markets shut for months, how important is it that ECM comes back? "Its vital. Vital," says Rob Sivitilli, head of corporate finance and M&A for southeast Asia at JPMorgan, speaking before the AIG/AIA trade (see Equity capital markets: AIG deal attracts one and all, Euromoney, April 2012) gave a positive sign that markets were reopening. "The ECM business makes up about 75% of the capital markets business in Asia, which in turn is two-thirds of the regions investment banking business." Its little surprise, then, that throughout the early months of this year, investment bankers have been looking with trepidation at the deals mainly small and mainly block trades that have been testing the market. "What happens next in terms of this regions IPO activity for the rest of the year is very dependent on executing some successful deals," says Sivitilli.