Investment banks cut back in Asia

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It might well be Asia’s century, but the dependence of the region’s investment banks on equity issuance puts them in a tight corner.

Perceived wisdom in financial markets over recent years has been that opportunity knocks louder as you move east.

Bankers in Asia are fond of telling you how they occupy the global sweet spot and how this is Asia’s century. For investment banks, cashing in will not be easy.

Wealth management will become increasingly central as the number of high-net-worth individuals across the region increases and retail banks will no doubt find plenty of opportunity to serve the unbanked populace that remains.

The way ahead for investment banks, though, is less obvious. Many of the largest potential M&A and equity deals have already been done and although debt markets are flourishing, the economics for investment banks of a heavily debt-dependent investment banking business do not stack up.

Already there are signs that all might not be so rosy. With Hong Kong struggling to build up any sort of momentum in the lucrative market for IPOs, banks are having to feed on the important but still relatively small scraps of business from a burgeoning Asean region.

They are also relying on China, India and Australia to provide the occasional blockbuster deal to boost the coffers and turn mediocre years into decent, business-sustaining ones. Job cuts are a constant threat against this backdrop as banks seek to capitalize on windows when certain countries provide the best opportunities or certain products are the height of fashion. Barclays, Morgan Stanley and Citi have already trimmed back their staff in Asia and others are expected to follow suit.

The other problem is that when the big deals arrive, such is the competition that almost every bank worth its advisory fee is involved in some way, splitting the pot and making each deal less lucrative and more unwieldy for all concerned.

When asked about how they are making up for the dearth of opportunities in equities and the relatively quiet M&A market, bankers will often say something along the lines of: "If the client wants an equity solution, we’ll give them that, if they want a debt solution we’ll give them that."

Although it is all well and good saying that you have to put the client first, paying no mind to the product in question, it is clear that if equity markets don’t cooperate, some serious thinking will have to be done about the best structure for an investment bank seeking to flourish in Asia Pacific.