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Asia investment banking revenues bounce back

Total revenues rise across the APAC ex-Japan region in the first half of this year, but not everyone is reaping the rewards.

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The jump in investment banking revenue across the Asia-Pacific region this year is giving many banks a reason to be cheerful. After two relatively weak halves in 2013, revenues have come roaring back, filling coffers and stoking optimism across the board. But a closer look at this rising tide shows it is not lifting all boats.

Dealogic figures show total net revenues for investment banking in Asia-Pacific ex-Japan reached just over $5.1 billion in the first half of 2014. By comparison, the first half in 2013 totalled just $4.6 billion and the second half of 2013 was even lower, at slightly under $4.3 billion.

Most of the boost this year can be put down to a spike in equity capital markets activity, where net revenue was over $2 billion, substantially higher than in any of the previous four half-year periods. Net revenue from debt capital markets rose to around $1.6 billion, higher than the $1.1 billion in the second half of 2013, but M&A net revenue dropped to just $660 million, also lower than any of the previous four half-year figures. Net revenue for syndicated lending stayed roughly level with previous years at $823 million.

One bank with particular cause to celebrate is HSBC, which made a strong start to the year, gathering the third largest share of investment banking net revenues for Apac ex-Japan: around $207 million. If the bank can maintain this pace, then it will be on course to beat the $315 million total it clocked up for the whole of 2013, a sum that placed it seventh in the overall league table.

“There are two major reasons why we’ve moved up the IB fees league table this year,” says Stephen Williams, head of capital financing for Apac at HSBC. “One is that our traditional lead in DCM was further extended by the robust level of issuance in the first half. The second is the considerable headway we’ve made in ECM.

ECM drives resurgance (Asia-Pacific ex-Japan IB revenue)
Source: Dealogic

“In ECM, we have increased our market share by doing more convertible bonds and being involved in some of the biggest deals of the year. Overall the equity market is still heavily dependent on issuance from Hong Kong and China. The ECM business is in good shape this year, but we expect intense competition to continue.”

In Apac ex-Japan, M&A net revenue of $660 million for the first half of this year continued the slide from $795 million in the second half of 2013 and $811 million in the first half of last year, according to Dealogic. Back in the second half of 2012, the total was closer to $1.2 billion, roughly twice what has been clocked up so far this year.

Williams says figures can be influenced by some very large transactions, but China is now moving towards more medium-sized deals, particularly outbound investments in Europe.

“China’s manufacturing sector is moving up the value chain, and that will be reflected in China’s outbound M&A activity, with Chinese buyers increasingly seeking technology and established brands,” Williams says. “On the regional level, we’re seeing more interest from Asian corporates to go global. I’m reasonably optimistic the second half will continue to be positive. The caveat is what happens when the US starts to raise interest rates.”

Diminished noise

Morgan Stanley continued to enhance its reputation as one of the top M&A houses in the region, claiming a deal value of nearly $55 billion for the first half of this year in Apac ex-Japan, according to Dealogic.

“It has been a strong first half in terms of M&A volumes globally and in Asia,” says Richard Wong, a managing director in Morgan Stanley’s Apac M&A group. “We have seen increases in the number of deals in our pipeline and the overall fee pool. Strong equity market performance around the world has buoyed the M&A market.”

Wong says the confidence of decision makers has been increased by diminished noise around any impending negative macroeconomic event and he highlights the deal activity in Chinese outbound M&A.

“China outbound M&A remains active,” Wong says. “The China-Australia corridor in sectors such as utilities, oil and gas and basic materials also continues to be topical, as has the consumer space more broadly. In addition, we are continuing to see deals involving the realignment of non-core assets of both Asian and non-Asian clients. If the pipeline holds, 2014 is going to be one of the strongest in recent years.”

The rise of equity capital markets in Apac ex-Japan has proven to be a boon for Goldman Sachs, which tops the Dealogic bookrunner rankings for the first half of 2014 with a deal value of over $9 billion, considerably ahead of the rest of the pack.

UBS and Goldman Sachs lead the pack (H1 2014 Asia-Pacific ex-Japan IB revenues)
Source: Dealogic

Jonathan Penkin, Goldman’s financing group co-head for Apac ex-Japan, tells Euromoney that Australia has been a bright spot for capital markets generally, as well as for his own bank.

“We have done a number of IPOs and blocks, supported by strong domestic and international investor demand,” Penkin says. “India has been another bright spot. There’s no doubt that the election result has set the market on fire. Investors have voted with their feet, but people are looking forward to some medium-term structural changes in that market following the budget.”

The surge in ECM activity in some countries is also matched by interest in certain sectors and other equity-linked asset classes, such as convertible bonds.

“Investors are interested in sectors including pharmaceuticals, healthcare, tech and internet, and logistics,” says Penkin. “US listings of Chinese companies have also performed well. In terms of convertible bonds, the terms achievable by issuers are at an all-time high. Low volumes are more down to structural reasons in terms of the lack of comfort with that product and the correspondingly attractive terms achievable in the straight debt markets.”

Challenging time

The deal value of convertible bonds in the Apac ex-Japan region for the first half of this year totalled around $8.5 billion, a similar amount to the first half of 2013, but well below the $13.5 billion figure for the second half of that year. The number of deals for H1 2014 stood at 59, down from 107 in H2 2013, according to Dealogic.

Penkin also concedes that it has been a challenging six months in Asia ex-Japan, with investors still sceptical about China, and with IPOs in Hong Kong performing poorly.

The uptick in revenues for debt capital markets over the first half of this year will have come as a welcome boost to bankers who witnessed a downturn in total deal value for the last half of 2013. Citi put in a strong performance, tallying over $23 billion in deal value for the first half of 2014 in the Apac ex-Japan region, according to Dealogic, placing it second in the bookrunner rankings.

“The first half of this year has been strong for Asia, and is a continuation of the growth story seen over the past few years,” says Duncan Phillips, head of Asia-Pacific debt syndicate at Citi. “While the local currency markets remain important, especially CNH, it’s some of the large USD offerings that have really caused overall volumes to rise. These include issues from corporate China, Asian sovereigns and Australian and Japanese banks.”

According to Phillips, there is a disparity in regional US dollar activity, with some countries much busier than others over the past six months.

“China is obviously the biggest issuer of bonds, followed by India and Korea,” Phillips says. “But there has been very little coming from Malaysia and Singapore, mainly due to a combination of good liquidity and supportive domestic markets.”

Phillips predicts a natural fall in volumes over the second half of this year, but says several areas of the markets could still be very active.

“This is mainly because borrowers have had largely unfettered access to markets and have been able to execute on annual issuance plans that tend to front-load the supply,” he says. “Additionally, we’d expect August and December to be quieter periods. Over the next few months, areas of focus will be high yield from southeast Asia, and investment grade corporate supply from Japan and India.”

Overall, it has been a strong half for the investment banking community in the region, but the boost in revenues masks an uneven spread of the spoils. ECM has been the clear winner, with DCM putting in a strong performance and M&A struggling in certain sectors. The region’s investment banks have produced mixed levels of performance but as the banks press on into the second half, hopes will be high for pushing final full-year figures beyond those for 2013.

Markets such as India hold a lot of hope for dealmakers, but bankers’ ability to grab less obvious business could be key to pushing up vital revenues.

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