Investment banking: Asia beyond the headlines

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Goldman Sachs is cutting and Citic is hiring – but is all as it seems?

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September brought more evidence of the apparently shifting sands in Asia Pacific investment banking. 

First, news broke of plans at Goldman Sachs to cut up to 30% of its investment bankers in Asia – about 90 people. Then, a few days later, rumours spread of a dramatic expansion of investment banking capability at China Citic Bank in Hong Kong, in particular in M&A and equity capital markets. 

At least the Goldman departees won’t be short of somewhere to go.

Each piece of news is worth closer inspection. The first assumption at the Goldman rumour – which is, Euromoney understands, broadly accurate, if slightly heavy on the numbers – was that it must be a consequence of Goldman’s southeast Asia franchise being hit by the 1MDB scandal.

In fact, the cuts rather reflect a miserable business environment and probably a degree of over-staffing in expectation of better markets that never came. In the six months to June 30, Goldman in Asia (including Australia and New Zealand) posted net revenues of less than half the level they were a year earlier; pre-tax earnings from the region dropped 71%, and accounted for only 10% of group earnings, compared with 25% a year earlier. 

Not alone

Goldman is not alone: there is ANZ’s shredded strategy in Asia, and in recent months we have seen Standard Chartered, BAML, Nomura and Barclays cull staff or entire businesses. CIMB has, too: being homegrown is insufficient insulation against grim markets.

How much does this have to do with the rise of Chinese players? A Dealogic ranking of ex-Japan Asia investment banking by M&A revenue (not volume) shows all the top five, and eight of the top 12, are Chinese houses; Goldman, on this (inexact) ranking, came joint 11th, having been top as recently as 2014. 

Citic Securities – a separate entity to Citic Bank, the one that’s doing the hiring – leads this table, as it does for Asia ex-Japan investment banking revenue year to date. Add to this the fact that every big Chinese deal, while it’s still likely to feature Goldman or its global peers, can have as many as 26 bookrunners, and it appears the Chinese are cutting the lunch of the multinationals.

Most of the capital market heft of the Chinese institutions, and therefore the revenue, is in A-share and domestic debt deals that multinationals either can’t take part in or don’t yet feel they want to. 

Goldman would argue it is still on the biggest deals that really matter and that its model still works – just that this is a terrible cyclical market for it, as it no doubt will be again. By then, how entrenched will Chinese banks be in the sort of transactions the Goldmans of this world have always considered to be their own?