Investment banking: Can BOCI step up to the next level?
Bank of China International has established itself as the leading investment bank of China’s big four, but what will it take to make BOCI a real challenger to the international firms that it wants to compete with?
By Rashmi Kumar
Bank of China International has a clutch of trump cards that few of its rivals can equal: the halo of its parent, the state-owned Bank of China; a chunky balance sheet; and a large client base that is eager to go global.
While some competitors see it as overly cautious, a sensible approach has kept it out of trouble with regulators while it prepares for bigger things.
Asiamoney spoke with several senior bankers at BOCI – one of the first investment banks established in China, and fully owned by Bank of China – many of whom stress the bank’s enviable client relations and its ambition to take on Western rivals outside its home patch.
“We have good relationships with key clients that we have built up over the last 20 to 30 years,” says BOCI’s chief executive Tong Li. “There is mutual trust. As the Chinese economy expands, we seize opportunities. We know the market well – better than the global banks – and have a solid foundation when compared to other Chinese investment banks.”
BOCI positions itself as a comprehensive universal investment bank. Its businesses include the usual array of corporate finance, equity capital markets, M&A, leveraged and structured finance, financial products or debt capital markets, as well as asset management, private equity, private banking, global commodities and brokerage and research.
One area where rivals follow it most intently is ECM, where the bank is confident of building its franchise.
“We’re learning and preparing for tomorrow’s IPOs,” says a senior investment banker at BOCI. “The way we see it is: yes, in some years we miss out, but in the five-year horizon, we will still have a market-leading position.”
China is a place to make miracles happen. The big tech titans, who are now fostering new industries and platforms, are long-term clients of BOCI - Wang Zhongze, BOCI
Take the case of technology and fintech deals as an example.Daniel Ng, head of investment banking and executive head of global client coverage at BOCI, acknowledges that there has been some resurgence of western banks in those two sectors, where they have more comparable companies and have built up sector knowledge. But Ng expects Chinese banks to catch up soon.
BOCI will likely have an advantage as the market becomes more comfortable with and open to new economy companies. Hong Kong’s stock exchange, for one, has loosened up its listing requirements for companies from the technology sector.
Pre-revenue firms in the biotechnology industry can now list on HKEx, while firms from innovative sectors can float with weighted voting rights.
China too is looking to woo its US-listed technology firms back home, with plans to allow them to sell depositary receipts onshore.
Needless to say, opportunities in this sector are rife – and BOCI may very well have an edge.
“We know the Chinese companies well, and we know their founders well, as we developed good relationships with these clients when they weren’t very famous yet,” says Wang Zhongze, CFO at BOCI.
“China is a place to make miracles happen. The big tech titans, who are now fostering new industries and platforms, are long-term clients of BOCI.”
How has the bank’s international ECM business fared so far, given competition is rising rapidly thanks to numerous Chinese brokerages squeezing into the market?
Rivals are quick to judge that the firm is present on deals, but rarely in the driving seat, which is where the best fees are made. “BOCI just ends up being a joint bookrunner on a lot of things rather than running things on a sole basis,” says a former BOCI senior investment banker. “And with competition rising, going forward, the BOCI ECM franchise doesn’t look that promising. Bank of China is still a highly leverageable name, however.”
|Up and down: BOCI’s ECM volume track record
BOCI worked on 10 IPOs last year, worth a total of $5.2 billion, data from Dealogic shows. Except for the $118 million Hong Kong listing of Wisdom Education International Holdings, for which BOCI was a global coordinator along with four other firms, and the $74 million flotation of Precision Tsugami (China) Corp where it was the sole global coordinator, the bank held joint bookrunning roles in all the other IPOs.
Bank of China’s Singapore branch was a joint bookrunner and underwriter on Dasin Retail Trust’s Singapore IPO.
In comparison, BOCI worked on 11 listings in Hong Kong in 2016, worth around $15 billion, while Bank of China’s Singapore unit ran two IPOs worth just under $1 billion collectively.
The build-out of BOCI’s ECM business began about a decade ago. In 2007, BOCI, through various units, had league table credits for 18 ECM transactions and $8.9 billion in deals, according to Dealogic. This rose to $15.9 billion via 30 trades in 2010 before falling back over the next three years.
In 2014, the numbers rebounded to a peak of $22.1 billion and 20 deals, but have since declined.
Bankers at the firm admit the numbers don’t look good, and acknowledge losing out on a number of prominent technology-related listings last year. They cite gaming firm Razer’s IPO of around $530 million, and the $867 million listing of online car retailer Yixin Group – both in Hong Kong – as examples.
But they say this is more down to BOCI wanting to fully understand new businesses before getting involved.
“In 2017, there were lots of small IPOs that we didn’t get involved in as we were not familiar with their risk and profile,” says the senior investment banker at BOCI. “Many were unicorn and new economy companies. Clearly, when the deals were happening, we were troubled by the fact that we don’t understand all these businesses.
But with the benefit of hindsight, they all dropped in secondary markets. We’re not involved and now investors are complaining.”
BOCI bankers can certainly feel vindicated. Razer, for instance, priced its listing at HK$3.88 ($0.49) a share in November last year. The stock was down 42.5% by early June. Yixin, meanwhile, was down by nearly half to HK$3.91 a share by early June, from its November IPO price of HK$7.70.
CFO Wang says he’s positive about BOCI’s ECM market share this year, especially in the Hong Kong IPO market, thanks in part to the many big technology-related deals in the pipeline.
That doesn’t mean the bank will jump in with its eyes closed. Its cautious approach so far has saved it from the fate of a number of international banks who have been penalized by the Hong Kong Securities and Futures Commission (SFC) for sponsor failures or have had IPO applications returned for lack of full disclosure.
Citi, the most recent to be rapped, was fined HK$57 million in May for its work as a sponsor in 2009 on the IPO of China-based Real Gold Mining.
Standard Chartered has also been penalized, while UBS is appealing against having its IPO sponsorship licence suspended. And in the middle of 2016, the Hong Kong bourse returned an IPO application from Shenhua Health Holdings, which had JPMorgan Securities (Far East) – JPMorgan’s local arm – as the sole sponsor.
Going global is a trend no one can reverse. Through our own network and collaboration with strategic partners, we are present in all major financial centres - Liew Shan Hock, BOCI
“We take our compliance track record very seriously, which can ensure the sustainability of our businesses and reputation,” adds BOCI’s Ng. There are challenges, however, as many new entrants are coming into the market aggressively and fees for IPO deals are declining rapidly, he says.
BOCI did not sponsor a single IPO last year. But as of early June this year, it had executed two IPOs as sponsor in Hong Kong, worth a total of $944 million, according to Dealogic: it was a joint sponsor on Bank of Gansu’s Hong Kong listing in January and on Tsit Wing International Holdings’ IPO in May.
“We maintain a very strong sponsorship track record,” says Ng. “We have an excellent reputation in the industry for our expediency, rigour and professionalism in execution, demonstrated by zero compliance breaches and no return or rejection of our IPO applications.” One thing that helps BOCI navigate such hurdles is the branch network of Bank of China (Hong Kong) Ltd (BOCHK), which has a big retail investor base in Hong Kong.
In addition to its global institutional reach, BOCI also provides margin finance to investors in IPOs, while also helping with renminbi remittances when investors need to sign up to IPO shares. The fact that BOCHK is a clearing bank for Hong Kong dollars and renminbi also serves as an advantage, say bankers.
What makes BOCI stand apart from many of its peers is its strategy of following not only its companies closely, but also the people running those companies.
Tong Li, BOCI
“Our all-round business strategy is to provide comprehensive product and service lines,” says chief executive Li. “We were the adviser on the China side for ChemChina’s acquisition of Syngenta. With that, we made use of BOCI’s strengths – the combination of balance sheet of BOC and network by providing advisory services and funding.
"It was one of the largest deals at $43 billion. The deal showed that we closely follow our clients as well, as the ChemChina CFO was previously the CFO of Cofco,” a state-owned food processing company.
ChemChina’s acquisition of Swiss seed-maker Syngenta was a landmark deal, tapping into many parts of the capital markets. The purchase was funded by loans syndicated into Asia and Europe, eventually taken out by a loan-plus-bond combination.
Ng says that for BOCI’s leveraged and structured finance business, the bank follows its clients in their ‘going global’ expansion by targeting those with M&A financing needs. He also acknowledges the collaborative mind-set within the business.
“Besides traditional lending business, we also built up our own distribution network and credentials in the area of arranger/ facilitator in some of the projects,” he says. “In addition, we have been working closely with other group companies to provide innovative financing solutions to clients.”
The balance-sheet strength of its parent, Bank of China, has been on show time and again. It was number one in the Asia ex-Japan dollar bookrunner syndicated loans league table in 2017, with credits for $8.2 billion of deals and an 8.2% market share. In 2016, in comparison, it ranked ninth with $3.4 billion in credits and a 3.1% market share, while the year before that it was top with an 8.1% share and $8.1 billion in credits, according to Dealogic.
Its roster of clients last year included Cosco Shipping Holdings Co, where Bank of China arranged a chunky $4.3 billion loan to support the company’s purchase of Orient Overseas, as well as the likes of tech names JD.com and Xiaomi, and Petron Corp of the Philippines. It is also a lender to India’s Reliance Industries and a handful of Chinese property credits.
One thing is clear though, no matter the asset class: BOCI is, unsurprisingly, extremely reliant on Chinese and Hong Kong clients.
Samson Lee, BOCI’s head of financial products, says mainland China and Hong Kong remain the bank’s core contributors, accounting for 90% or more of revenues. Chinese borrowers are the biggest dollar bond issuers in Asia.
Wang Lixin, head of private equity, says his division operates in both Hong Kong and China. Apart from principal investment, the PE division manages three funds: the China Culture Industrial Investment Fund and Bohai Industrial Investment Fund, both of which are domestic renminbi funds; and China Infrastructure Fund, which is a dollar fund that focuses on China’s infrastructure-related industries.
Alvin Chua, head of sales, trading and research, says the business spends more than 90% of its time on Chinese corporate credit, although it does occasionally try to reach beyond that.
Chua adds that the biggest test for the division is to diversify from a single product – Chinese credit – into global products.
BOCI’s management realizes that, and the bank is starting to expand beyond China. Lee says the financial products business’s target is to expand in the Asean (Association of southeast Asian nations) market by building its team in Singapore, where it has a debt desk that is bringing in business and adding to the group’s league table positioning. The bank is also building its M&A capabilities in Singapore and southeast Asia.
Bank of China separately launched a new DCM centre in Singapore in June last year to promote the Chinese bond market in the region. The Singapore branch is already active in ECM and has executed a few IPOs there.
BOCI also signed a strategic agreement with US bank Jefferies in January this year to jointly provide investment banking advisory and capital markets services to clients globally.
“The tie-up with Jefferies is mutually complementary to both as we can provide integrated services to clients,” says Liew Shan Hock, head of financial institutions and executive head of the investment banking division.
“Going global is a trend no one can reverse,” Hock adds. “Through our own network and collaboration with strategic partners, we are present in all major financial centres. In addition to identifying or evaluating targets, we can advise on funding, assist with internal and regulatory approvals, assist with valuations, and support any liaison with Sasac and the ministry of finance. That gives us a unique position.”
Wang Zhongze, BOCI
Sasac is the State-owned Assets Supervision and Administration Commission, a special commission of China’s state council that supervises and manages state-owned assets of enterprises under the purview of the central government.
And then there’s the much-talked-about Belt and Road Initiative, a pet project of China’s president Xi Jinping to promote economic cooperation among countries along what was the old Silk Road and beyond – linking Asia, the Middle East, Europe, Russia and eastern Africa.
The initiative is expected to provide abundant investment banking opportunities – which BOCI is keen to capture – across project finance, M&A, bonds and IPOs, and should give a further impetus to the internationalization of the renminbi.
Wang, BOCI’s CFO, says the investment needs across BRI regions is estimated to be around $1.5 trillion by 2030, presenting immense opportunities for BOCI. With many Chinese companies setting up operations in BRI areas, BOCI’s strategy is to follow these Chinese clients and provide them with investment banking services, he says.
How do rivals regard BOCI? Perhaps not surprisingly in the competitive arena of investment banking, many will readily disparage a rival from the safety of an anonymous quote.
“BOCI’s investment banking business has become completely marginalized in the last few years,” sighs the former BOCI senior investment banker, who is based in Hong Kong. “The glory days are long gone and won’t be repeated.”
Those are cutting words. The head of DCM at another Chinese investment bank, who has worked at both international and mainland firms, says BOCI’s DCM business, in particular, is “going downhill”, which he attributes to intense competition internally among various Bank of China subsidiaries – although data from league table providers belies this accusation.
A senior ECM banker away from the bank points out that BOCI has missed out on a lot of IPO mandates in the last year. A loan syndications banker suggests the firm is less visible now in the market than it was before.
How much veracity do these bankers’ remarks have? Has BOCI actually lost ground in investment banking in Asia?
One factor blurring the picture is the existence of numerous Bank of China arms offering similar capital markets services; this confuses many bankers and, some argue, may be undermining its long-term success.
Even bankers at the Bank of China group can get confused about the various branches, subsidiaries and offices within the firm, and which entities provide what service.
To give an example, BOCI is incorporated and based in Hong Kong and is effectively the holding company of the whole BOCI group. There is also a separate unit called Bank of China International Holdings Ltd, which is incorporated in the UK.
Hong Kong-based BOCI, in turn, has a handful of subsidiaries such as BOC International (Singapore), BOCI Asia Ltd and BOCI Securities Ltd. It also set up BOC International (China) Ltd in 2002, in collaboration with five other Chinese enterprises.
Bank of China is the ultimate parent based in the mainland and is listed on both the Hong Kong and Shanghai stock exchanges. In addition, there are also entities such as Bank of China (Hong Kong) Ltd (or BOCHK), and its holding company BOC Hong Kong (Holdings) Ltd, which was incorporated in 2001 and listed in the city the following year.
Bank of China also has a branch in Singapore, which focuses on everything from deposits and remittances to wealth management, corporate lending, loan syndications and renminbi services.
Can anyone follow the thread that joins them together?
Bank of China is not alone with this kind of a structure; other big Chinese banks, such as Industrial and Commercial Bank of China, feature a similar set-up.
Why does this matter? Perhaps the biggest impact of this kind of organization is felt in BOCI’s debt franchise.
“What is well known in the market, but will be difficult for outsiders to see, is that BOCHK and Bank of China’s Hong Kong branch and Singapore branch, as well as BOCI, all want to underwrite debt offerings internationally, leading to a lot of internal competition,” says the head of DCM at a Chinese investment bank. “The question then arises about who will be the closest to the head office. It’s not an issue just with BOCI, but other Chinese investment banks also have similar problems.”
The former BOCI senior investment banker adds: “Bank of China looks good in the league tables because all the businesses are banded together, but there is a lot of internal fighting on the fixed income side. There is no doubt this is destructive to building the business correctly.”
Bankers at BOCI, however, take a more measured stance. The senior investment banker who works for the firm admits there is some rivalry within the fixed income teams. But he insists it’s not a bad thing.
For starters, he too points to league tables from the likes of Dealogic and Bloomberg, which group all the transactions by various Bank of China entities into one. If these numbers are dissected, he reckons BOCI typically accounts for 60% or 70% of all the DCM business.
He offers a simple explanation for the eagerness of various Bank of China entities to get in on the international debt underwriting business – because it can be easily done.
“The DCM business is a low-hanging fruit, which is why so many Bank of China units want to do this,” he says. “We have too many clients with deposits wanting to buy bonds that are issued by BOCI or other banks. And we have some bankers that say: ‘Hey, we have just hired two bankers to do DCM’. They don’t need to know the GICs or the Pimcos of the world. They just need to know the private banking arm within the bank or the high net-worth branch of the bank – these are natural investors that can be leveraged on.”
But in addition, “BOCI has a full-fledged investment banking desk: we do credit ratings and have access to the Pimcos of the world,” he says. “If the Bank of China group is not directly involved in deals, then we can also tap into their investor base. This can be seen as a positive advantage to the whole BOC group.”
He also points to the fact that BOCI has a M&A unit that provides cross-border advisory services. The Bank of China head office is now trying to create a similar function.
“Again, it’s low hanging,” says the senior banker at BOCI. “There are clients asking for such opportunities and for funding. Our client base is big and the bank is big. And depending on the nature of the deal, it can get dropped to different parts of the organization.”
Bank of China group’s increasing presence in international debt markets is reflected in the numbers. In Dealogic’s Asia ex-Japan offshore DCM bookrunners league table last year, Bank of China placed fourth with credits for $18.2 billion through 156 transactions versus fifth place in 2016 for $11.6 billion of trades, through a 87 deals. In 2015, it held the ninth spot for $7.7 billion in credits and a total of 70 deals.
The numbers look less attractive when it comes to revenues, however. In Dealogic’s Asia ex-Japan ex-onshore China DCM revenues table last year, Bank of China placed 23rd with $9 million and a 1.1% market share. In 2016, it ranked 27th with $6 million of revenues; in 2015, it earned just $1 million, which put it in 77th place.
Figures from Dealogic are generally good, but they sometimes don’t capture the full picture. BOCI does not directly release details of its financial performance. But CFO Wang says the bank’s profits grew 30% year on year in 2017.
“The average return on equity of the top eight western banks is around 5% – ours is over 10%,” Wang tells Asiamoney. “In 2017, our brokerage, DCM, asset management and trading desks provided large contributions to profits. M&A was also a big contributor to the bottom line.”
Lee, the head of financial products, says his business maintains a very high risk-adjusted return on capital, which he reckons is much better than the market average.
Lixin, head of BOCI’s private equity operations that support the bank’s investment banking business, adds that his team has collectively achieved an internal rate of return above the average performance of some well-known names in the private equity industry.
“In recent years, many Chinese giant companies have raised capital,” says chief executive Li. “We have found opportunities as we know the market, the culture and know how to deal with China.”