Monday, 25 June 2018

Do foreign banks have a future in China investment banking?

Goldman Sachs didn’t wait long to move, after Jin-Yon Cai announced he was quitting to run the IFC (with effect from October 1).

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

Cai had been CEO of Goldman Sachs Gao Hua, the onshore joint-venture China investment bank and broker-dealer as well as head of China investment banking for the firm. His departure will be a blow.

Matthew Westerman, co-head of Asia investment banking, has been drafted in and given additional responsibilities for investment banking in China – excluding the JV, whose new CEO will be announced separately.

It’s become received wisdom that China has to feature prominently in the plans of investment banks that describe themselves as or which aspire to be global these days.

But I wonder what foreign firms are realistically hoping to achieve. It’s not clear to me that many of them are actually adding much value in China. Most certainly won’t be making much money if at all.

A superficial glance at equity underwriting data suggests there’s a lot worth fighting for in the China market. But numbers can be misleading.

In the first half of 2012, China equity and equity-related offerings – excluding A share offerings – amounted to over US$34bn, equivalent to 36% of total Asia-Pacific ECM activity for the period. If you add in Hong Kong ECM, much of which is China-related, that number goes up to 46%. In fact, China elicited more ECM activity in the first half of 2012 than any other country in the world – with the exception of the US – by a significant margin.

But despite all of that, activity is down 38% on the same period of 2011. The story’s the same in the domestic market. Year-to-date there have been 170 China A-share offerings worth US$23.3bn equivalent and 126 IPOs worth almost US$13bn. But the value of common stock offerings is down 43% year-on-year and there have been 101 fewer deals at just 170. Meanwhile IPO proceeds are 55% down by value and 34% by number.

In summary, it’s a poor market that is totally dominated by major domestic firms that – let’s be very clear – have picked up know-how across deal origination, syndication, distribution and trading. The expectation among some observers is that foreign firms will be increasingly marginalised.

YTD, UBS is the only foreign firm in the top 10 of A-share ECM, ranking ninth with four offerings under its belt and a 3.2% market share. For IPOs, Deutsche Bank is the top-ranked foreigner at 11th. Beyond that, foreign houses are way down the list of Thomson Reuters’ YTD league table of China A-share underwriting, which credits 57 firms with deal proceeds.

Another problem, of course, is that the securities firms foreigners are buying into are invariably second-tier players with limited top-tier banking talent.

Citigroup is the latest foreign bank to set up a China IB venture, getting into bed with Orient Securities (buying a 33% stake in Citi Orient Securities)

I see extremely limited upside, yet competition in the local capital markets is hotting up. Foreign banks, it seems, never tire of pushing their China endeavours and continue setting up joint ventures with domestic firms even though there is little evidence that they really work.

The JV market is crowded but ventures are constantly beset by issues of management control and influence; strategic disagreements; differences around incentive structures; not to mention cultural differences and misunderstandings.

Foreign banks continue to pile in, though, encouraged by a loosening of ownership restrictions and other deregulatory moves. It’s led to a frenzy of talent hiring and team poaching as firms angle for position.

Citigroup is the latest foreign bank to set up a China IB venture, getting into bed with Orient Securities (buying a 33% stake in Citi Orient Securities). Last year, RBS signed a deal with Guolian Securities (called Huaying Securities); JP Morgan is in business with First Capital Securities, while Morgan Stanley (having exited its stake in CICC) is in with Huaxin Securities.

The new ventures join existing arrangements – Zhong De Securities (Deutsche Bank), Credit Suisse Founder Securities, UBS Securities and Daiwa SSC (Shanghai Securities Co).

The likes of Barclays, Bank of America Merrill Lynch and Macquarie are all watching closely – the latter believed to be getting cosy with Haitong Securities.

Pushing ahead

Goldman, second in China international ECM in 1H12 but … ahem … joint-36th in A-share underwriting YTD, is pushing ahead regardless. To underpin its commitment to China, the firm rehired Mark Schwartz in June, following an absence of over 10 years, to be Asia-Pacific chairman based in Beijing.

Schwartz also became the firm’s fourth vice-chairman, sitting alongside incumbents Michael Evans – Schwartz’s immediate predecessor as Asia-Pacific chairman but since January 2011 New York-based global head of Growth Markets, Michael Sherwood and John S Weinberg.

The thinking is that Schwartz will remain close to the JV but also be on the ground to pitch for major deals with government, SOE and corporate officials and executives. How successful this strategy is, only time will tell.

As for Westerman, it’s fair to say that adding China to his portfolio is a stretch assignment. For a start, he’s only been in Asia for a matter of months so is hardly an Asia hand. And he’s keeping his current role as co-head of Asia investment banking alongside Dan Dees. He’s going to have a lot on his plate.

When JP Morgan appointed Jeff Urwin as its Asia-Pacific CEO in April, he kept his existing roles of head of global investment banking coverage, capital markets and M&A. Even though he’s based in Hong Kong, that’s hardly a sign of commitment to Asia. The arrangement with Westerman has some of the same flavour.  

Finally, of course, neither Schwartz nor Westerman are Chinese. In this regard, the appointment of Goldman Sachs Gao Hua’s new CEO is hotly anticipated. Whoever it is will have their work cut out for them.


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