Advising the wise
Source: REUTERS/Jon Woo
The transformation of Asia’s capital markets since the 2008 credit crisis has coincided with some serious upheavals in the banking sector. Western advisers have retreated, due to a regulatory backlash, while Asian competitors have grown, and competition among bankers is as intense as ever.
In this evolving environment, however, banks have had to rethink the way they cover Asia, in an effort to respond to the needs of a more sophisticated client base, while keeping costs down.
The winning formula – if, indeed, there is just one – has yet to become clear. While some institutions have restructured to place more emphasis on firm-wide relationships, other bankers say borrowers remain more cost driven than the quality of advice and execution they receive.
“Loyalty and longer-term relationships probably do not count for as much as what you can find in other regions,” said Philippe Espinasse, a former equity capital markets banker, who had worked for UBS, Nomura and Macquarie.
“We have found that relationships have developed across a number of areas with cash management clients including investment banking mandates.”
Overall investment-banking fees have fallen with debt replacing equity as the biggest source of investment banking income, and banks face tougher competition for a piece of the advisory pie. Average syndicate sizes on recent financings – both in debt and equity – have grown substantially as more banks chase high-profile deals.
“One of the reasons is the sheer number of houses and probably a scarcity of high-quality transactions, as compared to what you might find in other parts of the world,” Espinasse said.
Asia’s potential remains hard to ignore. Its economies are growing faster than those in the West, and the region has demographics in its favour.
Asian companies are expected to dominate the IPO pipeline by 2025, with China predicted to be the home of most new issuers and also the place to raise the most capital, based on a 2011 survey the Economist Intelligence Unit did on behalf of PricewaterhouseCoopers.
Wealth in the region has only been created in recent decades, and companies are still largely under the control of the patriarchs or matriarchs of these families. However, sophistication is growing as Asia’s corporate champions look to expand beyond their home markets.
The potential for Asia’s banking needs to rise even more over the next decade has prompted institutions from across the globe to attempt to grab at least a toehold in the region. As a result, Asia had become “overbanked,” said Espinasse, the author of a book titled IPO: A Global Guide.
“Not only have you got the global bulge-bracket banks that are chasing for business, you’ve got a whole roster of emerging second-tier houses, and then you have the local houses on top of that,” he said.
In Asia, prior to the explosion of so-called universal investment banks that provide a range of commercial and investment services, merchant banks with long histories in the East, such as Barings and Jardine Fleming, held sway in Hong Kong.
Traditionally, merchant banks used their ability to underwrite real financial risk to develop relationships with clients. Today, banks continue to leverage their wider array of products and services to win investment-banking mandates, but tougher capital rules mean the risk-reward equation is not as clear as it once was.
Citigroup was the first big bank to merge its corporate and investment banks, at the end of 2008, part of a move to streamline its client coverage operations amid the global financial crisis.
“The merging of corporate and investment banking by Citi in 2009 was a natural step that makes our coverage model much simpler and more responsive to clients,” said Stephen Bird, Citigroup’s Asia CEO.
“In Asia, as around the world, it means we can have one dialogue with a company across a broad range of areas. Citi’s consumer bank in Asia works closely with our institutional business so for some of our corporate clients in Asia – who we regularly advise or help raise capital – we have installed branches on their campuses and provide banking services to their employees.”
Citi has since rationalised its list of target clients in Asia to focus on becoming the top bank to a selected number of companies, rather than one of multiple relationship banks. Coverage bankers are measured on total revenue from a client, including transaction banking, rather than pure investment banking fees.
“Cash management is one of the most important pieces of business you can win from a client,” said Bird at Citigroup. “You don’t let someone else manage your cash lightly. With that trust we have found that relationships have developed across a number of areas with cash management clients including investment banking mandates.”
Rivals, including Bank of America Merrill Lynch, have followed, as has JP Morgan, which united its corporate and investment banks in 2012.
Strategies vary across the market. HSBC, for instance, has placed greater emphasis on providing investment-banking services to its smaller commercial-banking clients, while UBS has stepped up its efforts to originate from, and distribute to, its wealth management business.
“Banks have different ways of building their relationships with clients,” said Claire Suddens-Spiers, head of South-East Asia and Asian equity advisory at Rothschild in Singapore.
“Many full-service banks are able to build relationships across multiple products,” Suddens-Spiers said. “In many cases, it may involve lending or underwriting services, which for some corporates can be an important part of a relationship.”
Rothschild neither underwrites securities nor lends money. The company gets its income from providing independent advice on mergers and acquisitions, debt and equity transactions.
“Banks that have commercial lending arms or corporate banking arms have an advantage in that sense, but it is also the flow business – trade finance, cash management all these sort of things that are probably not as glamorous or visible, but are very important to companies because it really helps them in their day-to-day operations,” said Espinasse.
Claims that universal banks can use their balance sheets to win lucrative capital-market work are not new.
“Relationships are not important because so long as a commercial bank can allure the client with cheap debt, they can continually snag the capital markets work,” said a former managing director at a bulge-bracket commercial and investment bank.
JP Morgan and Bank of America, among those with the biggest balance-sheets, are consistently among the top three earners of global investment banking fees, making more than half of their fees from bonds and loans, according to data from Thomson Reuters.
In Asia, however, UBS and Goldman Sachs, whose asset base is a third that of JP Morgan, ranked top for investment banking fees in the first quarter, ahead of Citigroup.
“In the tougher times, many corporates saw instances where the advice from lending or underwriting banks became more self-serving, as they had less financial flexibility themselves,” said Suddens-Spiers.
Relationship-driven transactions also are put at risk when banks rotate personnel in Asia, shrinking and expanding staff to suit the region’s revenue pool.
“Longstanding minimum staff turnover is a very important consideration in some instances for maintaining relationships,” Suddens-Spires said. “The fundamentals of building relationships are the same in most parts of the world. However, there is probably an additional cultural overlay in Asia, where it probably takes a lot longer to build a truly ‘trusted relationship’,” she said.
Some bankers argue that Asian clients care more about fees than they do about relationships, often switching banks if they can save money.
“Relationships are important, to some extent, because many banks have lending or wealth-management relationships,” said Espinasse. “Having said that, loyalty is, to my mind, definitely not the norm in Asia; fees and how much banks charges for business actually play an important role.”
Banks that win capital markets mandates were those offering low fees in countries like Taiwan and Korea, he said. “India is also a market like that where you see some equity placements sometimes done on some ridiculous low fees,” Espinasse said.
Fees for Asian IPOs – expressed as a percentage of capital raised – were between a third and half what they were in the US, he pointed out.
Banks also face higher compliance costs in Asia, amid wide-ranging corruption probes in China and elsewhere.
US authorities have opened a bribery investigation into whether or not banks have hired the children of powerful Chinese officials, known as “princelings,” in return for lucrative banking mandates. JP Morgan has withdrawn from two IPOs since last November amid such investigations.
“As far as I can remember in my career as a banker, it is something that has always existed both in Asia and elsewhere,” said Espinasse. “I don’t think hiring ‘connected’ employees is an issue so long as there is a distance between the transactions you might do with a particular company and the relatives of senior management that you might employ.”
For all the talk of deeper relationships, banks remain just as keen to use league table rankings as a way to market their expertise and drive business.
“We hear and see regularly that companies often look at league tables as an important factor because if they’ve got to recommend using a certain bank to the board, it is much easier to persuade the board to choose a highly ranked bank rather a bank that is ranked at the bottom of the table. However, it is rarely the most important criteria to look at,” said Suddens-Spiers.
Banks that use their league table rankings as a marketing tool also have a strong incentive to focus on where they place and, as a result, the tables do not always paint a true picture.
“There is always a way to appear on the top for an investment bank,” said Espinasse. “You can play with titles, the timing of the transactions; you can exclude or include rights issues et cetera. There are so many ways to cut these tables.”
Still, changes in the rankings affect how a client perceives a bank’s quality, which has real consequences. As a result, banks may be often willing to join a transaction for reasons other than fees.
A recent trend in Hong Kong IPOs is the appointment of a large number of firms, for instance.
WH Group, the Chinese pork producer that bought the US-based Smithfield Food last year, lined up 29 bookrunners to market and underwrite its IPO of up to US$6bn. However, the IPO was pulled at the end of April due to a weak reception from investors.
The large number of firms appointed shows that “investment banks are very good at pitching and at making a point and trying to convince the companies that they can bring something a little bit different, though not all of it is true,” said Espinasse.
“What investment bankers do best is not executing transactions, but winning mandates.”
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