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Job cuts mount as Asian investment banking fees slide

Monday, October 3, 2016 - 08:44

The future of Asian investment banking is again under scrutiny as global banks scale back their operations in the region.

[HONG KONG] The future of Asian investment banking is again under scrutiny as global banks scale back their operations in the region.

Goldman Sachs and Bank of America Merrill Lynch are each cutting investment bankers in response to declining advisory fees and heightened local competition.

While the cuts in both cases span multiple products and markets, fee data show that a slump in equity underwriting revenues is exerting the greatest pressure.

Fees from Asia Pacific equity and equity-related deals have plunged 23 per cent this year, according to Thomson Reuters/Freeman Consulting data.

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In contrast, debt-underwriting revenues are up, while regional M&A activity is down only about 5 per cent on the same period in 2015.

Bankers and analysts believe many more ECM cuts lie ahead as Chinese banks continue to gain market share and offer far lower fees.

"I'm not surprised at all that they are cutting jobs," said Veronique Lafon-Vinais, associate professor of business education at the Hong Kong University of Science and Technology, who has also worked in banking in the US, Europe and Asia.

"If you look at investment-banking revenues in Asia they have historically always tilted towards ECM. And now you have Chinese banks coming in strong, so there is way more competition."

Among the senior bankers leaving BAML are Peter Kim, head of Korean investment banking and Niraan De Silva, head of South-East Asia ECM and equity-linked capital markets Asia-Pacific, sources told IFR.

Also departing in the Australia office are Ben Stewart, senior manager of debt capital markets and syndicate and Guy Foster, head of Australian ECM.

BAML planned to cut two dozen investment bankers across Asia, Reuters reported last week.

Goldman is looking to reduce its 300-strong investment banking workforce by up to 30 per cent, according to Reuters. The bank declined to comment.

Figures from Thomson Reuters SDC show Goldman remains the top M&A adviser for transactions with Asia Pacific involvement, but has slipped from first to eighth on the Asia ECM league table.

In terms of fees, the US bank ranks only 15th for Asian equity underwriting, excluding Australia, this year, behind the likes of Sinolink Securities and Guotai Junan Securities.

In 2014, Goldman earned about US$204 million from Asian ECM underwriting, according to data from Thomson Reuters/Freeman Consulting. Last year, it earned US$107.7 million and, so far in 2016, it was taken in just US$44 million. The data uses a proprietary model to estimate earnings where fees are not disclosed.

Goldman is far from the only Western bank experiencing Asian ECM struggles. Deutsche Bank, which rose as high as third on the same fee table in 2011, is now 16th. Credit Suisse has fallen from second in 2014 to 34th in 2016.

The slowdown of US listings from China has been particularly painful for Western arrangers, while Hong Kong IPOs now come with inflated bookrunning syndicates and measly underwriting fees.

The recent US$7.4 billion listing of Postal Savings Bank of China handed underwriters a US$118 million payday, but that was split unequally between 25 joint bookrunners.

While ECM bankers in Asia suffer, their debt counterparts remain cautiously optimistic. Asia's bond markets are also becoming more competitive, particularly in China and South Korea, but global arrangers have so far managed to fend off regional competition, and strong deal volumes mean the fee pool has remained relatively stable.

Fees on G3 bond sales from Asia, excluding Australia, have actually risen 14 per cent from the same period last year, and Bank of China and DBS are the only Asian underwriters among the top 10 fee earners.

Still, DCM bankers are not counting on the fee pool to remain stable. As the market evolves, they have to specialise and look for areas where they have competitive advantages, such as in certain private placements, local currencies and more complex transactions, they say.

"The theme of lower fees is constant, but it doesn't have to be earth shattering," said the Hong Kong-based head of DCM at a non-Asian bank. "I can point you to places where you can get nice fees in Asia, and I can also point you towards atrocious fees.

"We have to focus on areas where we can offer something different. There's no doubt that the region, and especially China, is overbanked."


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