UBS bets on China's Nasdaq-style exchange to offset a ban in Hong Kong: sources

[Hong Kong] UBS Group AG, which runs the biggest foreign-controlled investment bank in China, is counting on the nation's new Nasdaq-style exchange to mitigate the impact of an underwriting ban in Hong Kong, according to people familiar with the matter.

Beijing-based UBS Securities Co aims to boost fees from arranging share sales on the technology board, known as Star Market, to 20 per cent of its stock underwriting income from the mainland by December, said the people, asking not to be identified since the projections are confidential. The contribution may reach 50 per cent as soon as next year, with the bank working on two first-time offerings that may raise up to three billion yuan (S$582.5 million), they said.

UBS, one of two foreign ventures approved to sponsor initial public offerings on Shanghai's Star Market, is betting that the high commissions from these issuances will partly offset a revenue decline in Hong Kong, where it has been banned from sponsoring IPOs (initial public offerings) till April. The Swiss bank is among those expanding in China after taking majority control of its local securities unit as the nation loosens restrictions on foreign participants in its US$43 trillion financial industry.

"The fees are lucrative," said Liu Wencheng, co-head of investment banking at UBS Securities. "We are actively mobilising resources to dig and cultivate high quality tech-innovation companies to tap the opportunity."

Mr Liu wouldn't comment directly on the bank's plans for Star Market.

UBS is also focusing to the new bourse after mainland investment banking revenues, including fees from arranging debt sales, dropped 48 per cent last year as the number of large deals shrank, according to the people familiar. In March, it was fined HK$375 million (S$66 million) to settle cases brought by Hong Kong authorities and became the only foreign bank banned from sponsoring IPOs for 12 months.

The Swiss bank underwrote IPOs totaling US$317 million in Hong Kong this year, compared with US$1.6 billion in 2018, according to data compiled by Bloomberg. Its tally on the mainland is about US$98 million for 2019.

A Hong Kong-based spokesman declined to comment on the details of UBS's China plans.

The Star Market, launched in July, has been hailed as a testing ground for relaxed rules on listing and trading as policy makers seek to stem an exodus of new economy IPOs to Hong Kong and the US.

For investment banks, there's the carrot of higher fees. Underwriters typically charge issuers 1.5 per cent to 2 per cent fees for Hong Kong listings, compared with an average 7 per cent on the tech board, according to the people. Also, unlike in Hong Kong, Chinese regulators have capped the number of banks involved to one if the issuer's IPO size is less than 10 billion yuan.

Sponsors on the tech board are required to co-invest in between 2 per cent and 5 per cent of the shares issued by their clients, an unusual arrangement that may limit foreign players' interest in leading deals due to their limited capital base onshore.

To shore up available capital, UBS is seeking special approval to use the Qualified Foreign Institutional Investors programme to co-invest in tech board IPOs, the people said.

BLOOMBERG