Asiamoney.com: why equity is everything in Asian investment banking

Asiamoney.com, October 20 2010

A clutch of senior UBS bankers was on the road last week, briefing a Singapore audience on trends in regional banking and markets. One presentation leapt out: investment banking joint head Matt Hanning’s take on the industry landscape in Asia.

Two key themes come out of Hanning’s findings: that equity capital markets are utterly dominant in the Asian investment banking fee pool; and that China, in fee terms, is now well over half the entire ex-Japan Asian market.

By his calculations – underpinned, one imagines, by some time and effort with a Dealogic database – in the year to date equity capital markets have accounted for a remarkable 69% of the Asia Pacific fee pool, compared to 29% for M&A and just 2% for G3 debt capital markets. (He appears to have set aside local currency debt, presumably because it’s not a UBS product.) This, he says, is in contrast to developed markets where M&A would tend to be about half of the addressable opportunity.

It’s been an equity year in Asia, for sure: Agricultural Bank of China set a world record and Hanning’s figures won’t even include AIA, Petronas Chemical, Global Logistics Properties or the pending Bank Mandiri rights issue. But 69%, compared to 2% G3 debt? Part of the disparity is because these figures don’t represent total volumes raised, but addressable fees, and the two areas of the markets are scarcely comparable: in an investment grade bond deal, Hanning says, you might get 20 basis points in fees, whereas an IPO could net you up to 4%. “So the same volume of issuance is going to see a massive skew towards equities in fee terms,” he says.

Then there’s the geographical composition. In 2010 as of the third quarter, China has been 59% of the market in fee terms, compared to 13% for all of Southeast Asia, 11% for India, 8% for Hong Kong, 7% for Korea and 2% for Taiwan. This continues a trend that has been in play for some time: China was 41% of the market in fee terms in 2006 and 2007, and after a crisis-year dip moved up to 53% in 2009 before reaching this year’s highs.

In fact, this second remarkable statistic is the explanation of the first one. The equitization of China, whether from state-owned enterprises or private sector entrepreneurs, H-shares or A-shares or ADRs, is by a distance the most significant theme of Asian capital markets, and perhaps world capital markets, over the last five years. It is precisely because of this vast flood of Chinese corporate and banking stock hitting the domestic and overseas markets that equity has come to be such a dominant part of the landscape.

There’s an extension of this, too, and here one begins to see why UBS is keen to have these numbers more widely known. Within that China figure, a dramatic transformation has been taking place between the domestic and international opportunity. In 2007, Hanning says, the addressable fee pool from Chinese issuers was roughly 50/50 between international and domestic securities markets. “In 2010, 72% of the activity in China is a domestic securities opportunity.”

This should be evident to anyone who looks at an ECM league table. These days Goldman, Morgan Stanley and UBS rub shoulders with CICC, Citic Securities and Bank of China in the Asia Pacific top 10. “If you are not able to address the Chinese domestic opportunity, you have a growing problem,” Hanning says. He, of course, has a vested interest in pointing this out: UBS is one of the few foreign banks able to take advantage of this shift to domestic Chinese deals, through its UBS Securities business, a venture with domestic house Beijing Securities. (Although several other foreign banks have followed their and Goldman/Gao Hua’s lead, these ventures are increasingly being granted with less management control for the foreign party.)

It’s all good, though: the Asia Pacific fee pool in total is up 39% in 2010 to date over the same period in 2009, according to Dealogic, and every product’s fee contribution has increased this year over last, so any investment bank in Asia ought to be happier this year than last. But still, numbers as stark as these do raise a question: what’s the point of having an investment banking franchise that doesn’t include a credible presence in equity capital markets?

We can level the question at Barclays, but that institution is clearly making belated efforts to redress the situation: it announced six big new equity research hires in September and was clear that this was part of a broader equity platform, in line with the businesses the bank acquired from Lehman Brothers elsewhere in the world. We can level it at Standard Chartered too, although there as well the acquisition of Cazenove Asia has given it newfound capability in equities, albeit the bank insists it’s only there to help with equity-raising needs its existing clients from transactional banking come up with. So the most obvious one to ask about is HSBC. Several weeks ago we suggested that when Stuart Gulliver returns to Hong Kong he makes a priority of extending HSBC’s excellence in so many other areas to a credible equity capital markets business (where, in 2010 to the end of September, it ranked 32^nd in the region). Seeing these numbers, we’re inclined to repeat our suggestion.