Firms Suffer 23% Drop in Asia Fees Amid Search for Cash
Therese Esperdy, a 17-year JPMorgan Chase & Co. (JPM) veteran, suffered what she called “initial shock” in her first few weeks in Asia after three people told her some clients don’t want to pay merger-advisory fees.
“I thought, ‘What have I done? I’ve moved to a region where clients don’t even pay for M&A advice. What do they pay for?’” said Esperdy, who relocated to Hong Kong in 2011 from the firm’s New York headquarters to take charge of its advisory business and was made co-head of corporate and investment banking in the Asia-Pacific region the following year.
The answer, it turned out, is the stuff of everyday banking: corporate payments and remittances, cash management and trade finance -- what are known as transaction businesses.
“It’s a relatively unexciting but bread-and-butter business for banks,” Tjun Tang, a Hong Kong-based senior partner at Boston Consulting Group Inc., said in an interview. “If you are the management of the bank or the shareholder, it’s actually a very attractive business because it creates a lot of sticky relationships between the banks and the customers.”
Years of contraction have put pressure on global banks including JPMorgan, Bank of America Corp. and Deutsche Bank AG (DBK) to diversify income streams. Fees for underwriting equities and bonds, as well as advising on mergers and acquisitions, shrank 23 percent in the Asia-Pacific region from the beginning of 2011 through the end of 2013, even accounting for last year’s 1.4 percent increase, according to New York-based research firm Freeman & Co. Such fees rose 23 percent in the U.S. in the same period and fell 6 percent in Europe, the data show.
“In a developed-market context, in North America or in Europe, and even in an emerging-markets context outside of Asia, most people would put M&A on the top of the value chain from investment-banking products,” Esperdy said in an interview in Hong Kong. In Asia, the business is “lumpy and episodic” and the region far from homogeneous, “so it sort of turned my preconceived notions about what clients value on its head.”
Asia-Pacific wholesale transaction-banking revenues are expected to triple to $139 billion by 2022 from $46 billion in 2012, according to a September BCG report.
Investment-banking fees including for mergers and acquisitions, equity and bond underwriting and syndicated loans were $14.9 billion in Asia last year compared with $42.1 billion in the U.S. and $18.8 billion in Western Europe, according to Freeman data. That’s down from a peak in Asia of $19.3 billion in 2010. The mergers-and-acquisitions portion in Asia last year was $3 billion compared with $10.7 billion in the U.S. and $5.9 billion in Europe, the data show.
JPMorgan’s trade-finance balance sheet has tripled in the past three years, according to Tom DuCharme, who runs treasury services and is Esperdy’s co-head, based in Singapore. He declined to disclose the amount. JPMorgan, the world’s biggest investment bank by fees, also tripled its corporate bankers in Asia in the past three years, bringing the total to 100.
Revenue from JPMorgan’s transaction-banking services probably will overtake investment banking in Asia within five years, Esperdy said. It will increase to 60 percent of banking earnings by 2018 from 50 percent, she said.
HSBC Holdings Plc (5) and Standard Chartered (STAN) Plc, both based in London, and New York-based Citigroup Inc. (C) have had primary transaction-banking businesses in the region for decades. The banks split the top three spots in Asia market share last year. Standard Chartered led with 21.4 percent, followed by HSBC with 18.6 percent and Citigroup with 11.8 percent, according to East & Partners.
Transaction bankers make less than their investment-bank counterparts. In Hong Kong, those with six to 10 years of experience are paid HK$1 million to HK$1.6 million ($129,000 to $206,000) a year, excluding bonus, according to recruiter Robert Walters Plc’s 2014 global salary survey. Investment bankers with the same experience earn a base salary of HK$1.4 million to HK$2 million, the survey showed. The spread is similar in Singapore.
The heads of transaction-banking businesses can make about $1 million a year before bonus, an increase of 18 percent last year on average, while investment bankers’ pay stayed flat or declined, said Paul Dowling, co-founder of East & Partners Pty, a Sydney-based market-research firm.
About two-thirds of transaction-banking earnings in Asia typically come from the net-interest income on holding clients’ cash, JPMorgan’s DuCharme said. Additional fees are generated by processing transactions, such as foreign-currency payments to a company’s suppliers or trading partners, and short-term trade financing, he said.
Transaction businesses are expanding as Asian companies become more global. By 2020, the number of firms headquartered in Asia with revenue exceeding $1 billion will double to more than 5,000, according to data provided by BCG. Their trade in the region and with the world is forecast to increase to 37 percent of an estimated $37 trillion of global commerce by 2020 from 30 percent in 2010, the consulting firm’s data show.
Fees from Asia-Pacific corporate and transaction banking may swell to an estimated $100 billion a year, 10 times greater than those generated from capital markets and merger advisory, and they’re increasing by 5 percent to 10 percent a year, said Matthew Koder, Asia-Pacific president for Charlotte, North Carolina-based Bank of America, the second-largest U.S. lender.
The bank’s corporate and transaction-banking business in Asia is twice the size of investment banking, with the gap having widened for the past three years, Koder said in an interview in Hong Kong last month. The investment-banking workforce was cut 20 percent in that time, he said.
Revenue from IPOs for international banks has been shrinking as issuers hire more than five and sometimes a dozen or more underwriters per deal, instead of an average of three in the previous decade, spreading fees among more firms to broaden business relationships and improve distribution.
Chinese and Southeast Asian securities firms are taking more business away from Wall Street. Chinese investment banks captured a record 45 percent of Hong Kong’s IPO market in 2013, up from 16 percent in 2007.
As a result, investment banking is no longer the “star business” it used to be, BCG’s Tang said.
“The risk-return on investment is simply not high enough, so we will prefer to divert our resources to focus on other areas for other clients in order to get a better return,” Koder said. “The needs of those clients in Asia are not led by investment banking.”
Bank of America earned more in investment-banking fees than larger JPMorgan last year for the first time since acquiring Merrill Lynch & Co. in 2008 as it benefited from a record year in debt underwriting, company reports show. Bank of America ranked 13th in arranging Asia-Pacific stock sales last year, down from eighth in 2012, according to data compiled by Bloomberg. UBS AG (UBSN), Switzerland’s biggest bank, was first in managing sales both years, the data show.
Jaspal Bindra, head of Standard Chartered’s Asia business, said in a March 6 interview with Bloomberg Television’s Angie Lau in Hong Kong that margins for transaction banking worldwide have fallen over the past year.
“We hope the deterioration from here onwards is much more limited than it was through all of 2013,” Bindra said. “Margins will stabilize over time.”
At Citigroup, transaction banking generated about $998 million in profit last year, company filings showed. That accounted for 44 percent of earnings from its institutional-clients group, which includes corporate and investment banking and markets trading. Profit fell by 10 percent from 2012.
The firm added more than 1,000 transaction-banking jobs in Asia over the past three years, said James Griffiths, a Hong Kong-based spokesman said. The regional business accounts for 25 percent of the bank’s global transaction-banking revenue.
“The annuity style of the business means it is less volatile than episodic businesses, giving better earnings stability over time,” said Amol Gupte, the Hong Kong-based Asia-Pacific head of Citigroup’s treasury and trade-solutions group. “The network and relationships we have built up over decades cannot be replicated overnight.”
UBS and Credit Suisse Group AG (CSGN), both based in Zurich, along with Goldman Sachs and Morgan Stanley, have limited or no corporate-treasury businesses in Asia.
JPMorgan, Bank of America and Deutsche Bank rank sixth, seventh and eighth in Asia in market share for transaction services, East & Partners data show. JPMorgan has 7.4 percent and the others about 6 percent. The remaining banks in the top 10 are Asian, including Singapore-based DBS Group Holdings Ltd. (DBS) and Beijing-based Bank of China Ltd.
JPMorgan’s tripling of corporate bankers in Asia resulted in the hiring of Michael Paulus, formerly with HSBC, said DuCharme, who joined the U.S. firm in 2010 from Deutsche Bank. Dianne Challenor, formerly with Citigroup, was hired last year as head of transaction services in the region, he said.
Transaction banking in Asia by Deutsche Bank has been expanding at an annual average rate of 20 percent since 2010, requiring the hiring of 15 percent more people, Lisa Robins, its Singapore-based Asia head, said in an e-mail response to questions without providing specifics or saying how many people now work in the unit.
The bank, Germany’s largest by assets, has created three new senior Southeast Asian positions since May, appointing Vikas Arora as Singapore-based head of trade finance and cash management for nonfinancial institutions. The Frankfurt-based lender also opened its sixth branch in China in September, in Qingdao, in part to meet a growing demand for transaction banking. The city is home to companies including Tsingtao Brewery Co. (168) and appliance maker Qingdao Haier Co.
To capitalize on growing trade, JPMorgan is seeking to build its network of corporate clients and strengthen its multiproduct strategy when approaching companies that may want to seek an IPO.
Last year a senior JPMorgan banker in Hong Kong told a longtime investment-banking client that the bank was keen to manage his firm’s cash and was ready to give up a potential role in its next debt issuance, DuCharme said, without giving the company’s name. Companies are reluctant to give both businesses to the same financial institution, he said.
“That was a strategic piece of business that we wanted,” DuCharme said. “We had to make a trade-off because the client will never give all of their wallet in all of their products. That’s not realistic.”
A few months later, JPMorgan was awarded the business, which involves helping the company manage its working capital and flow of collections and payments, and assist with multicurrency clearing and settlements, Esperdy said. Its planned bond issuance proceeded with JPMorgan among five underwriters.
The U.S. bank won a mandate from PTT Pcl late last year to help Thailand’s biggest oil and gas company combine and manage cash flows for its overseas units in Cambodia, Indonesia, Laos, the Philippines and Singapore, beating six other bidders, said Wanida Boonpiraks, vice president of PTT’s treasury.
“They provide us with an interest-enhancement program, meaning managing the cash flow and combining all the cash flow of all our offshore affiliates,” Boonpiraks said by phone from Bangkok. “Everyone would be in the position of a win-win solution. We can decide it by ourselves, but we also need a bank system to sweep the cash flow from our offshore affiliates.”
JPMorgan last year won the cash-management business for eight companies out of the 17 tenders available in the region, compared with three in 2012, said DuCharme. It also won 13 export-credit agency deals to facilitate aircraft purchases from companies including Air China Ltd. (753), Cathay Pacific Airways Ltd. and Korea Air Lines Co., he said.
A client seeking a cash manager typically considers whether the bank has the capability to do business in the required geographic locations, pricing, the level of service and the ability to execute transactions efficiently with a high-quality electronic-banking platform, DuCharme said.
“Three years ago, we got ahead of the curve because after the financial crisis, there’s a clear view that there will be a slowdown in investment-banking capital markets,” he said. The crisis prompted JPMorgan to seek growth opportunities through its wholesale banking and international businesses, he said.
Investment-banking revenue may rebound this year as China’s ending of a 15-month freeze on IPOs in January could unleash $11 billion in share sales in the first half. More than 760 mainland companies have been waiting to go public, according to data compiled by Bloomberg. China’s decision to make it easier for some outbound deals valued at less than $1 billion will also bolster overseas acquisitions expected to hit $500 billion over five years and reverse a decline last year, according to a February report by PricewaterhouseCoopers LLP.
Deals have started coming back. The biggest IPO so far this year raised $3.1 billion in Hong Kong in January for Power Assets Holdings Ltd., controlled by Asia’s richest man, Li Ka-shing. Also in January, Suntory Holdings Ltd. of Japan acquired Beam Inc., the brewer of Maker’s Mark whiskey, for $16 billion in the largest takeover of the year.
While the thawing of China’s IPO pipeline may cause investment-banking revenues to recover, competition from domestic firms means global underwriters may take a smaller slice of the fee pool, Bank of America’s Koder said. Goldman Sachs, the fifth-largest U.S. bank, and HSBC, Europe’s biggest, were the lead arrangers for the Power Assets IPO, aided by 11 companies not including JPMorgan.
Only 20 percent of about 10,000 Asian companies receiving investment-banking services paid “a vast majority” of the fees, he said.
JPMorgan plans to become more selective and focus efforts on the most-profitable customers, Esperdy said. The firm’s investment banking revenue from Greater China rebounded 50 percent last year, while from Japan it climbed 25 percent, she said.
“Despite what I was told two years ago, I have seen the glimmers of hope that you can make money,” she said. “Even in M&A.”
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