Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Giving things away is something we usually associate with the music business, not banking. But that's exactly the problem with Asian investment banking, one that the new leaders at Barclays and Deutsche Bank are addressing as they plan a reduced presence in the region.

Barclays CEO Jes Staley, a week into the job, is weighing cuts in the British bank's Asian securities division as well as its global cash equities business, Bloomberg News reported last week.

Bankers in the U.S. and Europe, coping with mounting pressure to conserve capital as well as a spate of fines, have begun talking openly about just how unprofitable Asia can be, especially if you're (1) not a market leader, and (2) your Asia costs -- read banker pay and technology -- are as high as they are back home. 

Asia's Small Fee Pool
Investment banking revenues by region (in US$ millions)
Source: Freeman & Co.

In April, announcing a refocus on the U.S. and the U.K., Barclays Chairman John McFarlane said the lender was reviewing its Asia and Middle East businesses because "we don’t like places that don’t make money.” Standard Chartered, itself in the middle of a shakeup, exited its largely Asian cash equities operations early this year.

Deutsche Bank Co-CEO John Cryan, who took over from Anshu Jain in July, said that while "not to be in the U.S. would just be inconceivable," Asia is a different matter.  “I’ve spent time in Asia," the 54-year-old British banker said at a conference last week organized by Goldman Sachs in New York. "There’s not much of a fee pool there, it’s hugely competed for, the capital markets are not deep and it’s just not a replacement for the U.S."

That sums up what most banks have found over the years in the region. Apart from Australia and Japan, where local banks dominate and advanced pension systems make for liquid markets and higher margins, Asia's a low-fee game for investment banking. Barclays, Deutsche Bank and Standard Chartered built out Wall Street-like franchises in Asia in the wake of the financial crisis, moving away from their foreign-exchange niches or, in Stanchart's case, retail banking. They have since been pulling back.

Competition in Asia is intense. What used to be the region's most lucrative deals -- underwriting Hong Kong IPOs for Chinese companies -- has become less so as Chinese investment banks moved in. For a banker, the best way to float a Chinese company now is to go to the U.S., where fees of 6 to 7 percent dwarf those in a Hong Kong IPO, which can be as low as 1 percent.

The outlook isn't promising: The biggest chunk of investment-banking revenue in the region -- as elsewhere -- comes from trading equities, debt, commodities and currencies, and here too, fees have been falling.

M&A, running at record levels globally, doesn’t offer the returns in Asia that it does in the U.S., so that on many deals, the payoff for banks is so-called league-table credit.

Slim Pickings
Asian M&A fees tend to be lower than in the U.S. or Western Europe (in US$ millions)
Source: Freeman & Co

Just ask bankers who worked on the flavors of the moment: Chinese state-owned enterprise reform, such as Sinopec's sale of its gas stations-to-retail business last year, or the swath of restructurings among the region's family-owned firms in Hong Kong and South Korea.

India, which is fast taking over from China as investors' favorite Asian market of 2016, probably won't be a cash cow. The Indian government's planned sales over the next several years are unlikely to offer high fees -- banks received just one rupee in January for handling a 10 percent stake in Coal India, valued at $3.7 billion, in the country's biggest share sale this year. 

That leaves Asia's booming tech startups as the main potential fee pool. While funding of unicorns -- unlisted companies valued at more than $1 billion -- is increasing apace, many tech companies are bypassing bankers to raise funds.

Few banks have made money in Asia outside of old-fashioned banking services for individuals and companies, including cash-management fees from the basic plumbing of corporate life: delivering salaries to employees.  In fact, half of Citigroup's $15 billion in Asia revenue annually in the past five years has come from consumer banking, which includes retail and credit cards, and the rest from services for institutions and companies, including investment banking.

Unless you're making a play for the increasingly affluent Asian consumer (as with Citi's consumer banking), are in the top five investment banks in the region, or have an unassailable edge in foreign-exchange flows, the argument for sticking with an Asian franchise is a tough one to defend.

Banking on Asia
Asia Pacific's top 10 equity capital-markets banks, 2015, by value of deals.
Bloomberg

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net