Investment banks in Asia have been engulfed in the gloom surrounding job cuts in Wall Street trading floors. There are some green shoots emerging; things just won't be as good as last year.
Despite some early signs of a revival in stock markets, this is is likely to be a tough year for trading and investment banking worldwide, as firms grapple with record-low interest rates, plunging energy costs and cooling emerging-market growth. Citigroup CFO John Gerspach's warning that first-quarter revenue from fixed income and equity trading could fall 15 percent (investment banking fees are forecast to tumble 25 percent) slammed bank stocks that had recently been on the up.
Asia has to deal with all those headwinds, and more. The few big IPOs slated for Hong Kong this year will provide thin pickings, with an ever-rising number of Chinese investment banks sure to push down underwriting fees. Meanwhile, large investors such as hedge funds are nursing losses from the region's weak and volatile markets.
Last year, equity trading became the most important fee driver for Asian investment banks for the first time since 2010, according to data from Coalition, buoyed by a first-half boom in China's stock market. IPOs such as Japan Post's $12 billion offering and the $4.5 billion sale by Chinese brokerage Huatai Securities helped spur trading.
Fixed income, currencies and commodities trading (collectively known as FICC) is usually the biggest earner for investment banks, followed by equity trading and the traditional merchant-banking activities of arranging share and debt sales and advising on mergers and acquisitions. With China's stock boom having turned to bust in the second half of last year, equity trading remains subdued.
Investment bank revenues from Asia rose by 4 percent last year to $29.6 billion, thanks largely to the pickup in share trading, which spurred a jump in fees for advising hedge funds -- known as prime service -- as well as an increase in equity derivatives activity. By comparison, global investment-banking fees dropped to $160.2 billion from $164.6 billion, hurt by the slump in Europe, according to Coalition's data.
The buoyancy hasn't carried into 2016. Average daily equities-trading volume is running about 7 percent lower by value globally this year, according to Bloomberg Intelligence data. In Asia-Pacific, the decline is 43 percent.
Don't look to hedge funds for help. After beating counterparts in the U.S. and Europe last year, Asian funds are off to their worst start to a year on record. Excluding those that invest in Japan, they lost 6.6 percent in the first two months of 2016, according to Singapore-based data provider Eurekahedge.
There's been some pickup in activity since the Federal Reserve scaled back forecasts for how high interest rates will rise this year and China pledged to keep its markets stable. Emerging-market equities attracted $1.4 billion of fund inflows in the past week, the third straight addition after 17 weeks of outflows, according to data compiled by EPFR. One Hong Kong-based banker who deals in IPOs said investors were no longer shutting the door in his face when he tried to gauge appetite for sales.
There's also been some revival in FICC trading. Investors poured $1.05 billion into emerging-market funds focused on debt securities during the five days through March 9, the most since February 2015, EPFR data show.
But China's unlikely to see the same surges in trading volumes as it did last year, and there are few big flotations planned beyond a $10 billion Hong Kong IPO by the Postal Savings Bank of China. M&A remains lukewarm for Western banks, other than the opportunities for acquisition financing (which pays higher fees than plain-vanilla lending). China's Anbang Insurance didn't use Asia-based investment banks in its recent approach for Starwood Hotels, while only two banks -- HSBC and China Citic Bank -- are advising ChemChina on its $43 billion takeover of Syngenta, the biggest ever by a Chinese acquirer.
While Hong Kong share sales by Bank of Tianjin and Zheshang Bank could bring IPO volumes this quarter to the same levels as the year-earlier period, the biggest chunks have already been sold to cornerstone investors. For bankers, that means lower incentive fees.
All in all, it's going to be an OK year -- just not great.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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