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.

When Goldman Sachs, one of the earliest Wall Street entrants to China, takes a knife to its investment-banking activities in Asia, you could be forgiven for believing the region is in really bad shape.

It's true that business is poor. But bad enough to justify Goldman's decision to shed one-quarter of the staff in an Asian business built up over about 15 years?

While the 75 jobs to go are a fraction of the more than 3,000 staff Goldman has in Asia -- excluding Australia, Japan and the thousands in the Bangalore back office -- the scope of the reduction at the bluest of blue-chip houses sends a message that regional investment banking is in a secular decline. (Operations in Hong Kong and Singapore will bear the brunt.)

There's no doubting the scale of the current swoon: Aggregate investment banking revenue in Asia ex-Japan fell between 15 and 20 percent in the first half, dragged down by a slump in equity deals, according to Coalition, a U.K.-based data provider.

Dropping Down
Goldman Sachs, which ranked second for Asia ex-Japan equity offerings last year, has fallen to 11th place as Chinese banks rose up the league tables
Source: Bloomberg
Note: The rankings are by the value of deals for which advice was given.

Retail-focused peers like Standard Chartered and Barclays have made bigger retreats, lopping entire divisions, and UBS has reduced investment-banking headcount. But all of them have strong retail franchises that can carry their securities units.

The challenge is clear. Aggressive Chinese underwriters have shrunk the money Wall Street and European banks make from mainland companies' IPOs, once a huge source of business. Indian equity deals, currently reviving, barely pay fees. Southeast Asian activity has slowed dramatically in recent years. On top of all that, hedge funds, a key client, are suffering -- Tudor Investment is closing its Singapore trading desk, people familiar with the matter told Bloomberg News on Monday.

Goldman's own star has been fading in the region. The bank, usually tied with UBS for leadership in deal fees, has declined in some rankings. Layoffs in Singapore last year, and Goldman's involvement in underwriting billions of dollars of bond sales for 1MDB, the Malaysian state investment fund under investigation for money-laundering, meant the bank felt the pain of the Southeast Asian slowdown more keenly.

While league tables aren't a sign of profitability, Goldman's return on equity has slipped. The firm posted an 11 percent drop in second-quarter investment banking revenue globally, and ROE has been below the key 10 percent level for banks in recent years.

Dwindling Profitability
Goldman Sachs's return on equity has slipped in recent years
Source: Bloomberg

Western financial institutions have another challenge in Asia: While bonuses vary with deal activity, salaries are broadly the same whether a banker is based in a low-fee-pool region like India, or in Hong Kong, handling IPOs for Chinese companies. The glory days of big payoffs from taking those companies public are gone.

So an adjustment by Goldman seems sensible. Less so is its scale, coming just when Asian companies need all the help they can get to become more global.

Chinese acquisitions overseas have hit record highs, and Goldman is a major beneficiary, staying on top of the league tables for Asian M&A even as industry-wide revenue slips. While Chinese institutions are catching up, and are big financiers of these deals, Western banks still lead in Asian merger advice, and Goldman has long been in the top three.

Rebounds in emerging markets show just how quickly an out-of-favor business area can become compelling again.

Goldman is known for measured hiring when times are good. The bank may find its cuts were short-sighted when things pick up.

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