Morgan Stanley Sees Asia Gains Shielding It From China Reversal

  • Bank has a record year for merger advisory business in region
  • Equity market volume slumps, Chinese securities firms encroach

Morgan Stanley’s mergers advisory business in Asia outside Japan pulled in record fees last year and the firm gained market share in equities, helping partially shield it from an investment-banking contraction that prompted competitors like Goldman Sachs Group Inc. to cut jobs.

A surge in overseas acquisitions by Chinese companies and the pullback by some rivals in Asia played into Morgan Stanley’s hands in 2016, according to Gokul Laroia, co-chief executive officer for the Asia-Pacific region excluding Japan.

For the first time in 16 years, Morgan Stanley pulled in more investment banking fees than arch-rival Goldman Sachs in Asia-Pacific outside Japan, data from industry researcher Freeman & Co. show. Taking market share across several product categories may help the firm weather a potential downturn in outbound acquisitions from China, where the government is clamping down on money outflows, Laroia said.

"When China reverses, obviously we get impacted, but the diversity of the business compensates perhaps more than it does for others," the 21-year Morgan Stanley veteran said in an interview. "Clearly there is some uncertainty around policy that will create volatility in the region."

Even with the market share gains, Morgan Stanley posted a 12 percent drop in regional net revenue to $4.15 billion last year amid a slowdown in trading, according to its latest regulatory filing. In the first nine months the decline was 17.6 percent, less than the 32 percent slump reported by Goldman Sachs in the region for the same period. Goldman Sachs has yet to report full-year figures for Asia.

Going Big

Banks in Asia had to contend with Chinese securities firms grabbing more of the less-lucrative transactions, and a slump in regional equity trading after China’s stock market plummeted in mid-2015. And near the end of the year, China’s decision to clamp down on speculative dealmaking cast a shadow over merger advisers’ prospects for 2017.

With trading under pressure, competition for the biggest, most lucrative deals is intensifying. "The market just doesn’t have enough flow business to compensate for the loss of big trades in the region seen a couple of years ago," said Laroia, 50. "The only way to offset that is by getting a disproportionate share of the large deals."

Last year, Morgan Stanley underwrote $13 billion of stock sales and rights offerings in the Asia-Pacific region excluding Japan, 84 percent more than second-ranked Deutsche Bank AG, data compiled by Bloomberg shows. In terms of investment-banking fees, Morgan Stanley was the top earner with 10 percent of the $4.8 billion paid to non-Asian banks, Freeman estimates.

Morgan Stanley wasn’t immune to the sudden downturn in equities trading in 2016. The equities business, which includes wealth management, accounts for just over half of Morgan Stanley’s Asia revenue, while investment banking contributes about 20 percent, according to people familiar with the matter. Fixed-income accounts for about 25 percent and investment management revenues make up the balance, the people said.

Electronic Shift

In Asian equities trading, banks have faced falling volumes and lower commissions amid the shift to electronic trading. Turnover on Asia’s 10 biggest exchanges tumbled 46 percent to $23 trillion in 2016, the deepest slump since Bloomberg began tracking the data in 2006. That partly reflected the unusually good year in 2015, when the Chinese market was in the last stages of a dramatic rally.

Morgan Stanley ranked second in Asia-Pacific equities sales and trading by revenue in the first half of last year, up from third in 2015 and 2014, according to the latest data available from Coalition Ltd. UBS Group AG was the top player.

“It’s been a year in which the overall pie for investment banks has been down, but what’s been really gratifying for us has been that pretty much across the board, and perhaps more importantly, in areas that are more profitable, our share has gone up,” Laroia said.

Chinese Challenge

Laroia said the shift toward more electronic trading in the region is driven in part by hedge funds and other clients seeking to trade more cheaply and consolidate their broker-dealer relationships to contain costs. He said the bank’s revenues from electronic trading in Asia have grown more than 30 percent annually since the start of 2013, benefiting from new hedge fund launches in the region, many of which are China focused.

In the booming business of cross-border acquisitions by Chinese companies, local investment banks still find it hard to compete, Dieter Turowski, Morgan Stanley’s co-head of investment banking in Asia-Pacific outside Japan, said in a separate interview.
On the other hand, local securities firms are making inroads in areas of investment banking where they can compete with lower fees, such as initial public offerings and bond sales, Turowski, 51, said.

"It’s true that for some of the more commoditized business, the Chinese banks have been increasing market share." Turowski said. "They’ve been slowly moving up and taking more wallet share."

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