In the wake of the global financial crisis, US and European banks decided they could no longer afford to subsidise their small but growing Asian operations.
Some were also disappointed with the paltry returns from helping Asian companies who refused to pay much for advice.
A drop in deal-making after 2010 exacerbated the crackdown: investment banking revenues from IPOs, debt issues and M&A in the region fell to $5.2 billion in 2013, the third consecutive year-on-year decline according to data provider Dealogic.
The best managers managed to squeeze costs and prop up revenues by improving processes as well as trimming headcount. The winner of our Best Bank award for 2013, Citi, increased income in Asia by 10% during the first nine months of 2013 from a year earlier, while expenses dropped 5%. A handful managed to position themselves as offering premium products. JP Morgan has managed to raise the fees it charges on M&A.
The pain is paying off. At banks’ year-end parties the mood was decidedly more chipper than last year. Most had just been through annual budget meetings with headquarters for the year ahead and the consensus view was – markets willing – there would be no more drastic cost cutting in the year ahead.
Of course investment bankers are not completely out of the woods: successful cost cutting can breed requests from headquarters for more of the same.
Although many bankers say they will be disciplined and only accept IPO roles that pay higher fees they are still under pressure to accept any piece of business.
But there are reasons for optimism. China’s IPO machine is turning again. Structured products are slowly catching on with Asian companies: five large investors in China Everbright Bank’s $3 billion Hong Kong listing plan to take out a loan to finance their purchase, pledging CEB shares as security – high-margin business for their bankers.
Private equity firms raised a whopping $29 billion in 2013 for potential acquisitions. They are also enthusiastic users of products such as foreign exchange hedges to ensure their investments are made at a known dollar amount.
Fingers crossed.
