How many debt capital markets bankers does it take to change a light bulb at the Bank of China Tower in Hong Kong?
Well, the answer depends on what floor it is on.
Closer to the top, then it is likely that the debt capital markets team from Bank of China International (BOCI) will reach it before a rival team from Bank of China (BOC) on the lower floors.
And then there is Bank of China Hong Kong (BOC HK), which also has fixed income operations in the same building.
Over the past five years, the presence of three overlapping teams on different floors in one building, all employed by the same bank, has provided a ready symbol for what is wrong with the way that Chinese banks structure their investment banking operations.
No one doubts that the bigger Chinese banks and securities houses have done a great job originating bond mandates from the Mainland ever since BOCI first burst onto the G3 Asian bond league tables shortly after the Global Financial Crisis. But they have been far less effective at managing themselves over the past decade.
FinanceAsia has learned that Bank of China intends to fix this by consolidating all of its investment banking operations under the BOCI brand. Bankers say that the decision has already been made at the senior level and expect the consolidation process to begin early in 2019.
They say the bank will retain the distinctive “I” to distinguish its investment banking operations, which will remain incorporated and headquartered in Hong Kong.
“A matrix structure is being put in place, which means that investment bankers based in the Territory will have functional reporting lines to Beijing,” said one specialist. “The idea is to facilitate good coordination within the bank so it can become a significant investment banking force across the region.”
It is an obvious step the bank has needed to take for the past four years particularly in DCM where the internal contradictions are most stark.
Things had started out so well. Of the big four state-owned banks, BOC was always likely to lead the market thanks to the head start its parent had as China’s leading foreign exchange bank.
And until 2015, BOCI was pretty much the sole figurehead for the group - executing offshore bonds for Chinese clients sourced by head office in Beijing. Things started to go wrong, however, when it started being superseded by staff members directly employed by head office itself, or having to share the billing with head office and Bank of China Hong Kong.
When China Nonferrous Metals Mining raised $500 million in January 2016, for example, there were three bookrunners on the deal: BOCI, BOC and BOC HK.
Other Chinese banks such as ICBC and BoCom all started to follow suit. Term sheets began to teem with different offshoots of the same banks.
This has never had any impact on league table rankings. Data gatherers like Dealogic make no distinction which bit of Bank of China is leading a deal.
But Bank of China was never going to be able to push past the likes of HSBC and Citi until it could present a single face to the rest of the world.
HSBC itself was in a similar position until the early 1990s when it created a global investment banking platform which it re-branded as HSBC Global Markets. Before that, multiple offshoots of the bank did not even share the same brand name, with Wardley underwriting bonds in Hong Kong and Midland Montagu in London.
History suggests the Chinese banks will eventually be just as successful as their Western ones. The latter began to go global in the early 1970s when the Eurobond markets first took off and the likes of Goldman Sachs and Morgan Stanley started to open London offices.
While it might seem like US investment banks have ruled the world forever, the reality is that it has only been forty years and things can change fast.
The Chinese banks now have similar ambitions. But they would also be the first to admit that they still have some way to go to create global platforms that incentivize bankers from different parts of the world to work together, rather compete against each other and jealously guard their individual P&Ls.
As one Chinese DCM head told FinanceAsia: “When I worked at an international bank I had to report to a product head and a regional head. Chinese banks have historically not had product heads so there’s been no integration across different geographies.”
The banker added: “The only instances where people from different branches actually talk to each other is when they have a long-standing personal relationship.”
Chinese banks’ policy of rotating people between jobs also means that newcomers to DCM may have very little experience in the sector.
They are also perceived to have far weaker compliance. Couple this with inexperience and the result is a potential mishandling of conflicts of interest.
For example, the head of fixed income at an international bank will oversee DCM as well as sales and trading. But there are very strict rules about when that person can bring sales and trading over the wall as a new bond issue is being readied for launch.
At Chinese banks, the problem can also exist even lower down the ranks with some syndicate heads also holding sales roles – a clear conflict. The result can be damaging information leakages, which move markets.
One international fund manager told FinanceAsia that his company only had one Chinese broking relationship for this very reason.
The Chinese banks are, however, learning fast and if history is any guide, they should prove a formidable force as they back their increasing commercial banking muscle across Asia with lucrative investment banking mandates.
Headhunters say that BOCI already has a very strong fixed income platform with 70 people across Asia and London working in origination, syndicate, ratings advisory, research and sales, and trading. The debt capital markets team itself is believed to comprise 25 people in Hong Kong, with a further three in Singapore.
Key will be what happens to the BOC DCM team based in Hong Kong and Singapore. The bank’s expansion means that most are likely to be absorbed.
Observers say that Bank of China is very keen to start building up a stronger franchise based out of Singapore. Indeed, the bank’s move to consolidate its South East Asian branches under the aegis of BOC HK in 2017 was a forerunner of its intention to create better synergies across the group.
“It’s a step by step approach,” said one banker. “But the target is to start executing more business in Singapore, Malaysia and Indonesia.
“Further afield, the bank will target Vietnam, the Philippines and Thailand on a more opportunistic basis.”
Other Chinese banks have already begun to do so. Over the past couple of years, ICBC has forged a growing presence on sovereign bond mandates for the likes of Angola and Pakistan.
Likewise, BOCI became the first of the big four Chinese banks to lead an international debt capital markets transaction for an Indonesian borrower in 2018: a $300 million five-non-call three-year offering for Geo Energy Resources.
BOCI has long had a very experienced team under Samson Lee, head of the financial products division who has been running DCM since 2007 and Cammy Lam, head of debt syndicate since 2010 alongside Mario Altenburger, head of EMEA origination and syndicate.
Shortly, they may have a much bigger and coordinated platform to help take the investment bank to the next stage of its development.
