Citi Asia outlook

Citi’s Farhan Faruqui shares outlook on Asia

If there is a strategic fit then now is the time to do M&A, debt markets will likely remain strong, and although equity markets will remain volatile, there will be windows of opportunity for the nimble.
Farhan Faruqui, Citi
Farhan Faruqui, Citi

Investment banking has been a curate’s egg this year — record bond issuance, healthy M&A but anaemic equity. However with block trades back, there is a rising hope that equity markets may make a comeback in the fourth quarter. FinanceAsia caught up with Citi‘s Farhan Faruqui, head of corporate and investment banking in Asia.

Ok, let’s get this out of the way. I know you want to talk about Citi. 2012 has been a mixed year for the market. How have you fared?

We have good momentum during the past year and it is a manifestation of us having the right strategy. In the month of September we raised close to $20 billion from capital markets in the region across 9 ECM [equity capital markets] and 22 G3 debt deals in Asia-Pacific for clients.

We are fortunate to have a platform that allows us to generate revenues from diverse parts of our business across the globe. This leads to repeat business and long-term relationships with clients, which has translated into year-on-year revenue growth and strong momentum despite a challenging market.

What are the themes that you see during the next six months?
The debt markets will continue to remain robust and equity markets will remain volatile. There is a pulse back in equity and we are telling issuers to be ready to take advantage of windows that can open and close in a matter of few hours.

The next six months will also offer a great opportunity to look at assets globally, because of depressed equity valuations. Because of this, we may see an uptick in outbound M&A activity and cross-border deal flows — we are actively advising clients on possible opportunities where we see a strategic fit.

Everyone is talking about how great M&A has been; but so far this year, the M&A volumes are still lower than the same period in 2011. Do you expect more big-ticket M&A deals in Asia?
The lingering gloomy economic situation in Europe and the geo-political concerns is likely to depress prices and allow quality assets to be acquired at a lower valuation than historically. M&A transactions pursued during sector down cycles generally outperform the up cycle transactions. Even though deals during the down cycle tend to require higher acquisition premiums, they are usually closed at lower valuation multiples than historical averages for the corresponding sector. Although the focal point of the crisis is on Europe; emerging market companies from Asia, especially from China and India would do well to search for quality assets in other parts of the world where prices may get impacted by the crisis.

Several investors are waiting for markets to stabilise. There could be several so-called trigger points on the macroeconomic front that might suddenly push more deals to be struck and we may see a big uptick in cross-border deal flows in the next 12 to 18 months. Citi has been involved in a number of cross-border acquisitions in the Asia-Pacific region this year and ranks #1 in China cross-border M&A, which is the main driver of cross-border flows from the region. In the past few months we have already seen China’s largest ever outbound deal [Cnooc/Nexen], China’s largest take private [Focus Media], and just last week; the largest investment into Chinese healthcare [by Medtronic in China Kanghui Holdings].

Asia’s growing breeds of global champions have the financial ability today and the willingness to buy. There is increasing confidence — liquidity and capital is available to support transactions that need financing. These companies that blazed a trail a few years back showed those with similar aspirations what was possible. Expect to see more headline outbound M&A transactions from China and India and renewed interest from Asean too.

Inbound too will be equally interesting. The recent GE investment into China and the trend of global/international companies taking stakes or forming joint ventures with Asian companies will continue. The growth prospects in this region and rising consumer affluence are a big draw for multinationals with lower growth prospects in some of their local markets.

China is obviously an area where all banks want to expand. Citi has recently set up a joint venture with Orient Securities, which made news when you announced it. How is it going?
Yes, China is one of Citi’s global priority markets and we look at it as a long-term play. We have come a long way since the first branch was established in China by Citi in 1902 — we have doubled the number of branches in China to 50 in the past three years. And we have set up specific China desks in major international cities to serve the growing outbound business from China.

Our latest investment in the form of a JV with Orient Securities, again underlines our commitment. As you already know, we were very selective and searched hard for the right partner for this JV. We now have the right partner in the form of Orient Securities. This partnership will complement the work we already do globally for our Chinese clients.

By enabling Citi to engage in the investment banking business in the Chinese domestic market, this partnership will give Citi access to China’s increasingly important onshore equities [A-share] and corporate debt underwriting/issuance market.

This is indeed the final piece of the jigsaw for us in China. We are putting our heart and soul into it. This is part of our broader firm investment into China. We have very high expectations of this JV. In fact, we already have a long pipeline of quality deals and are very happy with the direction this is going.

Which are the other key geographies that you are focused on apart from China?
The centre of gravity in banking is moving to Asia, which will experience significant revenue growth during the next three to five years. We are focused on the growth potential offered not just by Greater China but also by Australia and Southeast Asia. We think that we have the right leadership and talent bench; and we will be able to further build on the strong momentum that Citi has in each of these markets.

We also see continued banking opportunities in India and South Korea; markets where we already have a strong franchise and outstanding client relationships.

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