Is this the new normal?

Investment banks in Asia have suffered from a steep fall in equity capital markets activity — and some fear the deals may not come back.

Asia’s investment banking industry has changed dramatically during the past four years. The ready supply of equity deals that once attracted banks from all around the world is now a shadow of what it once was. So far this year, equity deals have generated fewer fees for banks than advising on mergers and acquisitions, according to Dealogic.

That is quite a change. As recently as 2009, equity capital markets made up a whopping 69% of Asia’s investment banking wallet. During the bumper harvest of 2010, equity deals generated roughly $3 billion in fees, while this year Asia ECM is on target to earn around a third of that. Put simply, nobody is making any money.

Fees are down, but banks are still over-staffed for the level of activity. Everyone is chasing the same deals, which generally means that there is less to go round. The desperation is a sure sign that more cuts are on the cards. According to some, headcount may still need to come down by as much as a quarter.

“People are sitting around doing nothing,” said one senior banker last week. “The good ones are asking us when the next round of cuts is coming — they want us to do it sooner rather than later.”

The question facing Asia’s investment bank chiefs is whether today’s low level of activity is a permanent adjustment, or whether the flow of initial public offerings will one day return.

Most are betting that this is the new normal and that the years of bloated fees from China ECM deals were the anomaly. The more optimistic are even inclined to accept this as a healthy development.

“If you look at the breakdown of fees across the businesses in Asia today, it looks very similar to our business in New York,” said the banker. “It looks sustainable.”

That’s true. The fee pie is a picture of neatness — roughly one-third M&A, one-third ECM and the remaining third split evenly between debt capital markets and leveraged finance. If banks can reduce their costs and some of the less competitive players exit, as expected, the industry may return to an even keel.

The challenge is choosing where to find the savings amid the egos and personal fiefdoms of the region’s most senior bankers. With the benefit of hindsight, cutting in China rather than Southeast Asia would have been a profitable move at the start of this year because, if 2012 is indicative of the future, Asian investment banking is no longer just a China story. During the first three quarters of 2012, China accounted for less than half the Asia ex-Japan fee pool.

Yet some banks have struggled to cut their losses there, thanks in part to the years of plenty that went before. Most of the profits earned during the past few years came from China, which means there were plenty of powerful voices steering the cuts towards other parts of the business during the first round of cuts.

A lot of the over-staffing in Asia is obviously at the more junior levels. Bankers found it easy to argue for bigger teams when they were earning huge fees, and jobs were handed out liberally to many a nephew of someone or other. So there is still plenty of room to cut costs, but the next round may also see some more senior names let go as banks are forced to take some of the tough decisions that they have so far dodged.

How they manage that process could set the tone for how their business will perform during the next few years. Welcome to the new normal.

¬ Haymarket Media Limited. All rights reserved.

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