JP Morgan gives a FIG

James Von Moltke, head of JPMorgan?s financial institutions group (FIG) talks about some of the big issues facing the sector.
Q: Does Singapore currently account for almost 50% of Asian FIG revenues?

A: Depends on how you count it. The answer is certainly yes at this point in time. Whether that is the case at the end of the year is a separate matter. But certainly in respect of advisory and debt financing, Singapore banks have been a big revenue generator for the investment banking community this year.

Q: Do you think it is plausible that the Singapore government used DBS’s bid for OUB as a way of pushing UOB into doing something?

A: The DBS people have made it pretty clear in the market that their activity is driven by commercial considerations. No corporation would undertake a transaction, certainly the sort that was announced, in order to achieve an ulterior objective that is unrelated to the corporation. I don’t think anybody can justify that and I don’t think that’s plausible.

Q: In Singapore, a number of close house-bank relationships are forming – like Goldman and DBS. Does it make it slightly more challenging from your perspective that if you don’t get to be house bank straightaway, then you might lose out on future business?

A: I am a firm believer in clients and investment banks creating strong, long-standing relationships and particularly ones of trust. That’s certainly how we have tried to orient our business in the region, in financial institutions, and more broadly for JPMorgan. It’s definitely a welcome development.

I am also a believer that clients should have more than one investment banking relationship for a variety of reasons. Both in respect to information flow, and for their own security in the event that for a particular transaction, they find that their investment bank is conflicted in some way. Does it make it harder for those banks without a broad list of strong house bank relationships? I think it does. But in this market, and also the markets we see in Europe and North America, these house-banking relationships do change once in a while. They are not fixed in stone forever and there’s always a little bit of movement.

Q: Do you think there will be much consolidation in the Hong Kong banking market going forward?

A: I do. But will the transactions be headline multi-billion dollar deals? No. Is there a significant number of transactions that are likely to take place over the coming years? Yes, certainly.

Q: We have had the Citic Ka Wah sub-debt deal. Do you foresee other sub-debt deals coming out of Hong Kong to finance the M&A transactions?

A: Yes I do. At our financial institutions strategy conference, [HKMA deputy managing director] David Carse stated very clearly that the HKMA would look at the financing structures for such transactions and be supportive generally. It is also an opportunity for banks to re-balance their capital mix in a way that is hard to do via more standard operating measures, like dividends or share repurchases, which are subject to certain limitations. We saw that in the Bank of East Asia transaction – after its acquisition of First Pacific Bank – that because it was financed with subordinated debt, at the end of the day, it had the effect of bringing down their tier one ratios but maintaining their total capital ratios. That re-balancing of Bank of East Asia’s capital mix created a more favourable and efficient structure.

Q: Are the CFOs you are speaking to at Hong Kong banks becoming much more aware of efficient capital structures?

A: Singapore and Hong Kong banks are already quite sophisticated in their thinking about capital management. They are cautious about making substantial changes to their capital structures over time. I think they will do so, but they're not rushing into it. One area of uncertainty that’s been created is the Basel 2 standards which, at least in their current draft form, have created a concern on the part of the banks that they are in fact going to have to hold at least as much, if not more, capital against their existing balance sheet.

Q: Bangkok Bank is supposed to be raising more equity capital.

A: Our analysis and perception of the Thai market is that the Thai AMC programme that is being put in place has in fact given the Thai banks more time to raise capital. They are likely to need more capital eventually, in my view, as a given. They will be able to find a time that's suitable to them and hopefully, in their view, find a price that's better than the recent market conditions have accorded them for capital raisings. So, if you like, without the Thai AMC programme, they would have found themselves under more near-term pressure to raise capital than they are now. I think it’s a matter of couple of years. But certainly they will be raising capital.

Q: Is Indonesia an interesting financial market for FIG at the moment?

A: There are going to be more mergers of the domestic banks into larger institutions as part of rehabilitation of the weaker banks. We saw that with the Bank Mandiri and BII (Bank Internasional Indonesia) merger announcement. Then, there will need to be privatization of the banks that ended up almost entirely government-owned. In addition, there is likely going to be some form of foreign investment, whether strategic or financial, maybe involving private equity players in the Indonesian market. What's hard to gauge is the timing because all of those transactions are going to be subjected to some political uncertainties. So, I think the short answer to your question is the near-term opportunity is relatively limited.

Q: There has been quite a boom in private equity in Korea. Do you think that a private equity firm is a more likely buyer for Seoul Bank?

A: Rather than speaking of a boom in private equity, I would say it's a reflection of difficulties that strategic investors have had in investing in Korea. Those difficulties have different origins: familiarity with the market, availability within their organizations of Korean-speaking management, the price expectation of sellers, and certain structuring elements in a lot of these transactions. What happened in Korea is the private equity community has been more flexible. But I think over time, you'll see more strategic investor interest and perhaps less opportunity for financial players.

Q: Are you still bullish on the opportunities for bank M&A in Taiwan?

A: It was great to see the Financial Services Holding Company Act passed, because that removes the last roadblock. It remains to be seen which commercially-driven transaction will provide a catalyst for more activity – in the way that the recent round of consolidation in Singapore was set off by OCBC’s bid for Keppel, or in the way the Philippines was set off by the PCI transaction. We are still waiting for that commercially driven starter’s gun in Taiwan. I am optimistic that at some point, that transaction will take place. And there will be a relatively significant number of transactions to follow both in number and volume.

Q: Do you sense that Taiwanese deals will get completed at a lower multiples-to-book value than Hong Kong?

A: The Taiwanese banks are trading at a lower multiple at the moment. Almost by definition, the answer is yes. A lot of the 16 new private banks are trading significantly below book.

Q: Do you think there are going to be a lot of mergers in Taiwan between insurance companies and banks?

A: Taiwan is unusual in Asia because you have a strong, indigenously owned insurance industry. In fact, they're stronger than the banks in terms of market capitalization, balance sheet size, and so on. Unlike most of the other markets, Taiwan is a place where the leadership role in the creation of certain financial services holding companies is likely to go to a number of insurance-led groups rather than the banks necessarily. So yes, insurers will play an active role in the financial services industry in Taiwan, including the banks.

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