JPM China

JP Morgan retools China investment bank

The US firm’s China IB co-heads talk to FinanceAsia about hiring plans and diversifying revenues.
Jing and Brian in JP Morgan's HK office
Jing and Brian in JP Morgan's HK office

JP Morgan is adding headcount in China to capture more of the record-breaking surge in investment banking revenues from advising privately owned Chinese firms going global.

The bank's New York headquarters is also making more balance sheet available for key China-based clients, such as Beijing based private equity firm Hony Capital, according to JP Morgan’s co-heads of China investment banking Brian Gu and Jing Zhao in their first interview since taking on the roles in March.

“We will continue to invest in the China market,” said Zhao.

The biggest US bank was one of the six  bookrunners on Alibaba’s $25 billion IPO in New York, the world’s largest ever listing.

JP Morgan reported on October 14 that group investment banking revenues in the latest quarter rose 2% from a year earlier to $1.5 billion, driven by higher advisory and equity underwriting fees.

Like many of its peers, JP Morgan is looking to offset a smaller pot of fees from Chinese state-owned enterprises and fierce competition for mandates on Hong Kong IPOs across the industry. The US bank is diversifying its revenues, making more from advising on debt deals and structured equity.

“The old model of doing business in China is changing,” said Gu, who worked on privately owned Alibaba’s IPO. The new breed of bankers has to learn different product and industry skills he said.

The value of Alibaba’s IPO beat the listings of state-controlled ICBC at $21.9 billion in 2006 and Agricultural Bank of China’s $22.1 billion debut in 2010. 

JP Morgan is working on getting closer to other privately owned, acquisitive companies such as Fosun International, China’s largest privately owned investment firm.

Across the investment banking industry China-related fees hit a record $4.2 billion so far in 2014, up 80% on last year according to data provider Dealogic.

JP Morgan in China has completed five times more equity transactions by deal volume this year than it did last year, thanks in large part to its role on Alibaba’s jumbo listing. It advised on 40% more acquisitions and 85% more deals in the debt capital market, according to Dealogic.

Since their appointments, Gu and Zhao have been reviewing their team and planning how to fill holes in the firm’s coverage of clients. “You will see growth in our headcount,” said Gu who joined JP Morgan in 2004 from Lehman Brothers. JP Morgan already has more investment bankers working on China business than last year, he added.

“We are not headcount constrained,” said Zhao, who joined from Citigroup in 2012. 

Clamp down

To be sure, along with rising investment-banking fees, the risk of fines from regulators for contravening bribery laws and ensuing reputational damage is also growing.

JP Morgan’s third-quarter results were marred by a $1 billion legal expense related to investigations into alleged rigging of foreign exchange rates.

In China, the US Securities and Exchange Commission is probing whether global investment banks, including JP Morgan, have hired the children of China’s political elite in order to win more mandates.

A spokeswoman for JP Morgan declined to comment aside from saying that the bank was cooperating with regulators.

The US bank has stepped away from two initial public offerings where JP Morgan staff were related to the issuer’s management: China Everbright Bank’s listing in Hong Kong last year and Tianhe Chemicals’ IPO this year.

JP Morgan commanded a 3.4% market share of China investment banking revenues and was ranked eighth versus a 4.5% share for the same period last year and a ranking of third, according to Dealogic. 

Hong Kong regulators are investigating the role played by JP Morgan’s most senior investment banker in the country, Fang Fang, in hiring the sons and daughters of the country’s powerful. Fang retired after 12 years with the firm.

More mouths to feed

As well as increased regulatory oversight, there are also more bankers vying for advisory mandates on Hong Kong IPOs – and splitting the fees. Chinese pork producer WH Group first went to market with a record 29 advisers before whittling that down to two global coordinators on its second attempt.

“The sizes of IPOs are not growing that much in general but you’ve seen some IPOs involving a very large number of book runners,” said Gu, who was a senior research scientist at the University of Washington Medical School prior to his investment banking career.

To combat this trend the US bank is diversifying its investment banking revenue stream, coinciding with Chinese corporates tapping debt markets more often.

China has more outstanding corporate debt than any other country, having surpassed the US last year. 

“DCM is becoming a meaningful chunk of our business. Other ECM products like equity-linked notes, blocks and corporate derivatives are providing a substantial stream of revenues for us,” said Gu. JP Morgan was the sole bookrunner on Chinese travel agent Ctrip.com's $800 million convertible bond last year. 

JP Morgan is looking for more value-added roles, where it can give Chinese clients ideas for cross-border expansion via acquisitions but also help with financing those deals using multiple products and geographies. “The industry is evolving,” said Gu.

JP Morgan acted as sole M&A advisor to Chinese private equity firm Hony Capital on its £900 million ($1.54 billion) acquisition of PizzaExpress, and lead-left bookrunner on the financing in the high-yield market in London as well. The US bank also smoothed out the foreign exchange impact and escrow for the deal.

“This is the kind of deal that makes a big bank like us excited,” said Gu. “The revenue impact from a combination of products is very significant.”

Clients are also asking for balance sheet and the co-heads said JP Morgan’s New York headquarters is prepared to stump up the capital to support the China business.

JP Morgan is a mandated lead arranger and bookrunner for Chinese smartphone company Xiaomi’s $1 billion capital raising in the loan market. The deal raised the Chinese company’s profile in capital markets and many bankers expect the firm to follow Alibaba and IPO.

It also worked on the $3 billion privatization of Chinese online gaming company Giant Interactive and was part of the consortium underwriting the $850 million loan.

“When it comes to certain M&A deals or priority clients with a strategic need for capital, we could be a provider of a large amount of capital at a very crucial moment,” said Gu.

¬ Haymarket Media Limited. All rights reserved.

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