The tug of war for Asia Inc's banking business

To succeed in corporate banking these days, banks need a growth story and many are turning to Asia to find it.

“Long-term structural changes now under way will fundamentally affect banking in the years to come,” wrote Tab Bowers, a Tokyo-based director at McKinsey and Company, in a recent McKinsey Quarterly article on the changes facing global banks. He went on to write that in all of the outcomes he and his colleagues looked at, global banks would face capital shortages at home and that one strategy to maintain growth would be to shift their businesses towards rapidly expanding emerging markets.

J.P. Morgan and Bank of America Merrill Lynch (BoA Merrill) got the memo. Both institutions are now in the midst of strategies to build out their global franchises, especially in corporate banking, to capture growth in emerging markets. “The 2008 crisis hit Bank of America Merrill Lynch and J.P. Morgan’s home market hard,” said one corporate banking executive in Hong Kong. “Now they’re looking outside North America in order to grow.”

Even behemoth HSBC acknowledges this reality. Citing a shift in the centre of the world’s “economic gravity” to the east, HSBC relocated its group chief executive Michael Geoghegan to Hong Kong from London in February.

Asia is where the action is. The World Bank predicts that the region will grow 8.7% this year before dropping to 7.7% by 2012. This is in stark contrast to the euro zone, which the World Bank estimates will expand at a weak pace of 0.7% this year before rising to 1.8% in 2012. The US should grow 3.3% this year, falling to 3% by 2012.

One reason for optimism is that Asia’s corporations are flush with cash and actively expanding. Notable recent business moves include Bharti Airtel’s purchase of Zain’s African mobile operations for $10.7 billion and Geely’s acquisition of Volvo for $1.8 billion, both announced in March. During the first quarter, Asia ex-Japan mergers and acquisitions totalled $123.2 billion, according to Dealogic, the highest since the second quarter of 2008.

But buoyant indicators do not necessarily translate into success. J.P. Morgan, BoA Merrill and the other banks that want to capture Asia’s emerging dollar, renminbi, ringgit or rupiah business face competition from entrenched multinational banks, such as HSBC and Citi, as well as Asia-Pacific’s rising regional banks, such as DBS, CIMB and Korea Exchange Bank (KEB), and those that straddle both the multinational and regional title, such as ANZ. Plus, new entrants will have to prove they are committed to the region, which has been burnt by foreign banks rushing in during good times and leaving the region high and dry when times get tough.

The plans

“The global corporate bank is a joint venture between the investment bank and treasury and securities services,” said Daniel Cotti, global trade executive at J.P. Morgan, in an interview earlier this year. That’s an apt description for the plans of his institution, as well as BoA Merrill. Both have respectable investment and transaction banking businesses in Asia and are sizeable corporate banks in the US. Both intend to leverage those capabilities, their technology prowess and existing client relationships, to capture the business of Western multinationals and Asia’s emerging corporate leaders.

J.P. Morgan’s plan is the more concrete of the two. It calls for a $100 million global investment, approximately a third of which is to go to Asia, with as many as 300 bankers dedicated to its global corporate bank.

“It was quite natural for us to think about more corporate banking coverage on an international basis,” said Mike Brown, Asia-Pacific head of the global corporate bank. The bank hopes to deliver wholesale banking services, including credit, asset management, debt capital markets, operating services and syndicated loans to Asian, European and US multinational blue-chip companies, as well as large local corporates and financial institutions. He said the bank has already identified 1,600 potential companies.

“We’re going from very light coverage to much more comprehensive [corporate banking] coverage,” he said. “I think this will be recognised in the marketplace by the client base.” Putting its money where its mouth is, last month J.P. Morgan promoted Heidi Miller to the newly created position of president of international banking, where she will spearhead the corporate banking initiative. In an interview with the New York Times, Jamie Dimon, chairman and chief executive of the bank, said that if she came up with a “great plan” he would put “a lot” of money behind it.

BoA Merrill’s plans are similarly, if not more, ambitious. “Prior to the acquisition of Merrill Lynch, significant international expansion [by BoA] was not a high priority,” said Moshe Orenbuch, managing director at Credit Suisse in New York, who is responsible for research on both J.P. Morgan and BoA Merrill.

Its priorities have changed. “Corporate banking is a core business for Bank of America in the US and, through our acquisition of Merrill Lynch, we gained access to hundreds of investment banking and global markets clients in EMEA [Europe, the Middle East and Africa] and Asia, to whom we can now provide a complete range of financial solutions,” said Paul Donofrio, head of global corporate banking at BoA Merrill, in a statement earlier this year.

The bank has recently hired heavyweights such as Charles Alexander from Standard Chartered to be its head of corporate banking coverage for Asia-Pacific and Ivo Distelbrink from Citi as head of global treasury services for Asia, as part of its strategy to offer that complete range of financial solutions mentioned by Donofrio.

Both banks are financially capable of expanding. “I think that their ability to expand through acquisition would be closely watched, but in terms of internal expansion, yes, they absolutely could,” said Credit Suisse’s Orenbuch. Whether the plans are a good move, he said, would depend on execution.

The competition

“Competition is intense in this region – the demand for talent is increasing costs and the desire for market share is causing some price compression,” said Anthony Nappi, Asia-Pacific head of global transaction services at Citi. That might make turning a profit a challenge for institutions making significant investments in corporate banking, he added.

Asian corporates have had no trouble accessing liquidity during the past two years. Borrowing is up as much as 50% in China and double digits elsewhere in the region, and bankers report that excess liquidity in the market has pushed pricing to very low levels.

According to a consulting firm’s proprietary research, corporate executives in Asia feel they are overbanked. They say they have too many credit lines and they are reducing the number of banking relationships they have, preferring to retain local and regional bank ties at the expense of global banks. This does not bode well for the ambitions of J.P. Morgan and BoA Merrill.

“The window of opportunity for distinguishing themselves [global banks] against Asian local banks is actually closing pretty fast,” said Markus Ohlig, Asia-Pacific managing director at consulting firm Greenwich Associates. “They have to move pretty fast because local banks are moving up in terms of quality and sophistication.”

Greenwich’s latest survey of Asian corporate banking found that local and regional banks gained while global banks, with the exception of Standard Chartered, lost market share in 2009. Chinatrust, HDFC and KEB were named as institutions that have cash management and corporate banking offerings comparable to foreign banks in their respective local markets. Despite this, Ohlig said there was still room for quality players in the market.

“If you just look at the number of players, you would say it’s saturated but if you look at the quality of players, it’s probably not saturated. There’s room for high-quality providers.”

But defining a high-quality provider is subjective. Asked what he meant, Ohlig said an institution could distinguish itself with cash management and foreign exchange trading services, for example. Whereas Oliver Brinkmann, head of corporate banking coverage for Asia-Pacific at Deutsche Bank, said he thought the opportunities were in debt capital markets and Farhan Faruqui, Citi’s head of global banking for Asia-Pacific, said it was all about product value, quality and consistency or familiarity, and a global network to support them.

“Success is not just about putting two or three bodies on the ground in 15 or 16 countries, but about providing the products, the seamless solutions and building the relationships,” said another corporate banking executive. “It takes a certain art and science to pull it all together.”

Proving commitment

One of the biggest issues facing J.P. Morgan and BoA Merrill is their commitment to the region.

“There is reticence among [corporate] clients because first these banks are there, then they’re not there and then they come back again,” said Ohlig. ANZ, BoA Merrill, Chase Manhattan Bank (merged with J.P. Morgan in 2000), Citi and the Royal Bank of Scotland (RBS) have all exited, sold or retrenched one or more of their business lines in the region during the past 15 years.

BoA Merrill is the most extreme example. In the 1990s, Bank of America was recognised as the most successful in the region at setting up regional treasury centres, had an active investment banking business and operated a reasonably-sized branch network in Hong Kong and Macau. Then it shut down its Asian investment bank in 2001, sold its branch network to China Construction Bank in 2006 and let its treasury business shrink to a group of select North American clients.

“Prior to the Merrill merger, Bank of America was a very pedestrian, no growth bank in Asia,” said a banking analyst in the region. That said, Merrill has a much better image in the region and if the bank is smart enough – as it appears to be – to put those relationship managers forward, it may be able to dispel this negative image more easily than if it tried to alone.

ANZ may be slightly better positioned. While some remember the Australian bank’s exit from the South Asian market in 2000 after an extended dispute over cheque payments with the Reserve Bank of India, it has successfully gained recognition (and business) from corporate customers for its super-regional strategy. The plan was boosted when it bought select retail and commercial assets from RBS in six regional markets last year.

“We’re a long-term investor in this region,” said Mark Whelan, head of institutional and commercial banking for Asia-Pacific, Europe and America at ANZ. He added that last year’s acquisition brought the bank 10,000 commercial clients that would have taken “years” to build up organically. ANZ is currently rumoured to be investigating possible acquisitions of Indonesia’s Panin Bank and KEB, and last month Citi analyst Craig Williams suggested that a Standard Chartered - ANZ combination could be the “endgame” merger it needs to become a major force in the region.

But it is J.P. Morgan that is probably the best off of the lot. While some may remember Chase Manhattan’s sale of its Hong Kong cards and retail business to Standard Chartered in 2000, it has otherwise stood by the region. That said, it may have to put its wallet where its mouth is to make headway in corporate banking.

“J.P. Morgan has traditionally been extremely reluctant to extend its balance sheet in a meaningful way,” said Ohlig on the institution’s business in Asia. “They have been very focused on the investment banking and transaction banking sides of the business with relatively little credit support.”

Asked how much of its balance sheet J.P. Morgan was willing to extend to the region as part of the global corporate bank, Brown said there was “no specific limit” and confirmed that the firm has the capacity to invest more capital into the region relative to the past.

For Citi and RBS, it is more a matter of convincing customers that they are still here. Numerous competitors say they retrenched in late 2008 and early 2009, cutting credit lines to many Asian corporates while focusing on core customers. RBS also has to explain why it sold off a significant part of the business it acquired from ABN AMRO in 2007. Neither institution acknowledged a reduction in lending to the region.

Success, maybe

Asia’s corporate banking pie is expanding; economic growth and acquisitive regional corporates guarantee that. But with everyone rushing to capture the growing market, some are bound to win and some to lose.

“The crisis served to demonstrate that the balance of power shifts abruptly and powerfully rather than gradually; many Asian banks have vaulted to the top of league tables in one go,” wrote McKinsey’s Bowers. “For the next several years, Asia’s economic might will continue to grow, as will the influence and power of its banks.”

It is these players, the likes of DBS and Bank of China, that global financial institutions need to be wary of. With its already strong position in the bank services market, J.P. Morgan is already well-positioned to serve this market, but BoA Merrill, which lacks a notable presence in the segment, will likely have a tougher time of it.

Even Citi, one of the undeniable corporate banking leaders in Asia, is effectively acknowledging the challenging environment. Earlier this year it appointed Munir Nanji as its first dedicated Asia-Pacific regional bank services group head and moved Rahul Shukla to India as head of corporate banking for the country, the first time it has appointed someone to this position since 2008.

On top of the challenging environment, financial regulatory reform in Europe and the US, could significantly limit any Western bank’s ability to invest in new operations in Asia. And last, but not least, building a new franchise organically is just plain hard.

“The Cokes of the world can’t just pull the plug and switch from doing cash management in 50 or so countries with a Citi to a Bank of America or J.P. Morgan,” said the corporate banking executive. The new entrants, he added, “still have a long, long way to go”.

This story was first published in the July 2010 issue of FinanceAsia magazine.