US investment bank KBW expands into Asia

We talk to Thomas Michaud, KBW Asia chairman, and Vasco Moreno, KBW Asia global business coordinator, about their expansion plans and views on Asian stocks.

Keefe, Bruyette & Woods (KBW), a full-service investment bank that specialises in the financial services sector, announced on May 11 that it is expanding into Asia.

Headquartered in Hong Kong with an additional office in Tokyo, KBW Asia is fully integrated with the firm's other business units in the US and Europe, offering sales, trading and research of Asian financial companies to clients around the world. It will also offer capital markets services to corporate clients in the Asia-Pacific region.

FinanceAsia talked to Thomas Michaud, KBW Asia chairman, and Vasco Moreno, KBW Asia global business coordinator about their plans. 

KBW is a specialist in financial services. The bank has had success in the US and Europe. What makes you confident the model will work in Asia?  
Michaud: Many of the largest investors in Asian equities are actually based in North America and Europe. Many of these same investors are some of KBW's best relationships. Our firm has already earned their confidence and we can do the same in Asia. Also, there is no other firm using the sector approach in Asia. There are country-focused firms and generalist firms. The financial services sector dominates the Asian stock market and we think it is the ideal sector for a pan-Asian approach. We faced the same competitive issues in Europe in 2004 and were able to successfully develop the specialist model. It is a model we are committed to and we believe it will work here as well.

What exactly do the expansion plans in Asia involve? 
Michaud: Our core business will be cash equities. It is our largest business and one that we have been doing for nearly 50 years. We have the capital, the systems and the people to compete globally in this area. We will also work to build our capital markets presence in Asia. KBW is a leader in equity capital raising for American financials. Our aim is to offer the same services in Asia. Because of our strength in North America and Europe, and our position as a global specialist investment bank, we can bring a unique set of skills to an offering group. 

Our third effort in Asia will be cross-border merger advisory services. Because of the depth of our relationships with large, mid- and small capitalisation financial services companies, we are in an ideal position to help buyers and sellers of those companies execute cross-border transactions. In particular, we believe that many of the largest Asian banking and insurance companies will eventually look to expand in the US. We are an ideal partner for those firms to advise them on their strategy.  We are unlikely to ever buy those businesses ourselves and are free of any conflicts.  

How many jobs are you looking to add in Asia and in what areas of the business? 
Michaud: We currently have 20 employees based in Hong Kong and Tokyo and we will be adding six more shortly. Over time we will continue to add personnel as the business grows. Our European operation has been very successful and today it has 57 employees.

How do you plan to attract talent in an increasingly competitive financial market? 
Michaud: We will add colleagues that have specific experience in the region.  KBW is a terrific alternative for professionals who live and breathe financials. Everyone in our firm is dedicated to this sector and it is a professionally rewarding job. This is why we have low to nearly no employee turnover.  We are also not part of a universal bank. Our size is a competitive advantage, we believe.  Our employees also own over 30% of our shares, so there is an owner/operator feel to the company.  

What are some examples of financial stocks you like in Asia today and why?  
Moreno: We are positive on the Indian banks and see ICICI Bank as the top stock to own. We believe the bank's balance sheet strength has improved in terms of credit quality, capital adequacy, and funding. It has also cut costs. This sets the stage for it to resume credit growth. We believe its NIM can rise as the overseas business continues to shrink relative to on-shore operations. In our view there is also a big opportunity for its credit provisions to decline during the next couple of years. Based on our view that the stock can return to its historical average P/B ratio of 2.25x, our share price target is Rs1,100 per share, which allows for about 20% upside from the current price.  

Our top pick in China is China Construction Bank. The key reasons for this are: 1) Superior profitability - best return on assets (ROA) in sector in 2009 at 1.24% and 2010E at 1.36%, 2) Greater leverage to rising rates (boosting margins),  3) Focus & specialisation on infrastructure should lower asset quality risks, 4) It has been a laggard over past 12 months, and 5) China growth opportunities are obvious.

In Japan, we like SMFG (Sumitomo Mitsui Financial Group). There's no loan growth but the credit cycle appears to be improving and there are some reasonable prospects that economic recovery will provide some near term support for fees and commissions. Over the longer term I'd say there is a free call option on higher interest rates. These are what are needed, against the background of economic recovery of course, to re-establish loan/deposit spreads and get revenue growing. 

How concerned are you about the impact of bad loans on Chinese banks?  
Moreno: We are concerned about the asset quality at Chinese banks, but that is more a medium-term issue and should be manageable especially as regulators have been proactive. The key reasons for this are: 1) Loans made prior to 2009 are unlikely to lead to problems, in part due to "under-lending" taking place at that time,  2) Exposures to mortgages are deemed low risk given low loan-to-value ratios, 3) Direct exposures to developers are small (although we have concerns about indirect exposures... ), 4) Review of industry structure suggests H-share banks are best of breed and problems are likely to show up at the weaker institutions first...and this not happening yet, 5) Local government funding vehicles' exposures are manageable and non-performing loan experience is also low, 6) Economy is still growing strongly and rates are low, which is not a climate for bad loans to surge, and 7) Many infrastructure loans have maturities greater than five years. We won't see problems until later. 

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