In­vest­ment Banks in Asia face hard time to work

The Pak Banker - - COMPANIES/BOSS -

Rum­blings from China have caused Asian mar­kets to throw a sum­mer tantrum. This has been dif­fi­cult for stock-mar­ket bulls, but not as bad for in­vest­ment banks op­er­at­ing in Asia. For now, any­way. Our Jour­nal col­leagues write that in­vest­ment banks have en­joyed higher rev­enues in re­cent weeks thanks to busy trad­ing mar­kets, but say the longer-term out­look is likely to be more dire, thanks to fall­ing mar­kets and a drop in in­vestor con­fi­dence.

But if the down­turn in the re­gion per­sists, a new re­port from So­ci­ete Gen­erale says the in­vest­ment banks that will do bet­ter amid the tur­moil will be the ones that fo­cus on deal­mak­ing, rather than trad­ing.

Although IPOs and po­ten­tial deals could dry up if the volatil­ity per­sists, any long-term down­turn in trad­ing tends to hit the bot­tom line of in­vest­ment banks much harder. This is be­cause - de­spite re­cent reg­u­la­tion - trad­ing busi­nesses have a much higher cap­i­tal re­quire­ments than, say, an M&A team. A trad­ing busi­ness needs an in­ven­tory of stock, and a sig­nif­i­cant enough size to make economies of scale mat­ter. An M&A team needs a will­ing­ness to travel, and a good rolodex.

Global in­vest­ment bank's re­turn on eq­uity, "par­tic­u­larly in sev­eral ar­eas within fixed in­come, com­modi­ties and cur­ren­cies busi­nesses, were sig­nif­i­cantly be­low the cost of cap­i­tal," ac­cord­ing to the SocGen note pub­lished Thurs­day. Across the in­vest­ment bank­ing in­dus­try, post tax re­turn on eq­uity in 2014 was only 8.5%, be­low the ac­cepted break-even rate of 10%.

And any slow­down in China would mean a slow­down in Asia, which means fur­ther pres­sure on re­turn on eq­uity, which means a fur­ther ex­pec­ta­tion to "re-visit ex­pense/de-lever­ag­ing plans."

For Gold­man Sachs Group Inc., Mor­gan Stan­ley, Cit­i­group Inc. and UBS AG, their in­vest­ment banks all have sig­nif­i­cant ex­po­sure to Asia.

But in terms of busi­ness make-up, UBS and Mor­gan Stan­ley are weighted more to­wards in­vest­ment bank­ing ac­tiv­i­ties, whereas Citi and Deutsche Bank are weighted to trad­ing in the re­gion.

This means in the short term, as mar­kets bounce from red to green from day to day, the traders are well placed to ben­e­fit. But in the long term, if re­gional growth slows, the costs of run­ning large trad­ing desks may need to be ad­dressed.

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