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Three big reasons why Western banks are struggling in Asia, by EY’s Keith Pogson

Investment bank Asia

Ask Keith Pogson, EY’s senior partner of APAC financial services, to sum up why Western investment banks are sliding down Asian revenue league tables and he’ll start with a short answer: “Firstly, commercial banks are eating their breakfast; secondly, Chinese corporates are eating their lunch; and thirdly, mainland banks are eating their dinner.”

Then he delves into the detail. “The real competition for Western investment banks in Asia isn’t the fintech start-ups – it’s the commercial banks,” says Pogson.

“The large commercial banks in Asia – in particular the big four Chinese banks, HSBC, Standard Chartered and DBS – are starting to dominate debt financing,” he explains. “For example, the likes of J.P. Morgan and Deutsche Bank were effectively shut out of the huge bridge financing deal that helped ChemChina buy Syngenta earlier this year.”

Global investment banks are also struggling to generate fee income from Chinese M&A, even as outbound deals reach record levels.

“Within M&A, Chinese corporates like Alibaba and Fosun are recruiting bankers into their own deal teams,” says Pogson. “Rather than use a Goldman Sachs or a Morgan Stanley as expensive matchmakers, they scan the market themselves and make unsolicited approaches to potential acquisition targets, both in China and overseas.”

Investment banks – but usually mainland ones – are then only brought in to help Chinese corporates navigate through the takeover deals that they have already sourced themselves, he adds.

Chinese banks have also cut fees on ECM deals. “3% was the norm; now you’re lucky to get 1% in Asia,” says Pogson.

Mainland firms take four of the top-five places for ex-Japan Asia ECM revenue for the first nine months of this year.

Moreover, the growing (and potentially risky) reliance on cornerstone investors in the Hong Kong IPO market has opened up new opportunities for Chinese banks to grab ECM market share, says Pogson.

“This is because most of these cornerstone investors are from China. The Chinese banks have a huge advantage because the Western IBs don’t have enough people on the ground in China, especially in the second and third-tier cities where these investors are often based.”

He adds: “The Chinese banks have branches in the same city or at least same province as the cornerstone investors – and their bankers often speak the same dialect. The investors already know them as their local broker, and have little reason to work with a Goldman Sachs on a $50m investment. It’s much easier to team up with their local broker.”

The rise of Chinese banks is now starting to shake up the job market in Hong Kong.

“Potential career paths for investment bankers in Hong Kong are changing – fewer people are spending the bulk of their careers within Western banks,” says Pogson. “For example, if you’re a local Hongkonger you might now do three years at a Western bank, three years at a Chinese bank, and then go in-house to an Alibaba.”

Pogson describes compensation at Chinese banks as more “entrepreneurial”. “You’re not bound by CRD IV or ‘say on pay’ rules, so if you back yourself, you can make good money.”

“But to be successful at a Chinese bank you must remember that Chinese clients are serial dealmakers, so you must have excellent deal skills and be able to analyse and execute,” he adds. “Because Chinese banks are more focused on cross-border deals now, it helps if you have prior experience at a good international player.”

Will the rise of mainland banks mean Hong Kong will eventually lose out to Shanghai as greater China’s financial hub?

Pogson thinks not. “Hong Kong has a lot to offer compared with mainland financial centres – the rule of law, a developed professional services sector, and a global reputation for high standards of ethics and trust. And now Hong Kong also has the opportunity to take the best of what’s happening in Chinese fintech and translate it for Western markets.”


Image credit: olaser, Getty

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