U.S. Banks Try Fresh Formulas In Asia
U.S. investment banks are implementing new strategies in Asia to put themselves in a better position to compete.
Morgan Stanley has been having control issues in China.
The New York investment bank is negotiating with private equity investors to sell its 34 percent stake in Chinese brokerage giant China International Capital Corp. The deal could generate as much as $1 billion, say reports — a nifty return on the 1995 purchase price of $37 million.
But what’s really behind Morgan’s push for a divorce from CICC is its desire to find a more passive partner, say sources. Under China’s rules, foreign investment banks are limited to one joint venture in each business, and they must be the minority owner. Despite owning only one third of CICC, Morgan sought to gain management control, but its partner resisted — a frustrating scenario for a Western bank jockeying for position in China. Selling the CICC stake, however, would pave the way for Morgan to enter into an investment banking joint venture with Shenzhen-based China Fortune Securities, says a source close to the two firms. And the smaller China Fortune has said it would give Morgan management control, although the Chinese firm and its partners would remain the majority stakeholder. Morgan already has an asset management joint venture with China Fortune, set up in 2008, when it bought a 40 percent stake in the joint venture.
Morgan isn’t alone in rethinking its Asian strategy. “Western investment banks that have survived the crisis are reorganizing and implementing new strategies in Asia in order to compete,” says Neil Katkov, head of research for research firm Celent.
Since Lehman Brothers collapsed in September 2008, Allianz SE, American Express, Bank of America, Goldman Sachs, and Royal Bank of Scotland have all sold assets or stakes in Asian financial institutions to come up with cash to shore up finances back home, pay back government bailouts or reposition themselves in Asia.
In spite of the crisis, U.S. financial institutions continue to dominate Asia’s league tables outside Japan, holding four of the top ten slots in equities and five of the top ten in mergers and acquisitions, according to Dealogic.
For some Western banks integrating Asian acquisitions rather than bowing out of Asian ventures has been the biggest challenge lately. In addition to its 5,500 staff in 13 markets in Asia, Morgan now has 300 employees in Australia at its Morgan Stanley Smith Barney unit, a joint venture created when it acquired a 51 percent stake in the Smith Barney brokerage from Citigroup earlier this year. In Japan, Morgan will merge its subsidiary there into a joint venture formed with Mitsubishi UFJ Financial Group, which acquired a 20 percent stake in Morgan Stanley for $8.4 billion last year. “Our key initiatives are to build out our domestic platforms in key markets, invest further in wealth management and continue to enhance our collaboration with MUFG,” Owen Thomas, CEO of Morgan Stanley Asia, tells Institutional Investor .
Citi is also contending with integration issues in Asia, but the efforts are paying off, says Stephen Bird, Citi’s Asia Pacific CEO. The bank generated $14 billion in revenues from Asia in the 12 months through September 2009, 25 percent of all Citi’s global revenues. “Clients understand our commitment to this region, and this has been demonstrated,” Bird says.
A Bank of America Merrill Lynch source in Hong Kong says that merger synergies are kicking in for the bank/brokerage in Asia. That’s evident from recent deals that neither BofA nor Merrill could easily have done alone, including advising China Investment Corp. in its $850 million purchase of a 15 percent stake in Hong Kong–based commodities trading house Noble Group in September.
Meanwhile, Asian firms are still in catch-up mode, but they are moving in on their Western bank rivals, contends Celent’s Katkov. He notes that in some cases Asian firms have replaced Western ones atop league tables in markets such as Taiwan, South Korea and China. “The competition is heating up,” he says. CICC dominated new bond issues in Asia in 2009 through November 18, ranking No. 1 with 34 issues and $25 billion raised, up from fourth place last year, according to Dealogic. Beijing-based Citic Securities, China’s largest brokerage by market capitalization, has hired 300 bankers in Hong Kong since opening an investment banking operation there in 2006.
In a few cases Asian banks have capitalized directly on Western banks’ troubles. In October, Singapore’s Overseas-Chinese Banking Corp. bought the Asian wealth management unit of ING Group for €1 billion ($1.5 billion). The unit came with €11 billion in assets. “We find this a rare opportunity to acquire a quality franchise, which we think will broaden our wealth management business,” says Kelvin Quek, head of investor relations at OCBC. “This acquisition wouldn’t have been possible if not for the crisis. ING wouldn’t have sold.”