Eager for growth, U.S. and European banks are starting to focus more attention on a promising market that has long been frustrating them—China.
JPMorgan Chase & Co. is one recent example. In January, the New York banking company won approval from Chinese regulators to launch a joint securities venture with Shenzhen-based First Capital Securities Co. The partnership enables it to underwrite stocks and bonds in mainland China and offer clients the option of raising capital there—capabilities that international competitors such as Goldman Sachs and UBS already had.
"This was a gap we had in our franchise which we have filled now," says Zili Shao, chairman and chief executive of JPMorgan's China operations. "Our access in China will help cement our franchise in Hong Kong and globally."
Investment banking bandwidth in the country has become much more important for U.S. and European banks, as they seek to compensate for slow growth in other lines of businesses with revenue generated from China's hot IPO market.
China was the world's largest IPO market last year. Companies raised about $57 billion in IPOs listed in Hong Kong in 2010, a 79 percent increase from 2009, according to PricewaterhouseCoopers. In comparison, IPOs listing in New York raised $37 billion.
Foreign banks have operated in China for years, but have not gained much traction. Analysts cite restrictive regulations, competition from Chinese banks, and the global financial crisis, which preoccupied major U.S. and European banks and sapped them of the capital needed to expand.
The already meager market share of foreign banks in China actually declined in recent years, despite a slight increase in their asset size, according to the consulting firm Celent. They held 1.7 percent of the country's assets in 2009, down from 2.2 percent in 2008, Celent said in a January report. Their overall profits in China also fell in 2009 compared with the year earlier, to $900 million, from $1.75 billion, the report said. (The report did not include figures for 2010.)
JPMorgan experienced the same dip in profits in China as foreign companies overall did. Its after-tax profits there fell in 2009 to 136 million renminbi ($20.6 million) from 172 million renminbi ($26 million) in 2008, according to an analysis released in September by accounting firm KPMG. The 2010 results for its China operations were not immediately available.
However, investment banking is one segment where JPMorgan attracted more business last year. The fees the company collected in the Asia-Pacific region, excluding Japan, rose to $556 million in 2010, from $391 million in 2009, moving it up one spot to the number-two ranking among all firms, foreign and domestic, according to the research firm Dealogic. Only UBS did better, taking in total investment banking fees of $610 million. The fees are derived from advising on mergers and acquisitions, underwriting stocks and bonds and arranging syndicated loans.
JPMorgan, at the behest of CEO Jamie Dimon, has been intensifying its efforts to expand in China. Its strategy is to offer clients services across the entire wholesale banking platform, which includes investment banking, corporate banking, treasury and securities.
"In 2010, we grew our platform and our footprint in China," says Lisa Robins, head of Treasury & Securities Services for JPMorgan in China.
In addition to the new securities venture, JPMorgan has a 49 percent stake in a fund-management venture with Shanghai International Group, the investment arm of the Shanghai government, as well as a locally incorporated foreign bank in Beijing. The company also leverages its private equity and commodities operations in China at its branches in Beijing, Shanghai, Tianjin, Guangzhou and Chengdu.
The Asia-Pacific region is important to JPMorgan as it represents 14 percent of its overall global institutional business as of the fourth quarter, according to Gaby Abdelnour, chairman and CEO of JPMorgan Asian-Pacific, who has said the intent is to increase the region's share to 20 percent across bull and bear markets in coming years.
But the company has been a laggard in China so far; analysts have criticized the pace of JPMorgan's expansion there as early market entrants HSBC and Citigroup have enjoyed a head start on building market share.
Bankers continue to cite ongoing regulatory pressures in China as one of the chief challenges in coming years. They bemoan a regulatory environment of torturous red tape, including a lengthy approval process and limitations that hinder foreign banks from offering new products.
Moreover, bankers say restrictions on how much of a stake foreign investors can have in Chinese companies has slowed the pace of growth, according to several research reports. For example, a foreign investor can acquire no more than 20 percent of a Chinese bank, while aggregate foreign ownership in the entire banking sector cannot exceed 25 percent.
There are similar rules for other types of financial businesses. Foreign firms are limited to a 33 percent stake in securities joint ventures and 49 percent in asset management joint ventures.
Nevertheless, China remains at the forefront of U.S. and European banks' growth strategies. A survey of top bankers in China conducted last year by the consulting firm Pricewaterhouse says that the commitment to China among foreign banks remains "exceptionally strong."
According to the China Banking Regulatory Commission, there are 33 wholly foreign-owned banks operating in the country as of 2009, the latest year for which that data is available. The Celent report predicts the number will grow to 48 by 2013.
"There's a mentality of CEOs that you need to be in China for the size of the market and the potential for its growth," says Dariusz Kowalski, a senior economist and strategist for Crédit Agricole.
Key businesses under development for foreign institutions include retail banking, commercial banking, wealth management, private banking and financial consulting services.
Northern Trust Corp. of Chicago recently celebrated the opening of a branch in Beijing. It has had a representative office in China since 2005, but says having a branch will improve its ability to provide global custody services to large institutional clients in China and thus help it grow. Over the past three years, it has hired more than 2,000 employees at its offices in the Asia-Pacific region, reflecting its intent to be a major player there.
"Our relative size globally may not be the biggest, but in terms of clients we have in China, and our reputation, we are among the top players," says Michael Wu, the branch manager of Northern Trust's Beijing office.
The attention being paid to investment banking in particular comes as opportunities soar on China's three main exchanges. Companies listing initial public offerings in Hong Kong could raise $51 billion this year, according to an estimate from the consulting firm Ernst & Young. Another forecast by Pricewaterhouse predicts the amount will be between $38.6 billion and $45 billion.
Last year IPOs on the Shanghai and Shenzhen stock exchanges raised 478.3 billion renminbi, or $72.5 billion, a 155 percent increase from 2009, according to Pricewaterhouse.
Large IPOs in China were common in 2010. AIA Group had one for $20.5 billion listed in Hong Kong, and Agricultural Bank in China had a $22.1 billion Shanghai IPO, with Goldman Sachs and Morgan Stanley among underwriters on the deal.
Though UBS was one of several foreign banks participating in the AIA offering last year, its focus is not on megadeals, but on winning a high volume of mid- and lower-priced deals, says Philip Partnow, head of China mergers and acquisitions for the Swiss banking giant. "We've been able to be very successful by hitting singles and doubles, doing a lot of deals and being in flow," he says.
Sensing footsteps from competitors, UBS plans to sustain its market position by bolstering already strong relationships with state-owned companies and broadening its product offerings in China with derivatives products like index futures and credit default swaps, which are increasingly coveted by Chinese investors. "The first thing we have in the back of our minds is that just because we're doing good today, doesn't mean we'll be okay tomorrow," Partnow says. "There's no resting on your laurels in a market that moves so quickly."
