Investment Banking Landscape Changing in Asia

While the investment banking industry continues to struggle in traditional Asian markets, opportunities are beginning to expand in the faster growing, and more open, Southeast Asian region. According to the Financial Times, the “China-driven boom” of 2009 and 2010 has all but petered out, forcing many institutions to rethink their strategy in the region.

Over the last two years, apart from a few select players, the region has brought continual reports of falling revenues as deal volume collapsed. Traditional players in the area, such as HSBC, have managed to hold on to a respectable level of deal flow, while other institutions, lured by the prospects of a fast growing China, have struggled to maintain profitability. The firms that have succeeded in the region are often those with large traditional wholesale and transactional operations, where they can use such relationships to gain involvement in investment banking deals.

That said, the transactional wholesale side of banking has actually remained quite robust in the region. While investment banking services have typically earned lower fees in Asian markets than in North America or Europe, transactional services actually offer wider margins in Asia than in traditional markets. This positions integrated financial institutions well to prosper from future growth in China and neighboring economies.

Investment Banking Focus in the Region Shifts to South-East Asian Markets

While there has been a distinct slow down in deal making in China, South-East Asia is now picking up steam as the next big opportunity for investment banking firms. According to the Wall Street Journal, the South-East Asian segment of the total Asia-Pacific investment banking business was $13 billion in 2011, while China represented just a bit more of a prize, generating $19 million in investment banking revenue. This is a significant amount of revenue and as a result, investment banks will be clamoring for a position at the front of the line for new business in the area.

One significant difference between the two markets, however, is accessibility. Mainland China is notoriously difficult to do business in, with significant regulatory hurdles and outright prohibitions for foreign institutions in many areas. For most deals, joint ventures with local institutions are required, driving down deal share and fee revenue. In the liberalized South-East Asian markets, such as Singapore and Malaysia, among others, institutions can operate without as much regulatory pressure and are free to participate in deals with or without local partnerships.

The South-East Asia market is also attractive to investment banking firms due to the future growth characteristics of both industry and consumers. The region is becoming increasingly attractive for businesses, due to a relatively well-educated labor force in some countries along with low tax rates and friendly regulatory regimes. In terms of the consumer population, the middle class in the region is rapidly expanding, consuming a great amount of consumer goods. This increased affluence offers a variety of opportunities for firms looking for new markets for their products.

While China will continue to be a regional force both economically, and in terms of investment banking opportunities, South-East Asia is continuing to look like a more attractive market for many firms.

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