From the monthly archives:

March 2013

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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Lackluster performance has finally caught up to investment banking employees in Asia. According to a recent Bloomberg report, compensation for managing directors at major firms has fallen sharply this year in China in particular, down as much as 60 percent. This marks a low water mark for compensation in the region, not seen at any point in the last decade. Much of the decline in compensation has come from smaller bonus pools, as institutions struggle to generate revenue in a difficult economic environment.

North American Investment Bankers Regain the Lead in Compensation

For several years of the last decade, investment banking professionals working on Chinese deals held a compensation advantage. However since 2010, the tide has turned to favor those working in North America. In the past year, those working on Chinese deals earned between $900,000 and $1.3 million US dollars in total compensation, including salary, cash bonuses and stock options. This compared to an average range of $1.2 to $2.0 million for North American investment banking employees.

Analysts suggest that this shift in compensation reflects reality, rather than a fall below reasonable levels. According to Richard Hoon, CEO of a leading Singapore-based executive search firm, over the last decade pay had “went beyond the market, and now they’re back to market reality.”

In the past, those with skills and experience in Asian business practices, especially language capability, were paid a “China premium.” As the number of initial public offerings and merger deals has declined since the financial crisis, there is no longer a shortage of available investment banking professionals willing to use their skills in the region. Accordingly, this China premium has disappeared.

What are the Implications for Investment Banking Job Seekers?

The Asian investment banking market has held out as one of the limited number of bright spots for potential job seekers for the past several years. Continued robust economic growth in many emerging economies in the region created deal flow that simply did not exist in the traditional markets of North America or Europe. Now, as transactions slow in the Far East and regulators increase pressure on the industry at home, investment banks are scaling back their teams.

While the data from China is certainly not encouraging to those seeking out international opportunities in the industry, this data only represents one country in a region with vastly diverse economies. Opportunities continue to be strong in Singapore and Malaysia , and there is certainly the possibility that China could quickly return to growth. Compensation may be slightly lower than in the past, and opportunities may be fewer and far between, but the market does offer some intriguing possibilities for those that want to seek out a unique experience.

Of course, some skills will be critical those seeking opportunities in the area. Knowledge of local languages, especially Mandarin Chinese, is a major advantage, thought not necessary for all jobs. Experience in the region, whether within the financial industry or general business, is also a key attribute. With the right skills and experience, along with an interest in experiencing an entirely different business culture, those interested in an investment banking career still have opportunities in Asia, even if such positions have seen reduced compensation.

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In the lead up to the financial crisis, European investment banks were on top, leading global league tables and snapping up their American rivals in major acquisitions. According to an in-depth report from the Economist, even as the crisis began to take shape, many in the industry were suggesting the dominance of European banks would continue as their American rivals struggled and, even in some cases, went bankrupt. Then, the crisis shifted home for the major European players and the game changed entirely.

Since the crisis, many of the large players have scaled back their investment banking operations substantially, sometimes due to financial performance, yet more often due to regulation changes. Only two major players remain in the industry, despite the remnants of RBS, UBS and others playing a peripheral role within Europe. Barclays, the leading British institution, and German-based Deutsche Bank now account for the majority of market share in the Eurozone.

European Banks Lag Their American Peers

Despite reduced competition at home, the two European giants remaining are struggling to keep pace with their American peers. When comparing price to book ratios, the two European giants trail behind the two largest American investment banking institutions, namely Goldman Sachs and JPMorgan. The discount reflects a number of factors, but perhaps more glaring is the difference in outlook regarding regulation between the two jurisdictions. While American regulators are certainly not taking it easy on the investment banking industry, there is a perception that their moves are more predictable and will likely be more incremental than the regulators across the pond. European regulators are increasingly taking a hard line against some trading activities, and some senior European officials are seen as desiring a hard split between investment banking and traditional banking activities. This could mean either a considerable reduction in available capital for use in investment banking, or smaller sized institutions which would lead to decreased administrative efficiencies.

Bonus Pools the Latest Victim of Cuts

Whether in Europe, North America or Asia, investment banks are being forced to adopt leaner operations in order to justify their existence within the broader portfolio of a diversified financial institution. No longer are large scale bonuses a fundamental reality of the job, especially if results are not there to justify the payouts. According to New Statesman, European investment banks will be actively trimming their bonus pools for 2012, by 20 percent, potentially widening the compensation gap with their American peers. How this impacts the competitiveness of the European institutions in retaining top talent remains to be seen.

Much of this reduction in bonuses is due to the desire to shift more return to shareholders. Increasingly, investment banking operations are facing pressures from top bank management and boards of directors, to justify their returns on invested equity, which have trailed commercial banking’s now for several years. Until investment banks begin to see a sustained increase in profitability, bonuses will continue to be under pressure as bank executives demand margins that satisfy shareholder expectations.

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Investment Banking Shifting Focus to Lower Profile Activities

March 4, 2013

With the ongoing decline in investment banking activities worldwide, compensation in the industry is increasingly being tied to tangible financial results. While top performers in terms of commissions and fees generally did receive larger bonuses, the focus on tying compensation directly to bottom line contributions has never been stronger. While in the past those working […]

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