May 16, 2015    4 minute read

Made in China: Emerging Global Investment Banks

   May 16, 2015    4 minute read

Made in China: Emerging Global Investment Banks

The financial supermarkets of the world are shrinking in both size and complexity under the pressure of strict capital rules from global regulators, in their effort to prevent another financial crisis. HSBC is targeting its cost base by retreating from emerging markets, most notably Brazil and Turkey. Citigroup has found planting flags around the world unsustainable and pulled back from businesses in El Salvador and Egypt. RBS is leaving two-thirds of the countries it currently operates in. Deutsche Bank is planning to shrink its investment bank and sell off its Postbank network of branches. Standard Chartered shut down its entire global equities business in Asia. The list goes on – and yet whilst everyone else is trying to downsize, Chinese banks are trying to expand.

China’s banks are riding a wave of stock market fever, seeing the Shanghai Composite more than double over the past year and the Hang Seng Index reach seven-year highs with the opening of the Shanghai-Hong Kong Stock Connect, as well as the impending Shenzhen-Hong Kong Stock Connect. This has boosted their market capitalisations and lent them confidence to build up their capabilities outside their domestic markets. Again, the list goes on. Anbang Insurance Group bought South Korean insurer Tongyang Life in February this year, after acquiring Belgian banks Delta Lloyd and Fidea. Early this year, Industrial and Commercial Bank of China (ICBC) took a majority stake in South African Standard Bank’s markets businesses in London. Late last year, Haitong Securities bought the investment banking arm of Portuguese group Novo Banco and acquired London-based Japaninvest Group. Huatai Securities has poached senior staff from established banks like Bank of America Merrill Lynch to build up a team of international bankers ahead of its planned floatation in Hong Kong this year, set to be the third largest IPO globally of 2015.

We want to bring more deals from emerging markets to London and to New York to cater for the requirement from investors who are seeking higher yield, considering the low interest rate environment here [Europe and America].

Hiroki Miyazato, Deputy Chief Executive, Haitong Securities

In spite of their aggressive ambitions to expand globally, Asian banks do not have a great track record in successfully converting such dreams to reality. Japanese bank Nomura bought the European and Asian operations of Lehman Brothers after the latter collapsed in the financial crisis, and built up a US operation from scratch. These acquired operations proved to be unprofitable and Nomura ended up scaling back much of its overseas operations years later. Another Japanese Bank Daiwa Securities drastically reduced the scale of its European and Asian businesses in 2012 after volatile markets and keen competition made them unprofitable. In the same year and along similar lines, South Korea’s Samsung Securities exited equity sales and other markets businesses outside of South Korea.

Every country likes to have its own international investment bank as a window to the world for its homegrown companies, like how Deutsche Bank gives blue-chip German companies cross-border exposure to Wall Street. With the growing economic clout of China, its banks certainly have an increasingly large role to play, but they would do well to learn from the business models of other global investment banks or they risk following the footsteps of those who failed. They should choose their acquisition targets wisely and focus on integrating them within the firm. They should avoid over-emphasis on complex derivative products and be aware of increased scrutiny from global regulators on leverage ratios and money laundering issues. They should enter markets with the intention and capability to grab a sizeable market share instead of mindlessly planting flags across the globe. Maybe then, the next big Chinese export to the world could be a global investment bank.

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