Asia's Banks on the Fast Track

By Shari, Michael | Global Finance, June 2011 | Go to article overview

Asia's Banks on the Fast Track

Shari, Michael, Global Finance

Asia's big banks are elbowing out their Western rivals as demand for financial services skyrockets in the region - and beyond.

One of the great ironies lost in the panic of die global financial crisis of 2008 was that the banks that emerged unscathed were primarily Asian ones that had learned some harsh lessons during the Asian currency crisis of 1997-98. That historic blowup had been caused by a real estate bubble that bore more than a passing resemblance to the subprime mortgage implosion that laid low many of their American and European peers 20 years later. From Bangkok to Seoul, local banks instinctively steered clear of the problems that ultimately forced their American and European counterparts to sell equity stakes to sovereign wealth funds. The Asian banks thrived by deriving a majority of their income from loans and deposits - as compared with a minority for their Western peers - which made them primarily commercial banks, not investment banks.

But for the past couple of years, the conservative nature of Asian banking has been undergoing a dramatic transformation in favor of risk-taking. Since the global crash, Asia's big banks have missed few opportunities to rake in fees from investment banking activities, ranging from underwriting initial public offerings and bond issues to advising corporations on mergers and acquisitions. Excluding Japan, which has been in a deflationary malaise for two decades and is only just starting to recover from the devastating earthquake in March, Asia has rebounded strongly from the crash. Thanks largely to a sharp rise in domestic consumption by a combined population of more than 3 billion, Asian countries represent the worlds most powerful source of economic growtii, with many of them posting annual rates ranging from 6% to 7%, according to Credit Suisse.

Marching in lockstep, throngs of ambitious Asian corporations are rushing to finance their own breathless expansion plans on stock exchanges from Mumbai to Shanghai. Even household-name European companies are heading east to raise capital. Italian fashion house Prada, for example, tempted by the promise of a higher valuation, chose the Hong Kong Stock Exchange for an IPO that is expected to raise about $2 billion. An added reason for Prada s choosing to list in Hong Kong is that it already enjoys greater brand recognition among China's rapidly growing middle class than it does in Europe or the US.

The buying power of Asia's consumers is a large part of the reason why Asia is now eclipsing otiier major markets in some aspects of investment banking. The action is clearly concentrated in China, which investment bankers even, in New York now grudgingly admit is die world's most dynamic IPO market. In just over 16 months from January 1,2010, to May 4 this year, Chinese companies issued $89.7 billion in so-called ?-shares for domestic investors and licensed foreign investors in 454 IPOs on the Shanghai and Shenzhen exchanges, making the Communist-ruled country the world's biggest IPO market, according to Dealogic, a data provider that tracks investment banking. The second largest market is now the US, where a relatively lowly $66.4 billion in stock was issued in IPOs during that period. The third is Hong Kong, which saw $57.6 billion in equity issued in IPOs.

For the time being, the dominant players are still the venerable Western names that have ruled Wall Street, the City of London and Frankfurt for generations. UBS, Goldman Sachs, Deutsche Bank and Morgan Stanley raked in more investment banking fees than any other financial institutions in Asia from January 1 to May 2, taking the top four places in Dealogic's regional league table.

But as Asia's capital markets continue to test their upward limits, it's only a matter of time before Asian investment banks start to overtake their Western counterparts in the region. Thus far the advantage has gone to local banks that were in a position to capitalize on the main trends that are driving economic growth, says Kenneth Lowe, an investment analyst at Matthews Capital a fund management firm in San Francisco that invests only in Asia. …

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