Asia Investment Banking Fees Fall to Lowest Since 2008

Asia Investment Banking Fees Fall to Lowest Since 2008

Slump Bucks Global Trend of Rising Revenues for Investment Banks

ENDA CURRAN

Dec. 19, 2013 10:01 a.m. ET

HONG KONG—Investment banking in Asia has suffered its worst year since 2008, even as economic growth in the region continues to outstrip much of the developed world.The slump in Asian revenues bucked a global trend, as fees in U.S. and Europe rose. It also comes despite a rush of bond offerings and shares sales by Asian companies in the final months of the year as investor sentiment improved.

Across the Asia Pacific region, including Japan, revenues dropped to $11.7 billion this year, the lowest level since the global financial crisis convulsed markets in 2008 when banks in the region made just $8.5 billion, according to data provider Dealogic.

Year on year, revenues slumped 10% and are down 26% from a peak of $15.7 billion in 2010.

By contrast, investment banking revenues globally rose to their highest since 2007, climbing 12% in the U.S. to $36.0 billion and 10% in Europe to $17.5 billion.

Bankers in Asia pinned much of the blame on a subdued year for deals such as mergers and acquisitions and also complained that more banks are competing for fewer deals, pressuring fees lower.

“The fundamental point is the market is overpolluted. There are too many players chasing the same mandate,” said Keith Pogson, Hong Kong-based managing partner, financial services, Asia Pacific at Ernst & Young.

The flow of new share sales and large merger and acquisition deals—a key source of revenue for investment banks—fluctuated through the year, buffeted by worries that an expected move by the U.S. Federal Reserve to curb its $85 billion a month bond-buying program would hurt economic growth in the region. Those fears sent investors fleeing and caused a slump in currencies from India to Indonesia.

While total M&A volumes rose 11% to $520.8 billion—helped by some large deals out of China—deal activity fell 12% on year to the lowest number since 2006 and volumes in the region’s debt capital markets fell 15% to $928 billion.

Overall revenues in share sales or equity capital markets rose to $4.1 billion to make up 35% of investment banking revenues, the highest level since 2011.

The uptick was helped by a late rush of initial public offerings in Hong Kong including China Cinda Asset Management Co. 1359.HK -2.16% ‘s $2.5 billion offering earlier this month, which attracted more than $65 billion in demand.

“While volumes have been OK, certainly the fee compression is on because of the number of banks on any deal. That continues to be a negative for the industry,” said Mark Williams, managing director for investment banking for Asia excluding Japan, at Nomura Holdings Inc. 8604.TO -0.64%

Banks aggressively expanded their Asia operations when the region rebounded quickly after the worst of the global financial crisis. That led to a wave of expensive hiring for an expected boom in stock and bond underwriting and advice on mergers and acquisitions.

But the region has fallen short of expectations and since then banks have shed staff and cut back their operations. Tough new regulatory requirements are also hurting U.S. and European banks, forcing them to sell assets across Asia and offer fewer services than before. New rules clamping down on risky trading and the sale of exotic products has also hurt revenues, especially in Asia where bankers found willing investors.

Still, investment bankers say the region is on track for an improvement in 2014, buoyed as economic growth picks up in the U.S. and Europe’s debt crisis remains calm.

“Investment banking if anything is a play on [gross domestic product] and those stars seem better aligned as we go into January than they have been for a period,” said Matthew Westerman, co-head of Asia Pacific investment banking, excluding Japan at Goldman Sachs GS -0.04% Group.

The U.S. investment bank saw revenues across the region, excluding Japan, increase this year, continuing a spree of growth since 2008, according to Mr. Westerman.

And bankers also pointed to the response by markets in Asia to the Federal Reserve’s decision Thursday to taper its bond-buying program down to $75 billion a month. Investors shrugged off the move, with Japan’s Nikkei rising 1.7% and Australian stocks jumping 2.1%.

“It signals to people there is confidence around economic growth so it is actually a good sign,” said Matthew Ginsburg, head of Asia Pacific investment banking at BarclaysBARC.LN +2.14% PLC.