June 1, For many international investment banks the A-share market is an appetizing prospect, but they are realizing that it is not that easy to bite in to as domestic companies prove effective competitors.
China led the world in initial public offerings last year, with 346 companies raising a combined $83.7 billion, more than double the total raised in the U.S. That listing rush produced $5.6 billion in investment banking revenue in 2010, more than twice as much as Asia’s second-largest market, Japan. Thousands of companies are currently awaiting approval to go public and the domestic bond market is growing.
Left on the Sidelines: According to data provider Dealogic, 8 foreign investment banks made it onto a list of the top-20 institutions in China by investment banking revenue in the first 5 months of this year.
Swiss bank UBS AG earned $115 million in investment banking revenue in China in the first 5 months and had a 4.9% share of the market, the biggest, followed by local firms Ping An Securities Co. Ltd. and Guosen Securities Co. Ltd., which recorded $106 million and $105 million in revenue, respectively.
Goldman Sachs Group Inc. and China International Capital Corp. (CICC), once the most headline grabbing investment banks in the country, dropped to No. 5 and No. 12 on the list with revenue of $86 million and $55 million, respectively, for the same period, according to Dealogic.
The business model of foreign investment banks is not that competitive compared to their local rivals; it relates to corporate culture, business models and market positioning, a senior global investment banker told the 21st Century Business Herald.
According to Wind Co., a financial data and software provider, Ping An Securities underwrote 15 IPOs in the first 5 months of this year, ranking No.1 with underwriting fees of RMB 847 million, followed by Guosen Securities, which underwrote 15 IPOs and earned RMB 752 million in related fees.
In the same period, Sino-foreign joint venture UBS Securities Co Ltd. worked on just 1 IPO, while Goldman Sachs Gao Hua Securities Co. Ltd., Credit Suisse Founder Securities Co. Ltd. and China Euro Securities Ltd. had no mandates, according to Wind Co.
Fierce competition has also seen domestic participants scoop up more business and even drive foreign banks to the sidelines of China’s equity and bond financing and merger and acquisition advisory markets.
According to Dealogic, Goldman Sachs and UBS ranked No.1 and No. 2 in terms of handling Chinese equity financing in the first 5 months of this year, with domestic firms Guosen Securities, GF Securities Co. Ltd. (000776.SZ) and CICC hot on their tails.
In terms of fundraising, the top 5 institutions in bond financing in China for the period were all domestic firms -- Bank of China Ltd. (601988.SH, 3988.HK), Industrial and Commercial Bank of China Ltd. (601398.SH, 1398.HK), Bank of Communications Co. Ltd. (601328.SH, 3328.HK), Agricultural Bank of China Ltd. (601288.SH, 1288.HK) and China Everbright International Trust and Investment Corp., according to Dealogic.
Domestic firms GF Securities, China Jianyin Investment Securities Co. Ltd. and Western Securities Co. Ltd. were the top 3 M&A advisors in the first 5 months, beating out Bank of America-Merrill Lynch and Jefferies & Co.
New Foreign Participants: But as the Chinese financial services market continues to grow, international institutions are determined keep trying their luck in the country. On Monday, Royal Bank of Scotland Group Plc. (RBS) announced the launch of a China-based securities JV with local partner Guolian Securities Co. Ltd., the first venture of its kind for a UK bank.
RBS will take a one-third stake in the JV, the maximum a foreign firm can own under local rules. The partnership will give RBS a platform to underwrite share and bond issues in the world’s biggest market for IPOs.
RBS joins global rivals such as JP Morgan Chase & Co. in forming a securities JV in China. London-based HSBC Holdings Pls. has also said it is interested in a similar venture.
But foreign companies are having to learn to patiently cooperate with Chinese partners rather than expect instant success -- Morgan Stanley struggled for years to exit its JV with CICC after falling out with the local management.
Lei Jianhui, chairman of Guolian Securities, said he hoped his firm could become “a leading securities house in China” through the partnership with RBS.