As Asia continues to restructure in the wake of the late 1990s financial crisis, demand for investment banking services will grow despite the global economic slowdown, according to Cezar P. Consing, co-head of Asia Pacific investment banking at JP Morgan.
And while the restructuring has been erratic, the current downturn will force more companies and governments to continue this process. One result, Consing told the December 1 Asian Business Conference, part of Wharton’s 2001 Global Business Forum, is new business for investment bankers operating in Asia.
The market for investment banking services, or wallet, in Asia is $7 billion, he said, about one-fifth that of the United States. But in Asia, it is growing faster, at a rate of 10% to 20% compared to 5% to 7% in the U.S. and Europe.
Consing identified several key drivers of growth. “The Asia Pacific region needs to go through the economic restructuring that we have seen in the U.S. and Europe … It’s going in fits and starts,” he said, citing a recent announcement by the Chinese government – that it would liquidate several banks for nine cents on the dollar – as an indication of a new willingness to confront economic problems.
The potential for relatively faster growth runs across product lines, Consing added. For example, he said the LBO transactions volume in Asia is one-quarter of what it is in the United States.
Another driver is the growing sophistication of the region’s capital markets, helped along by increased global integration. “Asia Pacific is more and more becoming a part of the rest of the world,” Consing said. “Now the hot spot for growth is China, and we are seeing Hong Kong become the predominant investment banking center.”
Consing predicted that China will grow 7% to 8% this year, far more than other parts of the region. “With its recent accession into the World Trade Organization, China is becoming a real competitor to every other country in the region,” he said. “That forces Southeast Asia to get together to create an economic center of gravity.”
Economic growth in Asia, Consing pointed out, is at 1% to 3%, below the stellar rates of the past but still relatively respectable. “That’s pretty high for the rest of the world. The growth story in Asia, while it has taken a back seat to everything else in the past two years, is still quite strong.”
Challenges, however, lie ahead. “In the past, reform in Asia has been a bit of a stop-and-go exercise,” Consing noted. “In early 1998, every country in the region started to reform.” But when the economies started to bounce back in early 1999, the momentum waned. “Governments said, ‘Maybe we can postpone that privatization. Maybe we can postpone the difficult medicine.’ As the economy is once again going down, you see the impetus for restructuring once again start to grow.”
Another potential trouble spot for the region is the possibility of political instability in Southeast Asia. Over the past few years Consing has met three different presidents in Indonesia and the Philippines and two Thai prime ministers. “We continue to see stability in Malaysia and Singapore and China,” he said. “But in Southeast Asia political turmoil contributes to the stop-and-go in economic reform.”
The final problem is Japan. After 10 years of little or no growth, Japan remains a black hole in the Asian economy. “Japan is less and less the locomotive for economic growth in the region; it is being replaced gradually by China,” Consing said.
As for the investment banking industry itself, restructuring is occurring there as well. “While transaction volume began to grow again after the Asian financial crisis, in the past year it has dipped,” Consing said. In the mid-1990s large investment banking firms in the region had 300 professionals. Now it is double that and there has been a large increase in capacity. “But as the industry has gotten tougher you’re seeing the banks, like ourselves, forced into a situation where we have to reduce capacity.” In a service industry, that means layoffs, even though “keeping a core group of key people really determines whether we have a viable business for the long-term.”
The sharpest drop-off in products has been in equities. “Asia used to be a big equity market. Capital in Asia is equity capital much more than it is debt capital. That’s not surprising. It’s a high-growth market with higher political risk and a higher risk premium.”
At the height of the market a year or two ago, two dozen large deals accounted for about 90% of the Asian equity business, he said. “These companies raised their money in the good times. They don’t need as much as they used to, so IPO issuance has come way down.”
The current market in Asia will benefit hybrid firms with investment banking and commercial banking products that can become a one-stop shop for clients, Consing predicted. When times were good in Asia, corporate executives had enough work for 10 or 12 financial firms. Now, he said, they can use only two or three firms.