China investment banks hunker down as regulator shuts IPO tap
HONG KONG/BEIJING (Reuters) - Chinese investment banks are carrying out their biggest layoffs and bonus cuts since the financial crisis as they brace for further profit declines, hit by an ongoing drought in initial public offerings in China that started in September.
The situation exposes the heavy reliance of investment banks including Guosen Securities and Citic Securities on the China IPO business. The banks were among the top fee earners in the Asia-Pacific region outside Japan in the past decade as they rode a boom in new Chinese listings.
Those banks now face the prospect of at least seven months with no domestic IPO deals after regulators froze the approval of new offerings, prompting some banks to reallocate staff to focus on debt deals and on winning mandates for firms listed in Shenzhen and Shanghai to also list in Hong Kong.
Against this backdrop, global rivals like Goldman Sachs (GS.N), Morgan Stanley (MS.N) and UBS (UBSN.VX) look set to gain market share because they have a bigger footprint in the region and have more products to offer.
The China Securities Regulatory Commission ordered investment banks and accounting firms this month to review the financial statements of nearly 900 companies seeking to go public in the country, in an effort to bolster the quality of IPOs. The move extended its freeze on new listings until at least March.
The country has already gone without any new listings since September 21, according to Thomson Reuters data. Shenzhen-based Guosen Securities, which ranked first in managing IPOs in Asia excluding Japan last year, has worked on no new offerings since late August.
"It's going to be difficult and painful," said a banker with a Chinese firm who was not authorized to speak publicly about the matter. "You have way too many banks here and a lot of them are losing money."
The layoffs and bonus reductions are the most severe for the industry since 2009, according to multiple sources at investment banks and executive search firms, who declined to be identified because of the sensitivity of the matter. Industry statistics were not available for Reuters to independently compare past job reductions.
The belt-tightening comes after a third straight year of profit declines for Chinese securities companies on the back of a slump in revenue from underwriting and sponsor fees, according to the Securities Association of China. Companies earned 17.55 billion yuan ($2.8 billion) from those fees in 2012, the lowest since 15.16 billion yuan in 2009, while profit for the entire industry of 32.8 billion yuan ($5.3 billion) was less than the $7.48 billion earned by Goldman Sachs alone last year.
Their dependence on new listings is stark. For example, 84 percent of Guosen's estimated equity capital market (ECM) fees came from managing IPOs last year, compared with less than 10 percent for UBS, according to Thomson Reuters/Freeman Consulting.
Guosen Securities, China Merchants Securities (600999.SS), Essence Securities, Zhong De Securities and China Investment Securities are among several firms cancelling annual bonus payments for investment bankers, freezing salaries or aiming to cut about 5 percent of total staff, sources told Reuters.
China International Capital Corp (CICC) is cutting around 5 percent of its staff as part of its regular policy of trimming underperformers, but it has also stopped hiring. Citic Securities (600030.SS)(6030.HK) is looking to shrink its workforce by 5 percent to 10 percent, the sources added.
"Senior bankers will be most affected during this round of layoffs," a banker at Citic Securities said. "Those bankers are in danger as the company will not save jobs for idlers anymore."
CICC declined to comment. A spokesman for Guosen said market speculation was baseless.
China Merchants and Citic Securities confirmed that they were taking appropriate action in response to the falling revenues, including cutting bonus payments and commissions and reducing staff. They did not specify details of the job cuts or salary and bonus freezes.
The other securities firms could not be reached for comment.
Stock issuance in China has taken off since 2004, when the Small & Medium Enterprise (SME) and ChiNext boards were launched in Shenzhen. Since then, 1,215 companies have gone public in China, according to Thomson Reuters data.
By comparison, the United States, with a much larger and more developed equities market, saw 1,435 companies go public over the same period, while the UK had 1,142 and Japan 850.
The boom helped Chinese investment banks capture a 30 percent share of the Asia ex-Japan ECM fee pool last year, compared with 3.4 percent in 2004. In IPO underwriting, Chinese banks took 46 percent of all IPO fees in 2012, up from 4 percent in 2004.
To offset the recent lackluster IPO business, ECM bankers have started working on debt deals. They are also looking to win mandates to transfer so-called B-share companies listed in Shanghai and Shenzhen to trade in Hong Kong, after the successful listing of state-run container manufacturer China International Marine Containers (Group) Co Ltd (CIMC) 000039.SZ in November.
"The competition is very fierce. A lot of banks have put resources into this business," said a banker who helped arrange CIMC's migration.
- PepsiCo Inc reported a higher-than-expected quarterly profit and raised its full-year adjusted earnings forecast, helped by strong sales of snacks such as Lays and Doritos chips in North America.
BEIJING/HONG KONG - China reiterated its opposition on Thursday to a European Union plan to limit airline carbon dioxide emissions and called for talks to resolve the issue a day after its major airlines refused to pay any carbon costs under the new law.