Bonds beat equities in Asian fee pool
* First time debt fees outweigh equities
* Record issuance of bonds generates windfall
* Situation unlikely to be repeated
By Timothy Sifert
July 3 (IFR) - Banks in the Asia-Pacific region earned more from underwriting debt deals in the first half of the year than they did from underwriting equity deals, the first time bond fees have led at the end of June.
The shift demonstrates how far the Asian markets have evolved over the last decade - from an exclusively equity-dependent region to one that, in many ways, closely mirrors the US market, where both equities and bonds both contribute significantly to an investment bank's bottom line.
"Debt capital markets in Asia have reached a critical mass so that even just refinancing activity will generate a fair amount of new issuance," said Herman van den Wall Bake, head of Asian fixed income capital markets at Deutsche Bank.
It is a culmination of a trend that has been growing since at least 2011, as equities volumes - especially in Hong Kong - started to dip and the combination of low interest rates and the global search for yield pushed many corporate issuers into the bond markets.
Bankers say firms will no longer be able to survive without capable debt franchises, forcing a dramatic shift in mentality from some banks that had become dependent on large initial public offerings with chunky fees attached.
Investment banks earned US$1.63bn from underwriting bonds in dollars, euros and yen in the Asia-Pacific region outside of Japan during the first half, against just US$1.45bn from equities, according to data from Thomson Reuters and Freeman Consulting. The numbers are even more impressive given that only one Asia ex-Japan G3 bond priced in June.
Bond fees have more than doubled since 2009, when investment banks in the region earned just US$956m. Over that same period, first-half equity fees have surged before falling precipitously. In 2009, banks earned US$1.61bn, a figure that grew to US$3.162bn in the first half of 2011.
The Asia-Pacific bond market has hit the milestone at an interesting time. Just as banks broadly started to earn more from DCM than ECM, the Asian G3 bond market has more or less shut. Record volumes of bond issuance may have helped firms out of a slump created by their former dependence on IPOs, but rising global interest rates are presenting them with new challenges.
The 10-year US Treasury bond started the year at 1.86% and rose as high as 2.67% during intraday trading last week. It has risen almost a full percentage point since early May. That is a significant event, especially when a key reason issuers came to the dollar bond markets was low rates.
The prospects of the US Federal Reserve ending quantitative easing and escalating concerns about China's slowing economy have also contributed to the low bond volumes.
Indeed, the possibility that rates would rise this year encouraged many issuers to come to market in the January-through-May period. "We had an ideal situation of record low rates, calm markets in Europe and unprecedented liquidity coming from central banks around the world," Van den Wall Bake said.
As background moves back to normal, the distribution of fees earning from bonds and traditionally higher-paying equities are expected to reach more sustainable and typical levels going forward, similar to more mature markets, like the US, where equities often comprise 60%-70% of banking revenues.
In that vein, after the spate of DCM issuance, several banks in the region are looking for ways to continue to build out equities franchises in addition to their debt franchises.
Standard Chartered has been adding senior bankers this year to get more ECM business from its existing customers.
In addition, Jefferies has forged alliances with brokers in Malaysia, Thailand and Indonesia to distribute research and stocks to its own customer base. The New York firm also hired Gordon Crosbie-Walsh from JP Morgan's ECM syndicate desk last week. He will head Asia ECM syndicate and be joint head of Asia ECM alongside Danny Wong.
Global and regional firms in general have been looking to tap more equities business in South-East Asia, as new issues from Hong Kong and mainland China are been relatively dormant.
Meanwhile, as bond fees have escalated, fees earned from loans and M&A have fallen along with equities. In the first half of the year, banks earned US$741m from loans in Asia and US$938m from M&A. Both of those figures are lower than the US$778m and US$1.205bn earned, respectively, in the same period last year.
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