* 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
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
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
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.