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Investment banking activity in Singapore in downward spiral
Singapore’s investment bankers are going through a difficult time. A slowdown in economic activity in the region has resulted in a contraction in the number of deals.
The problem is compounded by the rise of Chinese investment banks which are becoming increasingly aggressive in capturing market share.
According to a recent Reuters report, the total value of merger and acquisitions transactions in the Asia-Pacific region in the current year stands at US$572.9bil.
In the same period last year, the value of M&A deals stood at US$745.7bil. This contraction has led to massive layoffs in the investment banking sector.
Investment banking executives face pink slips and garden leave
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Goldman Sachs’ investment banking revenues have been falling continuously for several years now. Consequently, it has initiated a cost-cutting exercise that will lead to US$700mil in savings per year.
Most of the bank’s employees in the region are located in Hong Kong, Singapore, and China and it is in these countries that the cuts will take place.
Goldman is not the only investment bank facing a contraction in business volumes. Bank of America also has plans to reduce its investment banking staff in the Asian region.
Layoffs are expected in Hong Kong, Singapore, and Japan. According to a report, BofA’s net income in Asia declined by 3% in 2015.
Chinese investment banks a growing force
While the business volume of American investment banks is shrinking, their Chinese competitors are making significant inroads into their territory.
A study by Dealogic, a financial market analytics and technology firm, has found that the top five investment banking companies in the Asian region, excluding Japan, are Chinese.
The same ranking reveals that of the 12 largest firms by M&A revenues in the region, eight are from China. As recently as 2014, Goldman Sachs held the premier position.
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According to a report in the Financial Times, China Citic Bank International is adding to its M&A team at its head office in Hong Kong. The bank recently worked on a large transaction that involved ChemChina’s US$44bil acquisition of Syngenta, a Swiss agribusiness company. Citic was the lead arranger for a US$12.7bil syndicated loan.
China Citic Bank International, a subsidiary of Citic Bank, which is based in Beijing, said that it would move away from its traditional commercial banking activities and concentrate on its securities and corporate finance advisory business.
Investment banks based in Singapore are suffering as the total volume of business available has dropped. While there is a certain amount of M&A activity in China, this is being snapped up by Chinese investment banks.
Global investment banking business is shrinking
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The world’s leading investment banks have not been able to halt the downward slide of their revenues and profits. The industry as a whole has been recording declining margins for the last five years.
The Boston Consulting Group’s report, Global Capital Markets 2016, reveals that revenue from trading in fixed income, currencies, and commodities has been falling. Income from primary market activities has also been shrinking.
The only area to show an increase is the revenue from equities, which has got a boost from stock market volatility.
Goldman Sachs’ record over the last few years is illustrative of the plight of the investment banking industry. The income that the firm generates from its proprietary trading and investment business contributed US $25 billion in 2009. In 2010, this dropped to US $18 billion and in 2015 it slumped to just US $5 billion.
Will Singapore’s investment banks see a turnaround?
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Lacklustre M&A activity accompanied with economic stagnation in the region indicates that investment banks will continue to face headwinds.
The recent 1MDB scandal, which saw the Monetary Authority of Singapore ordering the closure of Falcon Bank and BSI Bank, has not helped matters.
All these factors have combined to present a dim future for Singapore’s investment banking sector in the short run.
If a longer time frame is considered, investment banking is bound to pick up as Singapore is ideally positioned with its excellent infrastructure and the stability of its political system.
But it is difficult to predict when this will happen. Unfortunately, there are no indications of an immediate turnaround.
(By Ravinder Kapur)
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