To succeed in corporate banking these days, banks need a new growth story and many are turning to Asia to find it.
"Long-term structural changes now under way will fundamentally affect banking in the years to come," wrote Tab Bowers, a Tokyo-based director at McKinsey and Company, in a recent McKinsey Quarterly article on the changes facing global banks. He went on to write that in all of the outcomes he and his colleagues looked at, global banks would face capital shortages at home and that one strategy to maintain growth would be to shift their businesses towards rapidly expanding emerging markets.
J.P. Morgan and Bank of America Merrill Lynch (BoA Merrill) got the memo. Both institutions are now in the midst of strategies to build out their global franchises, especially in corporate banking, to capture growth in emerging markets. "The 2008 crisis hit Bank of America Merrill Lynch and J.P. Morgan's home market hard," said one corporate banking executive in Hong Kong. "Now they're looking outside North America in order to grow."
Even behemoth HSBC acknowledges this reality. Citing a shift in the centre of the world's "economic gravity" to the east, HSBC relocated its group chief executive Michael Geoghegan to Hong Kong from London in February.
Asia is where the action is. The World Bank predicts that the region will grow 8.7% this year before dropping to 7.7% by 2012. This is in stark contrast to the eurozone, which the World Bank estimates will expand at a weak pace of 0.7% this year before rising to 1.8% in 2012. The US should grow 3.3% this year, falling to 3% by 2012.
One reason for optimism is that Asia's corporations are flush with cash and actively expanding. Notable recent business moves include Bharti Airtel's purchase of Zain's African mobile operations for $10.7 billion and Geely's acquisition of Volvo for $1.8 billion, both announced in March. During the first quarter, Asia ex-Japan mergers and acquisitions totalled $123.2 billion, according to Dealogic, the highest since the second quarter of 2008.
But buoyant indicators do not necessarily translate into success. J.P. Morgan, BoA Merrill and the other banks that want to capture Asia's emerging dollar, renminbi, ringgit or rupiah business face competition from entrenched multinational banks, such as HSBC and Citi, as well as Asia-Pacific's rising regional banks, such as DBS, CIMB and Korea Exchange Bank (KEB), and those that straddle both the multinational and regional title, such as ANZ. Plus, new entrants will have to prove they are committed to the region, which has been burnt by foreign banks rushing in during good times and leaving the region high and dry when times get tough.
The plans
"The global corporate bank is a joint venture between the investment bank and treasury and securities services," said Daniel Cotti, global trade executive at J.P. Morgan, in an interview earlier this year. That's an apt description for the plans of his institution, as well as BoA Merrill. Both have respectable investment and transaction banking businesses in Asia and are sizeable corporate banks in the US. Both intend to leverage those capabilities, their technology prowess and existing client relationships, to capture the business of Western multinationals and Asia's emerging corporate leaders.
J.P. Morgan's plan is the more concrete of the two. It calls for a $100 million global investment, approximately a third of which is to go to Asia, with as many as 300 bankers dedicated to its global corporate bank.
"It was quite natural for us to think about more corporate banking coverage on an international basis," said Mike Brown, Asia-Pacific head of the global corporate bank. The bank hopes to deliver wholesale banking services, including credit, asset management, debt capital markets, operating services and syndicated loans to Asian, European and US multinational blue-chip companies, as well as large local corporates and financial institutions. He said the bank has already identified 1,600 potential companies.
"We're going from very light coverage to much more comprehensive [corporate banking] coverage," he said. "I think this will be recognised in the marketplace by the client base."
Putting its money where its mouth is, last month J.P. Morgan promoted Heidi Miller to the newly created position of president of international banking, where she will spearhead the corporate banking initiative. In an interview with the New York Times, Jamie Dimon, chairman and chief executive of the bank, said that if she came up with a "great plan" he would put "a lot" of money behind it.
BoA Merrill's plans are similarly, if not more, ambitious. "Prior to the acquisition of Merrill Lynch, significant international expansion [by BoA] was not a high priority," said Moshe Orenbuch, managing director at Credit Suisse in New York, who is responsible for research on both J.P. Morgan and BoA Merrill.
Its priorities have changed. "Corporate banking is a core business for Bank of America in the US and, through our acquisition of Merrill Lynch, we gained access to hundreds of investment banking and global markets clients in EMEA [Europe, the Middle East and Africa] and Asia, to whom we can now provide a complete range of financial solutions," said Paul Donofrio, head of global corporate banking at BoA Merrill, in a statement earlier this year.
The bank has recently hired heavyweights such as Charles Alexander from Standard Chartered to be its head of corporate banking coverage for Asia-Pacific and Ivo Distelbrink from Citi as head of global treasury services for Asia, as part of its strategy to offer that complete range of financial solutions mentioned by Donofrio.
Both banks are financially capable of expanding. "I think that their ability to expand through acquisition would be closely watched, but in terms of internal expansion, yes, they absolutely could," said Credit Suisse's Orenbuch. Whether the plans are a good move, he said, would depend on execution.
"Competition is intense in this region -- the demand for talent is increasing costs and the desire for market share is causing some price compression," said Anthony Nappi, Asia-Pacific head of global transaction services at Citi. That might make turning a profit a challenge for institutions making significant investments in corporate banking, he added.
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