Investment banking has always had a certain allure. Helping a company launch a billion dollar initial public offering, funding a big acquisition or buyout, these are the things that graduates pondering a banking career dream about.
It is safe to assume that fewer dream of arranging letters of credit or managing a depositary receipt programme. Lately, however, investment bankers’ pay has been shrinking, while compensation for their less glorified peers — corporate bankers — is looking more promising.
Corporate banking, which includes boring and sticky (but lucrative) parts of the business, such as trade finance and cash management, has long been a bread-and-butter product. But it is increasingly a more important revenue generator for banks.
Banks with solid corporate banking platforms are able to cross-sell their investment banking products to corporate and commercial banking clients — and this has boosted returns.
“Generally speaking, in Asia, those banks with strong commercial and corporate banking franchises were able to produce higher revenues and gain better market share last year than the majority of banks with pure advisory platforms,” says Simon Roberts, managing director of recruitment firm Sheffield Haworth. “Banks have begun to realise that it is the less glamorous world of trade finance, securities services and cash management that actually generates the returns and pays for the headcount.”
This shift is being reflected in pay. “We are expecting average total compensation in 2013 for investment bankers to continue the downward trend, though crucial relationship stakeholders and performers in both debt capital markets and M&A are likely to fare marginally better than average,” Roberts added. “At the same time we are starting to see increases in total compensation packages for strong corporate and commercial bankers.”
Data on corporate banking fees is not available, but, anecdotally, the pool of revenues is much deeper compared to the investment banking fee pool. Asian companies are growing and they have needs on a day-to-day basis, not just for the one-off IPO or acquisition.
“It used to be sexy for a company to talk to an investment banker,” said one banker. “But now, companies don’t just want one bank to provide advisory services, they want a bank that can service all their needs. Also, balance sheet is that much more important now.”
Investment banking fees have fallen during the past two years. According to Dealogic, total core investment banking revenue for Asia, excluding Japan, fell 18% from $8.6 billion in 2010 to $7 billion in 2011. They were 30% lower at $6.1 billion in 2012 compared to 2010.
A big reason for this is that equities, typically the big fee earner, has had a poor run. Banks are also faced with fee compression as the business becomes more commoditised. At the same time, competition is intense and the quest for league table credit often gets in the way of making money. While volumes have more than made up for declining fees on bond issues, the same cannot be said for equities.
According to Dealogic, in 2010, equities contributed 66% to investment banking revenues, with the remainder evenly split between M&A and debt. Last year, equities and debt each contributed about 40%, and the rest came from M&A.
“Most investment banks in Asia suffered from a sharp downturn last year with the dearth of lucrative equity capital markets fees and, as such, were below budget in this area. In contrast, debt financing businesses on the whole performed pretty well and most firms would have hit their full-year 2012 budgets in the first quarter of last year. M&A also had a reasonably good year in 2012 in Asia,” said Roberts.
Other trends expected in 2013 are a more equal remuneration for Southeast Asian bankers. Historically, there has always been a premium on China coverage bankers. This is unsurprising given that China drove much of the deal flow in Asia. It was the jumbo Chinese IPOs that paid the fees at bulge-bracket firms, while resource-hungry Chinese companies have also driven M&A activity.
But this year, according to Roberts, there is likely to be a more even balance in the way that bankers are rewarded from a geographical perspective with some bankers in Southeast Asia being on a more equal footing with their China counterparts. “The premium for China bankers is starting to be eroded,” said Roberts.
While China and Hong Kong drove much of the debt deal flow last year, on the equities side, activity out of Southeast Asia picked up, with major IPOs from Malaysian company Felda and IHH Healthcare.
According to Roberts, this year will also see the continuing trend of more value being placed on country-level bankers who have strong relationships with clients on the ground, as opposed to sector bankers who are content-orientated and often dependent on country bankers for access and relationships.
