Will big banks ever make money in China?


FT premium subscribers can click here to receive Due Diligence every day by email.Investment bankers should count their lucky stars. They’ve had a decade-long M&A boom that has generated mouthwatering fees and, just as activity starts to slow down on their home turf, there’s a new fee front opening up that could extend their run of good fortune. The Chinese government has long held a tight grip on the country’s financial system, opening up to trade but closing out competition to its national businesses from foreign institutions. Nowhere is this more apparent than in banking. Now that’s all about to change and, just like their tax cuts, US banks have the Trump administration to thank. Chinese officials have been under pressure from the US to liberalise markets as part of the trade deal between Beijing and Washington. Before anyone starts penning a letter of thanks to Trump too soon, the trade deal had to come out of a trade war, which has impacted dealmaking in Asia and hit the bonuses of some of the region’s top investment bankers.From April onwards foreign banks can apply to take full control in any joint ventures they are a part of. 
In theory that gives overseas investment banks much broader access to China’s $21tn capital markets. In practice, things are a little more complicated. Foreign banks will be competing with emboldened domestic rivals, which have had a 25-year long head start and they’ll be fighting over a fee pool that has shrunk from $7.8bn in 2016 to $5.9bn in 2019. Still, only 4 per cent — or $266m — of that went to foreign banks last year.“This is such a huge opportunity, but can you get access to it?”, Todd Leland, co-president of Goldman Sachs in Asia-Pacific excluding Japan, told the FT’s Don Weinland and George Hammond.The stage has already been set. Plenty of foreign banks have joint ventures in China but, until April 2018, they were prohibited from owning a majority stake.Since then, UBS and JPMorgan Chase have increased existing stakes to 51 per cent. Nomura has launched a 51 per cent-owned securities joint venture, Morgan Stanley and Credit Suisse are in the process of launching their own joint ventures and Goldman has applied to increase its stake. 
Initial regulatory approval is just the start of the battle to access the Chinese market: overseas banks have such a small part of the domestic market that they must focus instead on lines of business where local investment banks such as China International Capital Corporation and Citic Securities find it harder to compete.As the chart above shows, their best bet could be in M&A where foreign banks like UBS, Goldman and Morgan Stanley are already among the top six. Regardless, there’s plenty of market share to capture if foreign banks can play to their strengths. Xerox wants to give HP’s board its walking papersWe’re all guilty of overusing the David v Goliath trope but in the case of Xerox and HP, it really does apply. 
Xerox has made no secret of its desire to acquire HP, a much bigger company that has so far rejected its overtures. Now the copier company has escalated its $33bn hostile takeover fight for control of its larger rival by attempting to overthrow its board. You can find the list of nominees in this article by DD’s Eric Platt and James Fontanella-Khan. The candidates have been received with mixed reactions — some say the Xerox nominees lack experience in the printing and consumer electronics business, while others think they are credible enough but say HP’s board is fine as it is.This is what a Deutsche Bank analyst had to say about Xerox’s latest move: “XRX’s board slate appears credible, though we also believe that there aren’t holes to pick in HP’s present board of directors either, with 10 out of 11 independent directors, an independent chairman, and just 1 HP employee . . . we remain uncertain whether the combination, in its present structure, whereby the combined entity will be highly levered, makes sense when there are paths for alternative structures, especially if HP were to be the acquirer.”Of course the real issue at hand is Xerox’s offer of $22 per share, which is comprised of $17 in cash and the rest in stock. There’s little incentive for HP’s shareholders to engage when the company’s shares are trading above the offer price. And where there’s a hostile takeover, you can be sure to find Carl Icahn (see: Occidental Petroleum). This time, the activist investor, who owns a stake in both companies, is pushing for them to combine rather than attempting to scupper the deal. One thing is for sure, Xerox’s move hasn’t done much to allay HP’s suspicions on its urgency to strike a deal. Read Lex’s take on the battle here.Goldman: do as we say not as we doGoldman Sachs chief David Solomon has given companies with ambitions to go public an ultimatum: have at least one “diverse” candidate on your board or forget about doing business with the Wall Street stalwart. Unless you’re in Asia, the region that has the worst record on gender diversity, in which case, as you were. “Starting on July 1 in the US and Europe, we’re not going to take a company public unless there’s at least one diverse board candidate, with a focus on women,” he told CNBC. “And we’re going to move towards 2021 requesting two.”While Goldman itself has four women among its 11 directors, Solomon’s executive team remains more male-dominated than most of its peers, with just eight women on the bank’s 34-person management committee. We’ll let this picture of Goldman’s triple threat from a few years back do the talking. 
Job movesWestpac has named former Barclays chairman John McFarlane, known as “Mack the Knife” for his habit of sacking chief executives, to lead the Australian bank as it deals with the aftershocks of a huge money-laundering scandal. Full tale here + Lex.Renaissance Technologies founder Jim Simons has named his son co-chairman of the quantitative hedge fund’s board and added five new directors. The move positions Nathaniel Simons, who runs hedge fund Meritage Group and has been vice-chair of Renaissance since 2006, to take over from his father as chairman. More here.Saudi Aramco has hired Wells Fargo banker Robert Fernandez to manage its relationship with banks after the oil company completed the world’s biggest share sale. Fernandez will lead the newly formed financial advisory department. Credit Suisse has hired Swiss bank veteran Brian Gudofsky to be its global head of technology, Reuters reports. Greenhill has hired Pierre Mongin as a senior adviser in its Paris office. Mongin was previously executive vice-president of Engie, a French utility. Kunal Soni, a former managing director at The Carlyle Group, has joined Morgan Stanley Investment Management’s direct lending team in Los Angeles. Baker Botts has hired Gaye Lentz as a partner in the law firm’s global projects department in Austin. Lentz joins from Thompson & Knight.Latham & Watkins has hired Meghan Cocci as a partner in the law firm’s corporate department. Cocci, formerly at Dentons, has joined the firm’s New York office with plans to expand her practice into California.Squire Patton Boggs is opening a Milan office with Galileo Pozzoli, Daniela Sabelli, Ian Tully and Fabrizio Vismara joining as partners from Curtis, Mallet-Prevost, Colt & Mosle.Smart readsBlend or bulldoze The success of an M&A deal depends on how well the integration process goes, writes the FT’s Andrew Hill. But companies have taken different views on the subject. Brewer Anheuser-Busch InBev is a prominent example of take-no-prisoners integrators while companies like US technology group Cisco are more inclined to maintain the identity of the acquired businesses. (FT)High returns in the high seas Trade financing, traditionally the domain of European banks, is getting new entrants as money managers scour the global trade network for attractive rewards. But asset managers, used to trading stocks and bonds, may find themselves in too deep. (WSJ)The biggest tax heist ever? From 2006 to 2011, hundreds of bankers, lawyers and investors siphoned $60bn from the state coffers of European countries using a scheme built around “cum-ex trading” (from the Latin for “with-without”): a monetary manoeuvre to avoid double taxation of investment profits. (NYT)News round-upFairway Market: clean-up in aisle 11 (Lex)Dimon’s pay rose to $31.5m in 2019 (FT)UK regulator launches 11th-hour review of Just Eat-Takeaway.com deal (FT)Portuguese banker named in Isabel dos Santos probe found dead (FT)Stumpf to pay $17.5m over Wells Fargo fake accounts (FT)Hong Kong-listed group crashes 90% after suspension lifted (FT)Goldman to insist companies it takes public have diverse boards (FT)Axel Springer plans delisting from Frankfurt stock exchange (Reuters)


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