Profits of global investment banks drop in China

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Profits at Goldman Sachs, Morgan Stanley and a handful of other Western banks in China fell sharply last year as Covid-19 lockdowns and geopolitical tensions dashed any hopes that their operations in the country could finally begin to ramp up. be profitable.

Credit Suisse, Deutsche Bank, Goldman Sachs and HSBC all reported losses at their China-based units in 2022 and Morgan Stanley’s profits fell, data released by the lenders and seen by the Financial Times.

In a group of seven Wall Street and European groups with investment banking units on the continent ChinaJPMorgan and UBS were the only banks whose profits increased, although the HSBC unit lost less money than in previous years.

The western banks they spent years investing in small and often loss-making operations in China in hopes that a foothold in the world’s second-largest economy would eventually prove lucrative. But as relations between Washington and Beijing deteriorate, the figures show how difficult that gamble has become.

“These guys set them up [mainland units] when China was all about growth. . . and you didn’t have geopolitics in the background,” said a veteran Hong Kong financier. “The thing is, a lot has changed.”

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The lackluster performance marks a reversal from 2021, a record year for investment banks globally, when six out of seven they made a profit in their onshore operations after Beijing allowed them to begin taking full ownership of the units for the first time following a trade deal with the United States.

Lenders cited US-China tensions, Covid-19 restrictions, China’s real estate crisis, reduced onshore stock trading, restructuring costs and fierce competition for losses and meager returns, documents show corporate.

Progress has stalled just as global banks assess how hard their businesses in China could be hit by US sanctions and increased scrutiny from Washington. Banks have also received requests from Chinese regulators to curb executive pay and defer bonuses, in line with President Xi Jinping’s push for “common prosperity”..

Some have begun holding onto work that would otherwise prove lucrative to avoid incurring US sanctions.

“AI is the next big thing, and five years ago we would have spent a lot of time covering Chinese AI companies,” said a senior executive at a Western investment bank in Hong Kong. “But not now. They could end up on an entity list in the United States.

The seven banks collectively accounted for just 0.1 percent of the Rmb395 billion ($56 billion) in revenue made by a total of 140 investment banks in China last year. Continental units don’t represent all the money banks are making in China because profits from some lines of business, including advising Chinese companies on listings in the US or Hong Kong, are often accounted for elsewhere.

“As long as major US banks can build their brand among high-net-worth individuals in China, they have the potential to substantially grow their business in China’s $10 trillion wealth management industry,” said Victor Shih, professor of Chinese political economy at the University of California San Diego. “It will be difficult for them to navigate the regulatory landscape in both the US and China.”

JPMorgan Chief Executive Jamie Dimon is expected to visit China this month for the first time since he was forced to apologize in 2021 for saying the bank would survive the Chinese Communist Party. He is expected to arrive in Shanghai on May 30 for a series of conferences and then travel to Hong Kong for meetings.

Global banks failed to secure a significant amount of business in the burgeoning initial public offering market on mainland stock exchanges in the first half of last year. Shares there jumped even as stock exchanges in New York, London and Hong Kong struggled with declines in IPOs.

Executives at two of the banks said their institutions were reluctant to participate because underwriting standards were sometimes lower than in other markets.

In the fast-growing star board of the Shanghai Stock Exchange, which raised Rmb 17.9 billion from 11 IPOs in the first quarter of this year, banks are required to put their money into public offerings on which they advise.

New York listings of Chinese companies, once a lucrative source of fees that Western banks claimed as justification for their loss-making presence on the mainland, have declined after a regulatory crackdown by Beijing and tighter audit scrutiny by US regulatory authorities.

Global banks still dominate the Hong Kong equity market, but Chinese rivals are starting to challenge that position. Chinese banks are increasingly “trying to get in” by telling clients they should hire a mainland and an international bank for a Hong Kong IPO, said a senior executive in the mainland business of one of the global banks.

Chinese units are tiny in the context of the overall operations of global banks. JPMorgan’s China Securities unit turned in a profit of $38 million, compared with the bank’s $38 billion overall profit last year. Goldman’s net loss in China of $58 million came against a profit of $11.3 billion globally.

HSBC said it was “fully committed” to its mainland securities unit, which was “showing good momentum”. The other banks declined to comment.

Other foreign banks are in the early stages of setting up operations on the mainland. Citi has applied to establish a wholly owned securities unit in 2021, but has not received approval. In January Standard Chartered obtained a license to establish a wholly owned securities unit.

Despite the headwinds, Western lenders are unlikely to abandon their units on the mainland. “They planted the seed,” said a senior banker. “It’s expensive to get licenses and hire people. I don’t see them going off the market at all.”