Banking

Small deals aid underwriting success

By Philip Lagerkranser (China Daily)
Updated: 2011-01-08 10:55

HONG KONG - Foreign investment banks seeking a greater share of stock underwriting in China must focus more on smaller initial public offerings (IPOs), said the head of JPMorgan Chase & Co's Chinese operations.

JPMorgan and Morgan Stanley, both based in New York, got regulatory approval to set up investment banking joint ventures in China this week, joining Goldman Sachs Group Inc and UBS AG in gaining access to a market where companies raised $74 billion through IPOs last year, according to data compiled by Bloomberg.

Foreign-backed joint ventures were laggards in that market in 2010, with UBS Securities Co claiming the highest underwriter ranking at No 18 overall, Bloomberg data show. As smaller deals dominated, local companies with more employees in the country such as Ping An Securities Co benefited.

Related readings:  Beijing to encourage foreign firms to list in China  Regulators seek domestic banks' foreign investment details  State investment firm faces huge challenges  Better investment climate nurtures harmony

"Certain adjustments in (foreign companies') business models will need to be made, but the shift will be relatively gradual," Shao Zili, hired by JPMorgan in November 2009 as chief executive officer for China, said in an interview. Small- and medium-sized enterprises (SMEs) IPOs "is traditionally not an area the foreign companies focused on. However, it is a market that presents a great deal of potential and no one can ignore the SME market now."

Todd Marin, JPMorgan's head of investment banking in Asia, defined such IPOs as those that raise up to $150 million. JPMorgan expects those offerings to account for a greater share of IPOs in Shanghai and Shenzhen as some of the largest State-owned companies, such as Agricultural Bank of China Ltd, have already gone public, Marin said.

JPMorgan plans to expand its investment-banking workforce in the Asia-Pacific region outside Japan by 5 percent to 10 percent this year, in part to grow in China, Marin said. He declined to say how many employees the unit has now.

The US bank, the world's third-biggest manager of equity sales in 2010, received regulatory approval to set up an investment banking joint venture in China with First Capital Securities Co, according to a table posted on the China Securities Regulatory Commission's website on Thursday. Morgan Stanley said on Friday it had gained approval from the China Securities Regulatory Commission for a venture with Huaxin Securities Co.

JPMorgan's local venture will likely be "up and running" in the second quarter, Shao said.

Tying up with a local company is a prerequisite for arranging share sales in China. Deutsche Bank AG and Credit Suisse AG are among other global banks that have started ventures with local partners.

One bottleneck for foreign investment banks in China is staffing. Under Chinese rules, each underwriting company must have two so-called sponsors - bankers who have passed an underwriting test administered by the securities regulator and have relevant experience in equity offerings - sign off on each deal. A single sponsor can't work on more than two IPOs simultaneously.

UBS Securities has 20 qualified sponsors, putting it at No 25 among the 71 companies that can underwrite local IPOs by that measure, the China Securities Regulatory Commission said on Sept 3. Goldman Sachs Gao Hua Securities Co ranked No 40 with 11 sponsors at the time.

Guosen Securities Co employed the most such professionals at the time with 113, the regulator said.