Profits of global investment banks fall in China

Profits for Goldman Sachs, Morgan Stanley and other Western banks in China fell sharply last year as the Covid-19 lockdown and geopolitical tensions fueled hopes that their operations in the country could finally turn lucrative.

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

JPMorgan and UBS were the only banks among a group of seven Wall Street and European groups with investment banking units in mainland China to post profit growth, although HSBC’s unit lost less money than in previous years.

Western banks have spent years investing in small and often loss-making operations in China in hopes that a foothold in the world’s second-largest economy will eventually prove profitable. But as relations between Washington and Beijing continue to deteriorate, the data show how difficult that bet has become.

“These people set up these (mainland units) when China was about to develop. . . and you didn’t have geopolitics in the background”, said a veteran Hong Kong financier. “The fact is that a lot has changed.”

The weak performance marks a reversal from 2021, a record year for investment banks globally, when six of seven turned a profit at their mainland operations for the first time since a trade deal with Beijing. America.

Lenders cited US-China tensions, Covid-19 restrictions, China’s asset crisis, reduction in onshore stock trading, restructuring costs and fierce competition for losses and meager returns, corporate filings show.

Progress has stalled as global banks assess how hard US sanctions and greater scrutiny from Washington could hit their businesses in China. Banks have also received requests from Chinese regulators to rein in executive pay and suspend bonuses, in line with President Xi Jinping’s “general prosperity” drive.

Some have started coming back to work to avoid running up against US sanctions that could otherwise prove lucrative.

“AI is the next big thing and five years ago, we would have spent a lot of time covering Chinese AI companies,” said a top executive at a Western investment bank in Hong Kong. “But now, no. They may end up on an entity list in the US.

The seven banks collectively accounted for just 0.1 per cent of the Rmb395bn ($56bn) revenue made by the total 140 investment banks in China last year. The mainland units do not represent all of the money that banks are making in China because profits from certain business lines, including advising Chinese companies on US or Hong Kong listings, are often booked elsewhere.

Victor Shih, professor of Chinese political economy at the university, said, “As long as major US banks can build their branding among high-net-worth individuals in China, they can potentially gain significant traction in China’s $10 trillion asset management sector.” You can grow your business.” 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 due to visit China this month for the first time since he was forced to apologize for saying the bank would topple the Chinese Communist Party in 2021. 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 did not win a significant amount of business in a booming market for initial public offerings on mainland exchanges in the first half of last year. The listings boomed even as the New York, London and Hong Kong exchanges struggled with declining IPOs.

Officials at two banks said their institutions were hesitant to participate because underwriting standards were sometimes low compared to other markets.

On the fast-growing STAR board of the Shanghai Stock Exchange, which raised 17.9 billion rupees from 11 IPOs in the first quarter of this year, banks are required to invest their money in public offers on which they advise.

New York listings of Chinese companies, once a lucrative source of fees held up by Western banks as justification for their loss-making mainland presence, have waned following a regulatory crackdown from Beijing and more stringent audit checks from US regulators. Has occurred.

Global banks still dominate the market for Hong Kong listings, but Chinese rivals are starting to challenge that position. A senior executive in the mainland business at one of the global banks said Chinese banks are increasingly “trying to squeeze out” customers for the Hong Kong IPO by hiring a mainland bank as well as an international one. Needed

The Chinese entities are very small in the context of the overall operations of global banks. JP Morgan’s China securities unit posted a profit of $38bn last year, compared to the bank’s total profit of $38bn. Goldman’s net loss of $58 million in China came in the context of a profit of $11.3 billion globally.

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

More foreign banks are in the early stages of setting up mainland operations. Citi applied to set up a wholly owned securities unit in 2021 but has not received approval for the same. Standard Chartered was granted license in January to set up a fully controlled securities unit.

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

Profits for Goldman Sachs, Morgan Stanley and other Western banks in China fell sharply last year as the Covid-19 lockdown and geopolitical tensions fueled hopes that their operations in the country could finally turn lucrative.

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

JPMorgan and UBS were the only banks among a group of seven Wall Street and European groups with investment banking units in mainland China to post profit growth, although HSBC’s unit lost less money than in previous years.

Western banks have spent years investing in small and often loss-making operations in China in hopes that a foothold in the world’s second-largest economy will eventually prove profitable. But as relations between Washington and Beijing continue to deteriorate, the data show how difficult that bet has become.

“These people set up these (mainland units) when China was about to develop. . . and you didn’t have geopolitics in the background”, said a veteran Hong Kong financier. “The fact is that a lot has changed.”

The weak performance marks a reversal from 2021, a record year for investment banks globally, when six of seven turned a profit at their mainland operations for the first time since a trade deal with Beijing. America.

Lenders cited US-China tensions, Covid-19 restrictions, China’s asset crisis, reduction in onshore stock trading, restructuring costs and fierce competition for losses and meager returns, corporate filings show.

Progress has stalled as global banks assess how hard US sanctions and greater scrutiny from Washington could hit their businesses in China. Banks have also received requests from Chinese regulators to rein in executive pay and suspend bonuses, in line with President Xi Jinping’s “general prosperity” drive.

Some have started coming back to work to avoid running up against US sanctions that could otherwise prove lucrative.

“AI is the next big thing and five years ago, we would have spent a lot of time covering Chinese AI companies,” said a top executive at a Western investment bank in Hong Kong. “But now, no. They may end up on an entity list in the US.

The seven banks collectively accounted for just 0.1 per cent of the Rmb395bn ($56bn) revenue made by the total 140 investment banks in China last year. The mainland units do not represent all of the money that banks are making in China because profits from certain business lines, including advising Chinese companies on US or Hong Kong listings, are often booked elsewhere.

Victor Shih, professor of Chinese political economy at the university, said, “As long as major US banks can build their branding among high-net-worth individuals in China, they can potentially gain significant traction in China’s $10 trillion asset management sector.” You can grow your business.” 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 due to visit China this month for the first time since he was forced to apologize for saying the bank would topple the Chinese Communist Party in 2021. 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 did not win a significant amount of business in a booming market for initial public offerings on mainland exchanges in the first half of last year. The listings boomed even as the New York, London and Hong Kong exchanges struggled with declining IPOs.

Officials at two banks said their institutions were hesitant to participate because underwriting standards were sometimes low compared to other markets.

On the fast-growing STAR board of the Shanghai Stock Exchange, which raised 17.9 billion rupees from 11 IPOs in the first quarter of this year, banks are required to invest their money in public offers on which they advise.

New York listings of Chinese companies, once a lucrative source of fees held up by Western banks as justification for their loss-making mainland presence, have waned following a regulatory crackdown from Beijing and more stringent audit checks from US regulators. Has occurred.

Global banks still dominate the market for Hong Kong listings, but Chinese rivals are starting to challenge that position. A senior executive in the mainland business at one of the global banks said Chinese banks are increasingly “trying to squeeze out” customers for the Hong Kong IPO by hiring a mainland bank as well as an international one. Needed

The Chinese entities are very small in the context of the overall operations of global banks. JP Morgan’s China securities unit posted a profit of $38bn last year, compared to the bank’s total profit of $38bn. Goldman’s net loss of $58 million in China came in the context of a profit of $11.3 billion globally.

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

More foreign banks are in the early stages of setting up mainland operations. Citi applied to set up a wholly owned securities unit in 2021 but has not received approval for the same. Standard Chartered was granted license in January to set up a fully controlled securities unit.

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