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Asian IPO Boom Means 21% Lift for JPM
03/21/2011 3:35 pm EST
“We lose money on every sale, but make it up on volume.”
That wasn’t quite the motto for investment banks in 2010, but with fees for investment-banking deals falling to rock-bottom levels, volume is the key to profits in this sector.
And if a bank wants to do volume, it better have Asia’s emerging financial markets dead in its sights: Three of 2010’s five biggest markets for initial public offerings (IPOs), for example, were Hong Kong at $57 billion, Shenzhen at $47 billion, and Shanghai at $27 billion.
So who’s going to be the dominant investment-banking player in Asia? It’s way too early to declare the contest over.
Citigroup (C) is just getting back into the game. HSBC (HBC) has been thrown off stride by transition in the CEO’s office. The big Chinese banks have an insider’s advantage. It’s always too soon to write off Goldman Sachs’ (GS) chances.
But the surprising leader right now is JPMorgan Chase (JPM). The bank is using a run at the top of the global rankings—three years in a row as leader in investment-banking fees (including $4.14 billion in 2010), according to Bloomberg—to go pedal to the metal in Asia.
In 2010, JPMorgan Chase expanded its investment-banking workforce by 42% in China. That surpassed the bank’s heady growth in Brazil (a 40% increase in headcount) and Russia (20%).
Building volume is so important right now because intense competition for business in the emerging world’s financial markets has savaged fees. Historically, banks earned 3% to 5% on investment-banking deals—but some of 2010’s biggest offerings, such as the record IPO of Agricultural Bank of China, paid 2% or less.
According to Bloomberg, fees for IPOs and secondary stock offerings averaged just 2.9% in 2010. That’s the lowest level since Bloomberg began keeping such data in 1999. Investment-banking fees averaged 5.6% in 2003.
As of March 21, I’m leaving my target price for JPMorgan Chase at $58, by August 2011. The bank recently received approval from the Federal Reserve to increase its dividend payout, and has raised its quarterly dividend from 5 cents to 25 cents a share.
I think another dividend increase is likely, once the Fed loosens its restrictions limiting payouts to 30% of projected profits.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did not own shares of JPMorgan Chase as of the end of January; it did own shares of Citigroup and HSBC at that time. For a full list of the stocks in the fund as of the end of January, see the fund’s portfolio here.
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