A financial crisis is never going to be great for investment banks, but this one has created unprecedented opportunity for those in Asia to accelerate expansion plans both within and beyond the region. Alice Yan investigates

Banks based in Asia have no doubt suffered from the economic downturn, but relatively speaking they have lost less and recovered faster. Taking advantage of the weakened competition, the top Asian banks have not only consolidated their lead in the region but have begun expanding into Europe, the US and the Middle East.

Peter Siembab, head of Nomura’s IBD transaction legal for Asia (ex-Japan), said the big question will be whether banks expand through organic growth or acquisitions. “It all depends on firm strategy and the opportunities that are presented by the market,” he says.

The availability of attractive acquisition targets in the past two years has prompted a race among the growth banks to snap up these opportunities. Leading the trend is Japan-based investment bank Nomura. It has sought to expand its presence within and beyond Asia through the purchase of Lehman Brothers’ assets throughout the Asia-Pacific and across Europe and the Middle East.

Macquarie Bank isn’t far behind: the purchase of US boutique investment bank Fox-Pitt Kelton Cochran Cariona Waller in 2009 was its third acquisition in North America within six months. And recently, Mitsubishi UFJ and Morgan Stanley are discussing merging their Japanese operations.

While Chinese and Indian banks (though on a lesser scale) have also jumped on the acquisition bandwagon, the frenzy has begun to recede as the global economy stabilises and targets become more expensive. Meanwhile, some banks have stuck firmly to their strategy to grow organically. Generally speaking, organic growth is less risky and potentially less rewarding: growth is slower, especially in the short to medium term, and there is a risk of being overtaken by faster-moving competitors. But Standard Chartered, for example, has taken advantage of the changing competitive landscape in a different way. Instead of entering into new markets in the region, it has built out new capabilities and practice areas where competition was previously more concentrated.

Prior to the crisis, the bank only had an occasional hand in the capital markets, but now it offers fully fledged investment banking services. Its acquisitions and organic growth initiatives have been funded largely by record-high and repeated share offerings.

Expansion prospects for main players

The ‘bulge bracket’ in the investment banking industry has been dominated by the same big players for the past two decades. But consolidations and collapses over the past two years have drastically altered its composition. The status quo of the bulge bracket has now come under question, at least in Asia.
Major regional players like Nomura and Macquarie have gone toe-to-toe with the bulge bracket members still left standing in the region. But will these banks be able to compete with the bulge bracket in the UK, Middle East or US markets?

It might be safe to conclude they currently have a firm foothold in these markets. Nomura reported earlier this year that for the first time, it brought in more revenue from outside Japan than from within, signalling that its overseas acquisitions may be paying off. But once the initial publicity-assisted growth loses steam, the long-term expansion prospects for these banks look less assured.

In an industry based on client loyalty, referrals and repeat business, it is easy to be sceptical about whether new entrants can win over long-standing clients of the established investment banks. Many of the established players have consolidated and integrated, and now pose even larger competitive challenges to the incumbent market players.

But new entrants may have an edge in a matured industry. Nomura’s Siembab says that there is a real attraction in the market to the entrepreneurial spirit, and that Asian banks are less steeped in an established order and can offer clients a partnership with great flexibility towards particular client needs. “Clients may want a change from the bureaucracy of the more established players,” he said “They may want to work with a nimbler, more adaptive organisation rather than [with] a supertanker.”
But even the most ambitious Asian banks have limited their growth aspirations for the US market to organic – with the exception of Macquarie. As the US banking industry has always been tightly shut, it is a real challenge to break into the top-tier unless you have been there from the start.

In-house counsel roles change 

Rapid developments in the financial industry have transformed the make-up and function of in-house legal departments in growing Asian banks. During the financial crisis, the most obvious impact was redundancies, restructuring and integration. For those who stayed, Siembab says, day jobs became significantly more complex and multifaceted than before. “In-house counsels had to deal with the ordinary course of business of covering transactions,” he said. “But they also had to deal with legal and regulatory issues arising out of the financial crisis, shifting and evolving markets and changing personnel, both internally and among other banks.” Now that the market has stabilised, banks that have built up their businesses are correspondingly building up their legal and compliance teams.

The role in-house lawyers play in these banks, as they expand in the recovering market, has also changed. In-house counsel must refine existing infrastructure where the business has made acquisitions, or build it from scratch where the business has entered into new market segments. Siembab said the main challenge for lawyers is that they must build out the sometimes complex infrastructure needed to support the business while it is operational.

“This may range from developing new policies, procedures and analysis to the nuts and bolts of reconfiguring an internal computer program,” he says. And in-house counsel has yet another new responsibility: they will need to be at the forefront of understanding the significant and material changes in the regulatory framework of many countries that is expected to come out of the financial crisis.

Evidently the banks are now demanding much more of their in-house counsel. Legal teams are expected to juggle multiple tasks, including advising on growth and integration issues, building infrastructure, keeping up-to-date with regulatory changes, and covering ordinary course transactions. It follows that in-house counsel now play an increasingly significant role in the main business.
It will be interesting to see whether these banks will restructure legal departments to reflect this change. Siembab says some may depart from the traditional method of having a separate legal department, and shift the legal function so that it is closer to and more integrated with the business.

Closer proximity and more direct interaction between the legal and business aspects of companies may also increase the control and oversight of the business, facilitating more efficient interaction in executing a transaction. “There is a real difference between a lawyer and banker sitting at the same desk and a legal department that is a twenty-minute bus ride from the main business,” noted Siembab. ALB