Asia’s equity markets are well known to be heavily competitive, and that has only increased as international banks have decided to wholeheartedly make a fist of it in the world’s fastest-growing region.
But ambition does not a franchise make. Just ask UBS, ove rall top bank for equity sales and research this year’s Brokers Poll. The Swiss bank has been through a tumultuous few years following the global financial crisis, but to gather from the level of response it gained from regional and international investors, its strength as a business has never been better.
It was a particularly compelling result given the strength of responses this year. We received 4,431 of valid votes from institutional investors this year from 2,236 institutions, by far the largest number of responses we have ever received.
Amid exceedingly tough market volatility and conditions the Swiss bank stood tall, impressing with analysis and in particular strong sales efforts.
CLSA, winner of the poll for the previous four years, slipped to second place, and Citi jumped from fifth in 2010 to take third.
Competitive advantage
For Damien Horth, UBS’s head of Asia and Japan research since early this year, the result validates the bank’s continuing commitment to offering useful information on a global scale, combined with it rebuilding research teams after a trying period following the global financial crisis.
“Quality research is something that’s been in UBS’s DNA for a long time; it’s a critical part of the process of partnering with our key clients,” he says. “We have building blocks here for the long term. We rebuilt our India coverage in mid-last year, and we’ve invested into mainland China for the past two years.”
Horth notes that he is partway through the development of the Hong Kong and China research business, with plans to continue building the bank’s presence in both Hong Kong and in mainland China.
Shane Gunther, head of equity sales for Asia, adds that UBS has weathered this period well due to it retaining key personnel and rebuilding outwards from them.
“It’s no secret that UBS had a difficult period in the 2008 financial crisis. But during 2009 and 2010 we retained a core group of sales and research individuals, and they provided the bedrock for our rebuilding over the past two years,” he says. “And the people we have hired since have fit the philosophy of a globally connected business model, while we have also promoted people from within.”
“It’s important to remember that we’ve long been a successful advisory house that is committed to covering the region in full,” he adds. “Even when the Philippines stock market was only trading US$5 million a day we still had analysts and salespeople covering it. That consistency has helped ensure our appeal with clients.”
Gunther says that UBS has enjoyed a decent year for cash equities revenues despite sizeable levels of volatility amid yawing markets.
“We have increased our market share in seven of nine markets we cover in Asia and we expect double digit revenue growth from Asia ex-Japan this year, which we are happy about,” he notes.
Trading issues
It’s not all been good news for UBS. A few weeks after our poll closed the bank received some unwelcome publicity when it was revealed that one of its London-based traders had punched a US$2.3 billion trading loss through the bank’s balance sheet due to unauthorised trading activities.
However Horth and Gunther note that, aside from the surprise and a degree of disappointment about this having happened, it had little impact on daily operations.
“Nobody wanted such a loss to occur, but we refocused our team and our clients on the strength of UBS’s balance sheet,” says Horth. “And many realised that they hadn’t appreciated quite how strong it is; our capital ratios remain uncompromised and are among the highest in the world. Their focus quickly returned to bigger concerns about the global economy and financial markets.”
Gunther adds that while there was inevitable shock and then searching questions from UBS’s clients as to the details of what happened and how it occurred, clients throughout the region were generally sympathetic to the bank’s regional staff.
“They knew that it’s something that could happen to anybody, and that it didn’t impact the quality of the daily services we offer them,” he says. “I don’t think that the news undermined our relationship with clients here at all.”
CLSA’s future
In seizing the number one spot in this poll UBS beat four-time consecutive winner CLSA into second spot. CEO Jonathan Slone takes the drop in good grace however, noting that his brokerage continues to do what it has been doing for years: offering independent-minded research and utilizing one of Asia’s largest distribution platforms.
“We didn’t go crazy on our cost structure; we have kept our footprint the same and not gone crazy on bonuses or guarantees,” he notes. “As I’ve said before we are the ultra-vanilla of broking,” he says. “It’s a model that has served us well and will continue to do so.”
He points out that for most the year this model has worked just fine. “Until September we were ahead of where we’d been the previous year; then the bottom fell out of the market.”
However unlike in 2008, when the brokerage introduced staff salary cuts to keep down costs, Slone notes that nothing like that should be needed this year. “We are very comfortable where we stand, and that means we don’t need to look internally at cutting costs in most areas again.”
CLSA has in fact done a reasonable amount of expanding. Over the past two years it has built its research capabilities in the US, which Slone says are pretty much break even or profitable at this point, and been the dominant partner with a merger with French broker Cheuvreux.
It is also well on the way to greater cooperation with Chinese investment bank Citic Securities, which has negotiated a 20% stake in CLSA from its majority parent Crédit Agricole.
However core to its business will continue to be its research and sales. “We’ve picked up market share due to our international growth but we also possess longevity; we have stayed here when our competitors have moved in and out,” Slone says.
Time will tell
A key issue for all houses vying to be regarded as the best broker in Asia will be for the two to retain their best people. This is, as always, a challenge, especially as several houses have tried to build equities teams over the past two years.
But big, established houses are far better set to see out currently choppy markets than new entrants that are most likely running loss-making, smaller operations.
Horth of UBS notes that while conditions have been poor of late this will put pressure on the numerous recent start-up cash equity operations.
“The market has not started well in the fourth quarter and it has decelerated,” he says. “As we enter 2012 the current level of market volumes is going to heavily test the commitment of new market entrants.”
“Cash equities is ultimately a business of scale because it’s a transparent and very competitive market,” agrees Gunther. “The ability of new entrants to succeed will inevitably be placed into question when market volumes drop. I think several of these newer players came to Asia and thought it would be relatively easy to build a business. But it’s been very tough, and is likely to remain so for some time to come.”
Gunther predicts that this will lead to a thinning of the herd of regional cash equities players, noting that signs of this are already occurring.
Meanwhile Slone says he is not bothered about increased competition at all. “I don’t think our competitors are our issue; our real issue is to keep doing what we say we do, and deliver our research to the right places,” he says.
Another challenge for the whole industry will be increasing regulation. While the world’s current financial woes stem largely from credit issues there is a likelihood that the resulting drive for regulation will impact equity markets and the manner in which they operate too.
“My biggest concern for the coming months is the possibility of excessive regulation,” says Horth. “ Our industry has made mistakes over the last decade but adding too much red tape risks impeding free trade and capital flows, which would be bad for businesses and hence economies across the region.”
Despite markets looking particularly grim this year, Asia and its markets remain a relatively bright spot for investors across the world. The key challenge for the likes of UBS and CLSA will be to keep convincing these disparate fund managers that they are the best people to give them access.
