Decade of weak profits prompts rethink for global banks in China

By Lawrence White HONG KONG(Reuters) - A decade of poor earnings in mainland China is forcing global investment banks to shift focus from areas dominated by local players such as stock market listings to complex but more lucrative credit products. Citigroup , UBS Group AG and Morgan Stanley are among the big lenders hoping a jump in demand for securitisation and corporate bond underwriting will help transform their fortunes in the world's second largest economy. Securitisations, whereby assets such as car loans are packaged into a new security and sold, have surged to 213 billion yuan (22 billion pounds) in the first 10 months of 2014, a figure 13 times bigger than their total last year, Moody's said in a report this week. These structures, which command a higher banking fee because of their complexity, are becoming popular as they allow banks to shift credit risks to investors and offer new funding sources to companies as China's economy slows. This nascent market offers a large potential source of new revenues for foreign players, emerging at a time when many of them are looking to reshape their joint ventures with local partners in mainland China. "Some banks are having a rethink. These ventures were set up with a ten year shelf life, and they have an opportunity now to find a structure that will be more effective," said Keith Pogson, head of Asia Pacific Financial Services at consultancy EY. Citi has led the charge this year by completing 3 billion yuan of asset backed financing for e-commerce giant Alibaba . That deal is seen as paving the way for a string of similar transactions by foreign banks, which are more experienced in these structures than their local counterparts. "The Alibaba deals showed that China's regulators are comfortable with the structure," said Kenneth Koo, Deputy General Manager of Citigroup's China joint venture, Citi Orient Securities. UBS and Morgan Stanley are also pushing to diversify revenues by focussing more on the debt market, according to people familiar with their strategies. The two banks declined to comment for this story. CONSTRAINTS Beyond focussing on new services like securitisation, some banks are looking at more radical changes to their joint ventures. These include bringing in a third partner who would hold a 2-3 percent stake in the venture, or selling their entire stake back to the Chinese owner before seeking a new partner according to EY's Pogson. That's because since 2007, foreign investment banks operating through joint ventures with local partners in China have struggled to make much headway, with a Reuters analysis of data from China's securities regulator showing they averaged a collective loss of 21 million yuan a year. Citi Orient Securities leads the foreign players yet ranks 86th out of 117 securities firms operating on the mainland and made just $5.21 million (3.31 million pounds) in the first half of 2014, a mere 0.2 percent of Citi's global investment banking profits. Other global heavyweights were less successful - joint ventures involving Credit Suisse and Morgan Stanley made a loss, hampered by regulatory constraints. China forces foreign investment banks to operate in partnerships with local firms and restricts the range of business those ventures can do to protect the domestic players, who now dominate the market for stock market listings. Foreign lenders who got in early, have made the most money. Morgan Stanley sold in 2010 its 34.3 percent stake in China International Capital Corp for $1 billion, having paid just $37 million for it when the Chinese investment bank was founded 13 years earlier. It then went on to link up with a different partner, though that joint venture is currently loss making. Goldman Sachs and UBS, which enjoy greater control of their joint ventures because they also entered the market early have also been moderately successful. Some banks, including Bank of America Corp and HSBC have avoided investment banking partnerships altogether. However despite poor earnings and a tough regulatory environment, most foreign players in China continue to prefer to tweak their strategy and look at new opportunities such as securitisation, rather than lose their hard-earned investment banking licence, bankers told Reuters. "There's no question that it's very difficult in China, but I wouldn't give up on the joint venture opportunity- in almost every industry it's the best way for now to access the market," said Christian Edelmann, head of financial services Asia Pacific at consultant Oliver Wyman. (Editing by Lisa Jucca and Rachel Armstrong)