Goldman Sachs still wants to be number one. So far, so typical for the bank, which likes to trumpet its top ranking in global league tables in each earnings update.
But the ambition here relates to Asia’s equity capital markets — a market increasingly dominated by Chinese business the US bank cannot get. Is this brash overconfidence, or a shrewd bet on the long-term future of what has become the world’s biggest equity capital-raising region?
Goldman’s decision to maintain its top spot target follows a shocker of a year in 2016, where the bank failed to even make the top 10 in Asia-Pacific, according to Dealogic — after two decades in which it had never dropped lower than fourth.
Its 15th place finish in the region left it unable to tout a global number one ECM ranking for the first time in six years. Even more galling will have been the fact that Morgan Stanley finished top in Asia last year, one of only three non-Chinese banks to make the grade, ahead of Deutsche Bank in fourth and UBS in seventh.
Put a league table in front of a banker who cannot boast the top spot, and brace for a stream of reasons as to why the tables do not matter, how any old bank can get credit, why no one follows them any more and why what really matters is which bank made money.
In Asia, which holds the global record for bookrunners credited with an initial public offering — 26 to sell $2bn of equity — and where deal fees can still amount to a nominal rupee or renminbi, that last point has real merit.
But league tables can still speak to a bank’s ambition, and in Asia, its assessment of a rapidly changing — and growing — landscape. In the first half of this year, ECM deals in Asia totalled $136.7bn, putting the region ahead of the US on $126.6bn.
Equity business is proportionally more important in the region too, since it makes up on average about 40 per cent of the fee pool, compared with 25 per cent globally.
Goldman’s poor showing last year was partly due to its absence on some key deals, including a $6.6bn convertible bond from SoftBank that helped the Japanese dealmaker cash out some of its Alibaba stake.
But the sheer volume of mainland China deals is a longer-term threat to Goldman and its international rivals, who get only the smallest share of this business. In the first half of this year, onshore China accounted for 46 per cent of all equity deal volume in the region.
Last year’s 15th place prompted a quiet discussion among the bank’s senior ranks in the region: was a commitment to aiming for first place in the equity business worth it? Or would it too, like so many rivals, have to learn to box clever?
Western banks have since the financial crisis focused on their strengths and on balance sheet discipline. That is especially necessary in Asia, where each country needs a genuine local presence.
Big international banks also face powerful domestic competition. In any good year for Japan, Nomura and Daiwa Securities muscle their way back into the league table top 10. The same goes for China, only more so because of its size. No international bank makes the top 10 when ranked by China-related equity revenues.
Western bankers frequently point out that most onshore deals are not business they would want, partly because profits are so small that they make Hong Kong’s miserly average fee of 2 per cent look good (New York’s is 5-7 per cent). Also, they argue that the reputational risk from much onshore business is just too great.
Goldman’s top-spot ambition therefore implies it believes either the Chinese market will open to foreigners or that it can win more business offshore in Hong Kong.
Probably both are true to some extent. The bank has long pushed for foreign companies to be allowed majority control — suggesting it wants a greater presence onshore. If it also wants a greater share of the onshore equity business, that is a bet that deal quality will also improve.
“Number One is what we do. It’s why people want to work here,” says one Goldmanite. “And we think there is more than enough profitable work for us with Chinese companies who want exposure to international markets.”
This year the bank has fought back, reclaiming the region’s top spot ahead of China’s Citic Securities and CICC, as well as Morgan Stanley and UBS. The busiest months in the Hong Kong equity calendar — its regional home turf — are to come, too.
But it will have to fight harder still against its Chinese rivals to retain that regional crown for long.