JPMorgan looks to exit China securities joint venture
US investment banking giant is seeking to exit its mainland securities joint venture after years of lacklustre profit growth, but remains committed to China
JPMorgan is in talks with its Chinese partner to sell back its stake in JPMorgan First Capital after six years of partnership, as the joint venture securities business has not performed to expectation, having delivered three years of lacklustre profits whileseeking new capital investment.
The US bank’s spokeswoman in Hong Kong said that China remains a key market for the bank. It will evaluate its options to continue its onshore investment banking presence if the JV dissolves. Meanwhile, the bank’s ability to execute outbound deals for Chinese clients from Hong Kong will remain unchanged.
The discussion between JPMorgan and Shenzhen-based First Capital have come about after years of flat profit growth dating back to 2013, even as JPMorgan refers all China onshore investment banking business to the joint venture.
The joint venture brought in 24 investment banking deals in China in 2015, making a net profit of 17.6 million yuan, compared to 27 million yuan in 2014 and 16 million yuan in 2013.
For 2015 it ranked 17th against local mainland peers for bond underwriting business, and 35th for equity capital markets activities, according to China Securities Association’s data.
“China’s capital markets were volatile in 2015. Regulators had frequently launched intervention measures. Initial public offerings were suspended and resumed at the year end,” JPMorgan First Capital said in a statement. They added that the business was weighed by an undifferentiated product range, and could develop better with more capital.
Pu Dongjun, an analyst at Changjiang Securities, said the business has growth potential, even as the Chinese parent’s own results have been sliding.
“At the same time as it focused more on traditional investment banking activities, it has been developing innovative businesses, such as securitisation,” Pu said. He added that both its equities and bond underwriting business saw growth in the first half. “The company has a good project pipeline. The growth potential is there.”
JPMorgan underwrote three jumbo-sized deals for Chinese clients in September. These include participation in the US$7.4 billion IPO for Postal Savings Bank of China; leading a US$1.4 billion IPO for China Merchants Securities and a US$2.4 billion bond and equity offer for Chinese online travel website Ctrip. The bank ranked as Asia-Pacific’s fourth largest for international bonds and third largest in regional non-Japanese and Chinese onshore equities.
The discussions are at an early stage, First Capital’s spokesman said in a statement, referring to the buyback of the JV stake from JP Morgan.
JPMorgan contributed 33 per cent of the 800 million yuan of the JV’s capital. The remainder was contributed by Shenzhen-based First Capital, a mid-tier Chinese broker with 30 branches in China.
If the dissolution of the joint venture goes ahead, JPMorgan will lose its ability to execute onshore investment banking deals until a new option is found.
But the US bank’s spokeswoman stated the bank is committed to serving Chinese clients.
JPMorgan chief executive Jamie Dimon told shareholders earlier this year he has a negative near-term outlook for the Chinese economy, but was more upbeat on the longer term.
“We believe it likely that, in 20 to 25 years, China will be a developed nation, probably housing 25 per cent or more of the top 3,000 companies globally. Going forward, we do not expect China to enjoy the smooth, steady growth it has had over the past 20 years,” Dimon said.
“Reforming inefficient state-owned enterprises, developing healthy markets like we have in the United States with full transparency, and creating a convertible currency where capital can move freely will not be easy. There will be many bumps in the road.”
JPMorgan maintains a US$19 billion exposure to China. It has a wholesale banking operation, a fund joint venture with a Shanghai-government-owned investment vehicle, a string of representative offices and a new partnership agreement with the Postal Savings Bank of China.