For most investment banks, underwriting and broking equities is a poor business. Revenue rarely exceeds the costs of providing the service. Yet most institutions insist the business is essential. Standard Chartered just became a rare but welcome exception.
The emerging market lender has decided to close its institutional equities division, cutting 200 jobs and saving itself roughly $100 million a year. Most of the bank’s corporate clients will barely notice: last year, StanChart arranged equity issues worth little more than $2 billion in Asia-Pacific, according to Thomson Reuters, ranking a lowly 23rd in the industry league tables. Market leader Morgan Stanley handled almost ten times the volume in the region.
What’s surprising is that StanChart’s withdrawal from the business makes it an outlier. In Asia, the equities industry suffers from chronic overcapacity, forcing bankers to scramble for a small role on each deal, often in return for minimal fees. Low-cost electronic brokers are squeezing trading commissions. Banks have to pay for teams of advisers, salespeople and research analysts, while also investing in ever more-complex trading technology.
Even when banks do pull out entirely, others step in. StanChart bought its business from UK broker Cazenove in 2008. When Royal Bank of Scotland got out of cash equities in 2012, Malaysia’s CIMB bought the Asian business.
StanChart’s decision may reflect its wider predicament. Faced with slowing markets and rising bad loans, it is under intense pressure to cut costs. The bank also lacked a presence in the United States and Europe, where equities volumes are healthier.
Rivals, meanwhile, seem to be holding on in the hope that others will give up first. In the past, executives have justified losses in equities by arguing that the business was in “a buildout phase” or was necessary to support other, profitable, units. Those arguments look thin. StanChart’s overdue exit puts pressure on others to justify their decision to soldier on.