What Hong Kong’s banker malaise signifies

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

After a frenetic period during the post Covid-19 bubble, investment banking business in Hong Kong has pretty much collapsed.

The bread-and-butter business of taking Chinese companies public in Hong Kong or the US screeched to a halt about two-and-a-half years ago, and there are few signs of revival. China M&A volumes have collapsed, and market liquidity on the Hong Kong stock exchange is also drying up.

No wonder then that this Bloomberg article blew up in the Hong Kong financial community.

Hong Kong Bankers Have Lots of Free Time, Anxiety as Deals Slump

Eighty-hour weeks. Multi-billion dollar deals. Huge bonuses. Until recently, life as an investment banker in Hong Kong was both intense and lucrative.

These days, it’s anything but. The big China deals that lined rainmakers’ pockets for decades have evaporated. Banks and law firms alike are cutting jobs. Those advisers that remain are chasing smaller deals and taking extended vacations.

“The golden era of high-flying investment bankers and advisers is pretty much gone,” said Veronique Lafon-Vinais, an investment banker for more than two decades who now teaches finance at Hong Kong University of Science and Technology’s Business School.

Bankers know that compensation will be poor for the second straight year, and some of them checked out months ago. Morale is rock-bottom. They still fire out rounds of email to give the impression of activity, but their mind is elsewhere. Like priests who have lost their faith, these financiers are performing a liturgy they don’t really believe in.

Yet amid this crisis of identity and purpose, they are also having loads of fun (Alphaville’s emphasis below):

One senior investment banker traveled overland from the Kyrgyzstan/China border to Turkey with his son on a $40-a-day budget as part of a month-long break. Another spent four weeks trekking in the fjords of Norway and the mountains of Canada on two separate vacations this year. A third took her family hiking in Italy and the Swiss Alps. Others took lengthy sojourns in New Zealand, Croatia and southern France.

Family time has replaced overtime. A banking executive revels in taking his daughter to hockey practice every week and having dinner with his wife. High-end gyms too are benefiting, as bankers exercise regularly during the work day.

Yet behind the travel and more relaxed lifestyle lies anxiety about the future.

 It is highly unusual — to put it mildly — for any self-respecting “senior investment banker” to admit (or boast) about spending $20 per day per person on a vacation. He must be expecting a doughnut bonus and is pre-emptively saving up, like a squirrel hoarding nuts for a long winter.

That said, it’s much easier for a senior banker to check out when they receive a fairly high salary. Hong Kong bankers don’t receive role-based allowances like their senior European colleagues, but salaries have risen a lot over the years. The impact of no bonus will be felt much less in 2023 than in, say, 2008. Higher fixed pay empowers some in the senior ranks to float around when they’re not busy.

The downturn has more serious effects, too. For one thing, it blows a gaping hole in Asia-Pacific investment banking financial forecasts.

Offshore China equity offerings are normally the largest item in capital markets and advisory for the region, accounting for 32 per cent of overall Asia-Pacific investment banking for the big five US investment banks as recently as 2020. But these equity underwriting revenues have collapsed as Beijing has clamped down on Chinese company flotations in the US and Hong Kong.

Meanwhile, most other Asia-Pacific markets are subscale and/or overbanked, making the economics challenging for the big banks. Only Japan arguably compares in size and liquidity, but for the international banks, those revenues are still normally dwarfed by those generated from Chinese companies. And although some bulge bracket banks have an A-share license entitling them to underwrite on the Chinese mainland, onshore business is thin gruel: the fees are much lower, and Chinese banks dominate the league tables. International banks are largely irrelevant.

The deal slowdown isn’t confined to Hong Kong, of course. Virtually every market is feeling the pain. But the Hong Kong reaction — as set out in the Bloomberg article — feels markedly different.

Most senior bankers in London and New York are working as hard as ever right now, trying to close deals that are struggling to cross the finish line. They are also counting on a rebound next year. There’s barely any time to rest: they’re anxious to lay the groundwork with clients to capture any new business and not to cede territory to their competitors. Indeed, the financial media talk as much about new hires as about lay-offs. Several banks are opportunistically using the downturn to recruit talent in Europe and the US at a lower sticker price.

So if you believe this is a cyclical downturn — even an unusually long and deep one — you keep hustling for business. That’s broadly still the attitude in most financial centres. (For anyone who thinks this is easy, investment banking “origination” is hard work. Not coal miner hard work, of course, but it can be exhausting, stressful, tedious, and hugely time-consuming, as well as demoralisingly frustrating.)

But if you’ve lost hope in a recovery, then you start doing all the things you’ve dreamt of doing: working out twice a day in a boutique gym, reacquainting yourself with your family, reliving gap year bacchanalia on the Hippie Trail. Or you start pursuing more harmful hobbies as a solace from career misery.

It therefore sounds like a growing number of Hong Kong-based financiers think the slowdown in China represents a structural shift, and are starting to throw in the towel.

For a contrarian, this capitulation is a very bullish signal on China and heralds a major recovery in deal activity! Otherwise, it’s a very bad omen for investment banking across the Asia-Pacific region.