Investment firms scramble to survive as they come under pressure to cut overcapacity
The summer of 2018 is on the horizon, yet Beijing-based investment bank sponsor representative Wang Wei is feeling the chill after the IPO application he turned in and had worked on for the past couple of years was rejected by the Issuance Examination Committee (IEC) under the China Securities Regulatory Commission (CSRC) on Thursday.
Walking out of the CSRC building, Wang felt deeply disappointed, and soon began worrying about his future. "[The rejection] means that I have done nothing for the last one to two years," he complained.
The investment bank he works for is a small-scale one, whose business projects have shrunk rapidly against the low A-share IPO approval rate that has been biting since the new IEC, which examines IPO applications, was set up on October 17, 2017.
In the first quarter of 2018, the volume of A-share IPO applications approved by the CSRC declined dramatically, according to data compiled by China Banking News in April.
From January to March, CSRC greenlighted 32 out of 68 IPO applications, which translates as an approval rate of 47.07 percent. That number is in sharp contrast to an average approval rate of 77.87 percent set in 2017.
Plummeting revenues as a result of the lower approval rate, plus substantial labor costs, has ramped up pressure on domestic securities dealers like Wang's company.
And to survive under this tough situation, his firm has had to enforce a stricter compensation plan, including adjusting salaries and subsidies to balance costs and revenue.
"We used to think that people working at investment banks and securities traders were high-end talent, but we would never imagine ourselves being in the group that was reeling under the pressure of cutting overcapacity," Wang snorted.
But that's not even the worst scenario. Analysts have pointed out that more staff in investment banks will lose their jobs in the second half of 2018, as the low approval rate of IPOs will become a "normal state" following the government's tightened quality control on firms aspiring to get listed.
An industry winter
An industry insider told the 21st Century Business Herald that a medium-sized domestic investment bank in Central China has rolled out a new performance system, where employees who fail to meet the assessment standard will be demoted to a lower-ranking position, and the ones who post the lowest performance every quarter will be bottomed out.
Even traditional industry giants like Beijing-headquartered China Securities Co are sharing the sector's growing pain.
"The fixed allowance for sponsor representatives at China Securities has been declining, and the commission fee per project will also be payable by installments to control costs," said a Shanghai-based employee at China Securities.
Adding fuel to fire is the limited "way out" for industry practitioners, analysts noted.
"Under general market rules, many sponsors will look to job-hopping to escape the industry's 'winter.' But now the problem is that workers at small-sized investment banks are seeking to pursue a career in bigger securities traders, yet the doors to big traders have also been shutting down," said a headhunter in the financial services industry surnamed Li.
Li added that he has "a bunch of resumes" in hand, but can hardly find a suitable position to recommend to his clients.
Wang, who specializes in IPO applications, said he is scrambling to find alternatives in the business scope of investment banks. "I'm sure that if I only work in the niche sector of IPO applications, I will be kicked out in the end," Wang said.
Li added that this time, the challenges are even bigger than those in 2013, when IPOs were halted in China for almost a year, which led to many industry practitioners being laid-off. But another senior manager at a large-scale investment bank, who only spoke on condition of anonymity, disagreed with Wang.
"The development of the investment bank sector is periodic, and fluctuations are normal… This is not the most difficult time for us. I'm still optimistic," he said, citing the market opportunities brought about by China's industrial structural changes as well as the return of Chinese companies listed overseas to the A-share market.
Also, based on the growth momentum of China's economy, there is plenty of room for the business of investment banks to grow further, the senior manager stressed.
Sector reshuffle
A former official at the CSRC said that the tightened scrutiny will "reorganize" the large number of investment banks and will be good for the industry in the long-term.
Previously, "dragons and fish jumbled together in the sector because no matter what the attitudes of securities traders were, their IPO applications would obtain approval anyway," he said.
But now, only those talented and risk-resisting teams that provide professional services and work with "a great cooperative ability" are eligible to enter the first echelon, he said. And large-sized investment banks may have an edge in this competition.
"Some domestic securities traders only start preparing IPO documents when the deadline looms, and they copy materials everywhere rather than completing the process in an organized manner," the anonymous senior manager said.
"How can work done at the last moment guarantee good quality?" he asked.
Since October 2017, a total of 10 investment banks, most of them small-scale ones, have seen none of their projects get approval from China's securities regulator, the Economic Observer reported.
For example, Sinolink Securities and Zhong De Securities have each turned in six IPO applications since October, yet both of their approval rates still stand at zero, according to industry website choice.eastmoney.com.
Industry insiders said that against such a backdrop, the investment bank sector could actually evolve and transform with new business models.
"In the future, investment banks will emphasize that discovering valuable companies as the model for pursuing a large number of IPO applications no longer works," the former official noted.
More market opportunities will emerge after companies successfully get listed on domestic bourses, for example, through further financing and mergers and acquisitions, he said.
