Profits at Goldman Sachs, Morgan Stanley and a clutch of other western banks in China fell sharply last year, as Covid-19 lockdowns and geopolitical tensions thwarted hopes that their operations in the country might finally start to be lucrative.
Credit Suisse, Deutsche Bank, Goldman Sachs and HSBC reported losses in their China-based units in 2022 and Morgan Stanley’s profits fell, figures published by the lenders and seen by the Financial Times show.
Among a group of seven Wall Street and European groups with investment banking units in mainland China, JPMorgan and UBS were the only banks whose profits rose, though HSBC’s unit lost less money than in previous years.
The western banks have spent years investing in small and often lossmaking operations in China in the hope that a foothold in the world’s second-largest economy would eventually prove profitable. But as relations between Washington and Beijing deteriorate, the figures show how difficult that bet has become.
“These guys established these [mainland units] when China was all about growth . . . and you didn’t have the geopolitics in the background”, said a veteran Hong Kong financier. “The fact is a lot of that has changed.”
The lacklustre performance marks a reversal from 2021, a record year for investment banks globally, when six of the seven made a profit in their mainland operations after Beijing allowed them to start taking full ownership of the units for the first time following a trade deal with the US.
The lenders cited US-China tensions, Covid-19 restrictions, China’s property crisis, reduced onshore stock trading, restructuring costs and fierce competition for the losses and meagre returns, corporate filings show.
Progress has stalled just as global banks assess how hard their businesses in China might be hit by US sanctions and greater scrutiny from Washington. The banks have also received requests from Chinese regulators to rein in executive pay and defer bonuses, in line with President Xi Jinping’s “common prosperity” drive.
Some have started holding back on work that might have otherwise proven lucrative in order to avoid running up against US sanctions.
“AI is the next big thing and five years ago, we would’ve spent a lot of time covering Chinese AI companies,” said a top executive at a western investment bank in Hong Kong. “But now, no. They might end up on an entity list in the US.”
The seven banks collectively accounted for just 0.1 per cent of the Rmb395bn ($56bn) revenue made by a total of 140 investment banks in China last year. The mainland units do not represent all of the money the banks are making in China because profits from some business lines, including advising Chinese companies on US or Hong Kong listings, are often booked elsewhere.
“As long as the major US banks can build up their branding among high net worth individuals in China, they can potentially grow their business substantially in China’s $10tn asset management sector,” said Victor Shih, professor of Chinese political economy at the University of California San Diego. “It will be tricky for them to navigate the regulatory landscape in both the US and China.”
JPMorgan’s chief executive Jamie Dimon is due to visit China this month for the first time since he was forced to apologise in 2021 for saying the bank would outlast the Chinese Communist party. He is expected to arrive in Shanghai on May 30 for a series of conferences and then travel to Hong Kong for meetings.
The global banks did not win a significant amount of business in the booming market for initial public offerings on mainland exchanges in the first half of last year. Listings there jumped even as New York, London and Hong Kong exchanges struggled with a drop in IPOs.
Executives at two of the banks said their institutions were hesitant about participating because underwriting standards were sometimes lower than in other markets.
On the Shanghai Stock Exchange’s fast-growing Star board, which has raised Rmb17.9bn from 11 IPOs in the first quarter of this year, banks are required to invest their own money in the public offerings on which they advise.
New York listings of Chinese companies, once a lucrative source of fees that western banks held up as justification for their lossmaking mainland presence, have dwindled after a regulatory crackdown from Beijing and more stringent audit checks from US regulators.
Global banks still dominate the market for Hong Kong listings, but Chinese rivals are beginning to challenge that position. Chinese banks are increasingly “trying to squeeze in” by telling clients they should hire a mainland bank as well as an international one for a Hong Kong IPO, a senior executive in the mainland business at one of the global banks said.
The China units are tiny in the context of global banks’ overall operations. JPMorgan’s China Securities unit made a $38mn profit, compared with the bank’s overall $38bn profit last year. Goldman’s net loss in China of $58mn came in the context of an $11.3bn profit globally.
HSBC said it was “fully committed” to its mainland securities unit, which was “showing good momentum”. The other banks declined to comment.
More foreign banks are in the early stages of setting up mainland operations. Citi applied to establish a fully owned securities unit in 2021 but has not received approval for it. Standard Chartered was awarded a licence to set up a fully controlled securities unit in January.
Despite the headwinds, the western lenders are unlikely to abandon their mainland units. “They’ve planted the seed,” said one senior banker. “It’s expensive to get licences and hire people. I don’t see them exiting the market at all.”