Malaysian Banking On a New Chapter?

Adopted from Malaysian Business (Jan 16th-31th, 2007)- by James S

January 1, signified and historic occasion for the Malaysian financial landsdcape, with the collectively upgrading of Local Mechant Banks (MBs), Universal Brokers (UBs) and Discount Houses (DHs) transformed into Investment Bank (IBs).

To recap, in March,2005 Bank Negara Malaysia (BNM) had announced that framework for the creation of IBs. Under it, an IB can be formed via various merger permutations, ie. via merger of:

• A merchant bank and stockbroking company within the same banking group; or
• Two stand-alone discount houses with one stockbroking company; or
• A universal broker (UB) with the one discount house

On Dec 29 last year, Bank Negara Malaysia (BNM) and Securities Commision (SC) annouced that:

• All bank-backed discount houses now been absorbed by the merchant banks within thier banking groups. With respect to the rationalisation of merchant banks and stockbroking groups., all the entities concerned have obtained the neccessary approvals to transform into IBs.
• KAF Kenaga Bhd, K&K Kenaga Bhd, Hwang-DBS and OSK Securities have obtained a merchant bank licences and necessary approvals to transform into IBs
• The remaining universal brokers are still in the process of meeting the necessary pre-requisites to become IBs.

What really is an IB?

• IBs - actually differ from the commercial bank, which mainly take deposits and make commercial and retail loans.
• IBs - engage mainly in public and private market transactions for corporations, government, and investor.
• IBs - also advise and assist clients with specialised industry expertise (such as technology and real estate.)
• IBs- do securities businesses such as trading, securitisation, financial engineering, merchant banking, funding, investment, management and securities services.IBs earns fees, commisions and gains from the principal transactions.

What are the differences among the other bankings with new IBs introduction locally:

• Merchant banks (MBs) - are allowed to take corporate clients deposit. Apart from investing the firm's own capital as well as funds raised from outside investor, MBs also do syndication loans and project financing for clients.
• Universal broker (UBs) - are involved in corporate advisory business (such as corporate restructuring and M&As) and raising capital via equity and debt markets. They are also involved in equity and debt markets broking and underwriting businesses.
• Discount Houses (DHs) - basically help clients to raise capital via the debt market, apart from being involved in the debt market broking business.
• Niche brokers (NBs) - are involved in the equity market broking business. They are also allowed to undertake corporate advisory business with some restriction.

Type of IBs

To look into the future roles of the local IBs, one could perhaps look at how the IB industry has developed in US. Berfore Gramm-Leach-Bliley (GLB) Act of 1999, there were basically two types of IBs:

• The full-serviced IBs - offer clients a wide range of services including underwriting, M&A advisory, trading, merchant banking, securities services, prime brokerage, asset/investment management and research. (this large IBs such as Godlaman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. In Malaysia context, AmInvestment Group-AIGB is likely classified under this category.)
• Boutinque IBs - only focus on particular segments. Some specialise in M&As some in financial institutions and some techonology-base businesses. (e.g. Sandler O'Neill works on the financial institutions segment. Lazard specialises in asset management.)

Local IBs Challenges

Local IB industry will be facing intense competition forstered by:

• Regulatory changes (e.g. the existing IBs will face keen competition from UBs-turn-IBs eager to get a shae of the pie)
• Globalisation (local players facing competition from the full-fledged,foreign stockbrokers); and
• Technology advancements