Investment Banking - Lecture-1 (08 09 2014)

8/10/2019 Investment Banking - Lecture-1 (08 09 2014)

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Investment Banking

INTRODUCTION TO INVESTMENT BANKING

Reading Reference

1- Chapter 1 - Investment Banking (Pg 1-15)

2- Chapter 8Investment Banking (Pg 1 -09)

3- Investment Banking Association of Pakistan (www.ibap.biz)

4- Investment BankingFact Sheet Pakistan (www.sbp.org.pk)

5- Newspaper Articles (Business Recorder)


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Investment Banking

Economic Wealth

Savings +Financial Investment = Economic Wealth/Capital


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Investment Banking

Generation of Capital

Income

Expenses

SavingsInvestments

Economic Activity


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Investment Banking

Generation of Capital


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Investment Banking

Generation of Capital contd.

If rate of savings < investment requirements

What will happen???


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Investment Banking

Generation of Capital contd.

Dependency on External Source of Fund Generation

External Debt (IPOs, Private Equity)

Bank Borrowings


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Investment Banking

Financial Intermediation(Contd.)

Banking Framework

Commercial Banks

Islamic Banks

Investment Banks

Development Finance Institutions (DFIs)

Housing Finance CompaniesBrokerage Houses

Microfinance Banks

Financial Market Framework

Securities Market

Capital Market (LT Securities i.e. Stocks, IPO etc)Money Market (ST Securities i.e. Inter bank deposits, T-Bills etc)

Derivates Market

Forex Market


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Investment Banking

Investors

/

Savings

Forex

Marke

t

Banks/FI

Capital Market/

Money Market

Business

Activity

Economic

Activity

Commodity/

Futures Market

Real

Estate/

Gold etc

Institutional Intermediation in Capital Flows


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Investment Banking

Introduction

Investment banking is a field of banking that aids companies in acquiring

funds. In addition to the acquisition of new funds, investment banking also

offers advice for a wide range of transactions a company might engage in.

Mergers & Acquisitions

Corporate FinanceAdvisory

Capital & Allied Market Operation

In brief:

Investment Banking tries to match people who have money to

those that need money


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Investment Banking

History of Investment Banking

Evolution of American Investment Banks

The First Investment Bank formed during in late 1800 focused on raising funds

for the US Govt. to finance on-going Civil War

End of World War 1

Commercial Banks were preparing for Economic Recovery

Demand for Corporate Finance where corporate entities focused on raising

funds through stock market/bonds instead of opting for commercial loans due to

low cost of funds & higher tenor

Commercial Banks started to acquire brokerage business in late 1920s as

affiliates through holding companies

Abnormal profits were made by commercial banks through short selling in

stock market

Public joined the trend

Bubble busted in Oct 1929


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Investment Banking

History of Investment Banking(contd)

Evolution of American Investment Banks

Banking Act of 1933 (Glass Steagall Act)

Restriction on Commercial banks from engaging in Securities, underwriting or acting

as agents

Enhanced Role for Investment Bank

Puts Restriction on Investment Banks to accept deposits & Corporate Lending

The act helped Investment Banks to flourish in Capital Markets through the basket of

goods under their domain

Universal Banks

Section 20 subsidiaries by 1990s

Repeal of Glass Steagall Act through Gramm-Leach-Bliley Act in 1999

Removal of anti-affiliation restriction on Commercial Banks

Merger of Citibank, Travelers & Salomon Smith Barney to form the Universal Bank


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Investment Banking

History of Investment BankingContd

European Banks

Different from Universal Banking Concept

Clear roles of Commercial and Investment Banking

Barriers relaxed in 1986 due to rapid globalization

Owned subsidiaries

Megers


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Investment Banking

Investment Banking in Todays World

Innovative Offerings (i.e. DIB Orient Oil Exploration Deal)

No Geographical Boundaries

Performing on 3 broad segments

Equity Market Activity

Debt Market Activity

Mergers & Acquisitions Activity (M& A)


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Investment Banking

Investment Banking in Pakistan

Started operations in 1987

Regulated by SECP

Approx. 10 banks are currently operational

Wide range of activities i.e. Lease Finance Solutions, Deposit/Mutual FundProducts, IPOs, Advisory, M& A etc

Market share mere 4.6%

Crescent Investment Bank was the first licensed investment bank


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Investment Banking

Investment Banks in Pakistan

Atlas Investment Bank Limited (merged to become Atlas Bank)

Asset Investment Bank Limited

Al-Towfeeq Investment Bank Limited (merged)

Crescent Investment Bank Limited (merged to become Crescent Bank)

Escorts Investment Bank Limited

Fidelity Investment Bank Limited (merged with Trust Investment Bank)Invest Capital Investment Bank Limited (Formerly Al-Zamin Leasing Modaraba)

Franklin Investment Bank Limited

Islamic Investment Bank (Closed on grounds of Corruption/Fraud)

Jehangir Investment Bank Limited (Merged to become JS Bank)

Orix Leasing & Investment Bank (Pak) Limited

Prudential Investment Bank Limited (Currently IGI Investment Bank)Security Investment Bank Limited

Trust Investment Bank Limited

First Credit & Investment Bank Limited


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Investment Banking

Investment BankingMandate by SBPThe scope of the investment banks' activities as described under SRO 585(1)87 are as follows:

a) Money market activities, including the issuance of short term COIs or own paper of not less

than 30 days maturity.

b) Capital market activities, including trading in equity and non-equity instruments,underwriting floating and managing mutual funds, providing margin loans and offering cash

management accounts;

c) Project financing through investments in projects and the provision of guarantees; and

d) Corporate financial services, such as advisory, placement of debt and equityinstrumentation locally and abroad.


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Investment Banking

Diff b/w Investment & Commercial Banks

1. Investment banks cannot accept deposits of less than 30 days maturity, issue cheque books oraccept foreign currency deposits of less than three months. Term deposits can only be acceptedby issuance of Certificates /Letter of Investment.

2. Lending is restricted to demand finance only and investment banks cannot provide overdraft

lines.

3. Investment banks cannot operate letters of credit or provide trade finance.

4. Investment banks are subject to a 14% liquidity reserve requirement (including minimum of1% cash requirement) as against the requirement applicable to commercial banks to keep 20%(15% in cash and 5% in government securities).

5. Investment banks are required to have a minimum paid up capital of Rs.500 million whereascommercial banks are subject to a minimum requirement exceeding 3 billion.


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Investment Banking

Debt Financing - 70%

Mergers & Acquisitions - 10%

IPOs - 15%

Restructuring - 05%

Common IB Transactions in Pakistan

The major source of an investment bank's revenues are: -

fund based, i.e. they come mostly from financing activities, which arenot in the traditional domain of investment banks.

This makes profitability highly susceptible to changes in interest rates.

The decline in profitability can be attributed to the rise in interest rateswhich have pushed the cost of funds up thereby squeezing the netinterest margin.


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Investment Banking

Investment BankingChallenges

Historically, in the developed countries, Investment Banks were given protection byrestricting the Commercial Banks from getting into high-risk activities pertaining to CapitalMarkets and those activities were left for more specialized Investment Banks. By the timethose restrictions were removed (Sixty six years later 1933 -1999), Investment BankingSector had already grown to the size that could defend for themselves and compete withlarge Commercial Banks In the US, the Glass-Steagall Act of 1933 prevented conflict ofinterest between Commercial Banks and Investment Banks. It restricted the asset powers

of Commercial Banks to underwrite, buy and resell risky business securities andInvestment Banks were prohibited from engaging in Commercial Banks' businesses.

Although Investment Banks in Pakistan have never favored or demanded Industry SpecificProtection Regimes, the fact remains that in the pre SECP era, Investment Banks were notprovided any protection as was available in other developed countries, at the infancystage. Another reason why the Investment Banks in Pakistan could not flourish initially wasbecause it was perceived that Investment Banking was about mega Mergers and High-Worth activities only, which were not available in the Country at that time. The relativelylower end activities like Intermediation in Securities (Brokerage) were not focused upon byInvestment Banks at that early stage


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Investment Banking

Term ProjectGlobal Financial Crisis2008

(Impact on Global Economy & Role of Investment Banks)

U.S Markets

Background

-Housing Boom

- Sub Prime Mortgages

-Role of Mortgage Backed Securities

- Collapse of Lehman Brothers

-Impact of US Financial Markets

- Impact on General Economy

-Chapter11 act

-Public Entities benefitting from Chapter 11- Role of US Govt. / Federal Reserve Bank


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Investment Banking

Term Project

Global Financial Crisis2008


European Markets

-Impact on Overall Economy

-Key affected countries

-Layoffs

-Deflation

-Impact on Financial Markets

-Entities Defaulted /Declared Bankruptcy

- Role of U.K and allied Govt.s for improving situation


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Investment Banking

Term Project



African & Middle East Markets (MENA REGION)


-Key affected countries-Impact on Oil Prices (What happened to Brentt & WTI index and its impact)

-Deflation

-Property Downfall of UAE

- Default of Saad Al Gousebi (Largest Conglomerate of KSA & impact on ME markets)


- Role of GCC Governments for improving situation


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Investment Banking

Term Project



Asian Markets


-Key affected countries- What happened to CHINA??

-Impact on Airline Industry (JALetc)

-Impact on Currency


- Role of Asian Governments for improving situation


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Investment Banking

Term Project



Pakistani Markets


-Key affected entities-Impact on Currency

-Inflation or Deflation


-Impact on FOREX reserves

-Impact on Financial Markets

- Role of Pakistani for improving situation


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Investment Banking - Lecture-1 (08 09 2014)

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Transcript of Investment Banking - Lecture-1 (08 09 2014)