A challenging year for investment banks

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IF numbers tell a tale, then perhaps the recent poor results of investment banks (IBs) may indicate that the investment banking party is over. The financial results for the recently ended June quarter show that IBs are facing a challenging time indeed.

Take, for example, one of the top IBs, CIMB Group Holdings Bhd’s CIMB Investment Bank Bhd (CIMB IB). For the six months ended June 30, 2014, CIMB IB — one of the pillars of the group — saw earnings drop 90.5% year-on-year.

It registered a profit before tax of RM13 million compared with RM137 million a year earlier. Its poor performance was mainly due to rising overheads, which increased RM101.7 million, or 24.5% y-o-y, to RM516.2 million. The IB segment also saw its net non-interest income drop marginally 3.7% to RM494 million in the same period.

The latest performance is in stark contrast to 2012, its “best ever year”. According to its 2012 annual report, revenue and profit before tax (PBT) rose 16.1% and 18.3% respectively, allowing it to remain Asean’s top investment bank. It registered PBT of RM309 million.  

That year, the Malaysian market saw some of the world’s biggest initial public offerings (IPOs). The three major IPOs were those of Felda Global Ventures Holdings Bhd, which raised RM10.4 billion, IHH Healthcare Bhd (RM6.7 billion) and Astro Malaysia Holdings Bhd (RM4.5 billion). The listings pumped up the market capitalisation of the local bourse to RM1.47 trillion from RM1.29 trillion. In 2012, nearly RM25 billion was raised in IPO exercises.

This year’s IPO pipeline, with only about RM5.55 billion raised, pales in comparison. And this was reflected in IBs’ earnings.

The country’s largest banking group. Malayan Banking Bhd (Maybank), has also seen a drop in the earnings growth of its IB arm. Maybank Investment Bank Bhd’s non-interest income fell 26% to RM501.2 million for the six months ended June 30, 2014. The segments’ PBT decreased 54% to RM114.6 million.

But Maybank IB was not as hard hit as CIMB IB because it was able to trim its overheads by 10% to RM478.5 million.  

IB heads agree that the industry is going through challenging times. “Things are challenging, yes. But we must look at the opportunities. We need to keep our focus on the business, keep our heads down and whatever we have, try to convert the deals. And it is not just go, go, go … we have a good risk management team as well as a support side,” Maybank IB’s CEO John Chong Eng Chuan tells The Edge in an exclusive interview.

He points out that foreign IBs are active in this space too, and fees are getting lower.

Meanwhile, group managing director of K & N Kenanga Holdings Bhd and managing director of Kenanga Investment Bank Bhd Chay Wai Leong admits that the investment banking landscape has shifted. “The market is going through some changes. You don’t see many big deals, like Astro and Felda, that we saw two years ago,” he says, candidly. “The jobs we are busy with right now are mainly in the general advisory space like IA (independent advisory) and structured financing. We still see a healthy pipeline ... These are for the deals for small to medium-sized companies.”

The recent IA jobs Kenanga IB has undertaken include those for Eco World Bhd, Goldis Bhd, Kian Joo Can Factory Bhd and Padiberas National Bhd.  

Meanwhile, a senior investment banker with over two decades of experience notes that in the current landscape, there are no big deals in the pipeline. “We are going through a lull for the big-ticket items,” he says.

“Despite this, the market is still seeing trading volume … and this is because the small to mid-cap segment activity is still quite high,” he notes, adding that the market is seeing more private deals compared with public ones. “For example, we recently had a client who wanted to buy into a private oil and gas business.

“There is a general lack of interest in large-cap stocks. There are a variety of reasons, which include valuations and lack of impetus in this segment. But you can see that the activity has not slowed down for the smaller to mid-sized companies and stocks … There was a major correction in the market recently but due to continued interest in the small and mid-cap stocks, the market absorbed it quite well. As a result, even the big IB boys have started to go after the smaller deals,” he adds.

The current challenging landscape is not exclusive to Malaysian investment bankers. In an Aug 31 report, Deutsche Bank noted that for 2014, it expects a global revenue pool for the investment banking industry to drop 4% y-o-y to around US$260 billion, with most of the weaknesses being structural rather than cyclical. “Over the next few years, we expect regulatory and technological changes to cost a further US$39 billion of revenue. But we also see growth in capital markets in emerging economies (financial deepening) adding up to US$24 billion of demand,” it states.

A changing landscape

The IB industry has evolved over the years and in the past 24 months, there has been some consolidation locally. One by one, standalone IBs were snapped up by bigger banks while others merged among themselves. For example, Kenanga completed the acquisition of the investment banking and broking unit of ECM Libra Financial Group Bhd in December 2012 for RM875 million, valuing the acquisition at 1.3 times price-to-book, while RHB Capital Bhd completed the acquisition of OSK Holdings Bhd’s investment bank in April 2013 for RM2 billion, valuing that acquisition at 1.77 times.

More recently in April, Affin Holdings Bhd paid RM1.09 billion for Hwang-DBS Investment Bank Bhd, valuing the buy at 1.28 times.

The merger and acquisition activity and shifts in the investment banking landscape are also partly due to the liberalisation measures announced in 2009. Stockbrokers and unit trust management companies were given the green light to have 70% foreign ownership, an increase from the previous level of 49%.

IBs were also allowed to enter into foreign strategic partnerships to enhance international linkages and business opportunities. As such, the foreign equity participation in IBs was also increased to 70% from 49%.

The liberalisation has sparked interest among the foreign players. Kim Eng Holdings Ltd, prior to its acquisition by Maybank IB, had proposed to buy a 70% stake in Inter-Pacific Securities Sdn Bhd in 2010 at RM142 million. The price values the deal at a premium of more than RM42 million, or 1.42 times price-to-book.

The deal has fallen through but it shows Kim Eng’s willingness to pay a high premium for a local stockbroking outfit. Apart from Kim Eng, OCBC Bank and Philip Securities Pte Ltd are also rumoured to be looking for acquisition targets here.

Malaysian banks have also been eyeing investment banks overseas. In 2005, CIMB acquired Singapore’s stockbroking company GK Goh while Maybank IB bought Singapore’s Kim Eng Holdings Ltd in 2011.

Indeed, the investment banking setting has evolved. Today, there are 12 local investment banks. As the operating environment continues to get tougher, regulatory requirements increase and costs escalate, how many will be left standing?

(Left): Chay: The market is going through some changes. You don’t see many big deals ... that we saw two years ago. - Photo by Kenny Yap
(Right): For the six months ended June 30, CIMB IB’s earnings dropped 90.5% y-o-y - Photo by Lee Lay Kin

This article first appeared in The Edge Malaysia Weekly, on October 06 - 12, 2014.