Investment Banking

INTRODUCTION TO INVESTMENT BANKING

Reading Reference
1- Chapter 1 - Investment Banking (Pg 1-15)
2- Chapter 8 Investment Banking (Pg 1 -09)
3- Investment Banking Association of Pakistan (www.ibap.biz)
4- Investment Banking Fact Sheet Pakistan (www.sbp.org.pk)
5- Newspaper Articles (Business Recorder)

Investment Banking

Economic Wealth
Savings +Financial Investment = Economic Wealth/Capital

Investment Banking
Generation of Capital

Income

Economic Activity

Investments

Expenses

Savings

Investment Banking
Generation of Capital

Investment Banking
Generation of Capital contd.

If rate of savings < investment requirements

What will happen???

Investment Banking
Generation of Capital contd.

Dependency on External Source of Fund Generation

External Debt (IPOs, Private Equity)
Bank Borrowings

Investment Banking
Role of Financial Intermediation.
To generate sustained economic growth
Promotion of adequate domestic savings
Channelize such savings towards productive investment
Focus on economic growth instead of financial growth

Types of Financial Intermediation.

Banking Framework
Financial Market Framework

Investment Banking
Financial Intermediation(Contd.)
Banking Framework
Commercial Banks
Islamic Banks
Investment Banks
Development Finance Institutions (DFIs)
Housing Finance Companies
Brokerage 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

Investment Banking
Institutional Intermediation in Capital Flows

Banks/FI
Capital Market/
Money Market

Investors
/
Savings

Forex
Marke
t
Commodity/
Futures Market

Real
Estate/
Gold etc

Business
Activity

Economic
Activity

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 Finance
Advisory
Capital & Allied Market Operation
In brief:

Investment Banking tries to match people who have money to

those that need money

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

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

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

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)

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 Fund
Products, IPOs, Advisory, M& A etc
Market share mere 4.6%
Crescent Investment Bank was the first licensed investment bank

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

Investment Banking

Investment Banking Mandate by SBP

The 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 equity
instrumentation locally and abroad.

Investment Banking

Diff b/w Investment & Commercial Banks

1. Investment banks cannot accept deposits of less than 30 days maturity, issue cheque books or
accept foreign currency deposits of less than three months. Term deposits can only be accepted
by 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 of
1% 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 whereas
commercial banks are subject to a minimum requirement exceeding 3 billion.

Investment Banking

Common IB Transactions in Pakistan

Debt Financing
Mergers & Acquisitions
IPOs
Restructuring

70%
10%
15%
05%

The major source of an investment bank's revenues are: fund based, i.e. they come mostly from financing activities, which are
not 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 rates
which have pushed the cost of funds up thereby squeezing the net
interest margin.

Investment Banking

Investment Banking Challenges

Historically, in the developed countries, Investment Banks were given protection by
restricting the Commercial Banks from getting into high-risk activities pertaining to Capital
Markets and those activities were left for more specialized Investment Banks. By the time
those restrictions were removed (Sixty six years later 1933 -1999), Investment Banking
Sector had already grown to the size that could defend for themselves and compete with
large Commercial Banks In the US, the Glass-Steagall Act of 1933 prevented conflict of
interest between Commercial Banks and Investment Banks. It restricted the asset powers
of Commercial Banks to underwrite, buy and resell risky business securities and
Investment Banks were prohibited from engaging in Commercial Banks' businesses.
Although Investment Banks in Pakistan have never favored or demanded Industry Specific
Protection Regimes, the fact remains that in the pre SECP era, Investment Banks were not
provided any protection as was available in other developed countries, at the infancy
stage. Another reason why the Investment Banks in Pakistan could not flourish initially was
because it was perceived that Investment Banking was about mega Mergers and HighWorth activities only, which were not available in the Country at that time. The relatively
lower end activities like Intermediation in Securities (Brokerage) were not focused upon by
Investment Banks at that early stage

Investment Banking

Term Project
Global Financial Crisis 2008
(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
-Chapter 11 act
-Public Entities benefitting from Chapter 11
- Role of US Govt. / Federal Reserve Bank

Investment Banking

Term Project
Global Financial Crisis 2008
(Impact on Global Economy & Role of Investment Banks)
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

Investment Banking

Term Project
Global Financial Crisis 2008
(Impact on Global Economy & Role of Investment Banks)
African & Middle East Markets (MENA REGION)
-Impact on Overall Economy
-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)
-Entities Defaulted /Declared Bankruptcy
- Role of GCC Governments for improving situation

Investment Banking

Term Project
Global Financial Crisis 2008
(Impact on Global Economy & Role of Investment Banks)
Asian Markets
-Impact on Overall Economy
-Key affected countries
- What happened to CHINA??
-Impact on Airline Industry (JALetc)
-Impact on Currency
-Entities Defaulted /Declared Bankruptcy
- Role of Asian Governments for improving situation

Investment Banking

Term Project
Global Financial Crisis 2008
(Impact on Global Economy & Role of Investment Banks)
Pakistani Markets
-Impact on Overall Economy
-Key affected entities
-Impact on Currency
-Inflation or Deflation
-Entities Defaulted /Declared Bankruptcy
-Impact on FOREX reserves
-Impact on Financial Markets
- Role of Pakistani for improving situation

Investment Banking

Term Project
Global Financial Crisis 2008
(Impact on Global Economy & Role of Investment Banks)
Guidelines
1- Each Group shall give its own synopsis on the allocated domain
2- Synopsis will not be copied from any assignments/web etc which may result in negative
marking of 5 marks in case of any cross reference found.
3-The project should not exceed 75 pages
4- References to be properly documented separately
5- Presentation /VIVA to shall be in the following week after submission

Submission Deadline: Dec 15, 2014

Best of luck!!!