Investment banking facing increasing pressure

  • Banking
  • Saturday, 25 Apr 2020

Slow deals: A money changer displaying RM100 bills in Kuala Lumpur. As cash is more important than ever now due to the pandemic, companies are preserving it. – AFP

AS A whole, the banking sector is facing increasing pressure by the day.

With expected further interest rate cuts, which will curb the income growth of lenders, and slowing consumer spending which shows no signs of recovering soon, the outlook is far from rosy.

Blame the current global Covid-19 health crisis, which has resulted in a now-prolonged movement control order (MCO) across the country.

In reality, though, the income of banks had already been taking a hit before the health crisis surfaced as the economy slowed amid global trade tensions, faltering commodity prices and increasing competition among lenders themselves.

Now, the pandemic is further exacerbating the situation, providing more deterioration, as consumers shun new loans – an important source of income for banks – amid increasing uncertainty.

But it is not only consumer banking that is suffering, as investment banking (IB), its lesser-talked about counterpart amid the current crisis, is feeling its fair share of the heat.

Deals put on hold

Investment bankers generally concur that things within this segment are moving at a snail’s pace.

AmInvestment Bank Bhd CEO Seohan Soo says with the MCO now in its sixth week, a majority of corporate deals – the core of IB –have been put on hold.

CEOs and deal promoters are “reassessing” their plans amid the fast-changing landscape, he says.

“Cash is more important than ever now, so companies will prioritise their plans around preserving this, be it delaying an acquisition or proceeding with a rights issue, ” Soo tells StarBizWeek.

He says he foresees most of the equity fundraising deals being put on hold “until the issuers and investors have better clarity on the impact of Covid-19 on their businesses, as well as the financial performance”.

“For the bond market, there is rising risk of rating downgrades and corporate defaults should market conditions deteriorate rapidly, ” Soo adds.

Maybank Investment Bank Bhd regional head of equity capital markets, Ramesh Manimekalanandan, agrees that present market conditions for IBs are “certainly challenging”.

“Nevertheless, deals are still getting done, ” he says, citing Petroliam Nasional Bhd’s recent US$6bil bond offering and Serba Dinamik Holdings Bhd’s latest RM457mil private placement deal as examples.

Again, to be sure, the IB scene has been erratically challenging for quite some time now.

Take the IPO market for instance.

Although things did improve last year, the same cannot be said for the year before that.

In 2019, Bursa Malaysia saw 30 new listings, which raised around RM2bil, compared with 22 exercises in 2018 which raised only RM709mil in capital.

Recall in 2018, although there were 22 listings in total, the value raised at RM709mil

was even less than the RM1bil raised in 2016, which at that time – based on that amount – was already seen as a collapse, no thanks to a soft overall global market.

Just a year before that in 2017, things had improved and total capital raised via IPOs stood at RM7.4bil from 13 listings, of which among the larger ones were Eco World International Bhd and Lotte Chemical Titan Holding Bhd.

Falling value

Fast forward to the present and for the first quarter of this year, the total value of equity fund-raising stood at some RM438mil, a fall of 84% from RM2.7bil in the same period last year.

AmInvesment’s Soo says over the same period, the Malaysian merger and acquisition market saw RM57bil worth of deals, although RM46bil of this related to just one deal, which is the sale of Tesco Thailand and Tesco Malaysia.

“Our outlook is one of caution, as even if and when the MCO is lifted, it may take time to revert to normalcy. Ultimately, economic activity is important to drive deals, ” Soo says.

Last year, the IB segment for the top-four investment banks in the country each contributed 5% to 10% to their respective groups’ overall revenue and net profit.

Banking analysts say that while IB plays a relatively small role in the bigger scheme of things within the banking industry, deal-flow remains an important indicator of not only the relevance and profile of a bank, but also the strength of corporate firms and the operating environment as a whole.

“Therefore, it is important that the deal-flow does not dry up completely or stay stagnant for too long a time, even if it is not profit from IBs that lenders are relying on to grow their revenue..., ” says one analyst.

In recent years, other non-consumer banking segments like private banking and commercial banking have generally overtaken IB as better sources of revenue and income.

But bankers insist that IB adds value in many ways others cannot.

“It cannot be said that just because IB doesn’t make banks as much money as certain other is not a vital component. It is very important for putting the brand of a bank out there for example, and as such, remains a crucial part of a bank’s entire ecosystem, ” says a former bank CEO.

Additionally, he says that unlike a lot of other businesses within a lender’s operations, IB does not use a lot of capital and banks can and should leverage on this, especially in tough operating landscapes such as the current one.

“While it is indeed challenging, the old saying of opportunities in crises rings true for IB, ” concludes Maybank’s Ramesh.

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