Investment banks in Malaysia provide various services including corporate financial advisory, portfolio management, corporate banking, and share trading. They were introduced in 2005 to strengthen the financial sector by consolidating merchant banks, stockbroking companies, and universal brokers into a new investment bank framework. Investment banks play important roles in developing the capital market by raising capital, facilitating mergers and acquisitions, managing investments, and providing other financial services. They offer a wider scope of activities and larger facilities than commercial banks.

1. INVESTMENT BANK

2. OBJECTIVES
1. Describe the roles of investment bank in
Malaysia
2. Describe the services of investment banks
a) Corporate financial and advisory services
b) Portfolio and investment services
c) Corporate banking
d) Fund-based activities
e) Share trading

3. • Investment bank is introduced by BNM on March 2005- to strengthen
Malaysian Financial Sector.
• All discount houses were absorbed by the merchant banks by the end
of 2006.
• The new framework required the merchant banks, stock-broking
companies and universal brokers to be transformed into investment
banks latest by first quarter of 2007.
• Investment banks is licensed to perform investment banking functions
by Securities Commission and BNM.
INTRODUCTION

4. • The establishment of investment banks, in line with the
recommendation of the Financial Sector Master plan, aims to
strengthen the capacity and capabilities of domestic banking groups
through internal rationalisation so that they can contribute to the
economic transformation process and better face the challenges of
liberalisation and globalisation.
• Following the successful rationalisation of the commercial banks and
finance companies within the banking groups, the model is now
extended to the merchant banks, discount houses and stockbroking
companies within the banking groups to achieve greater efficiency and
effectiveness.

5. • With enhanced capacity, the new investment banks would also play a
greater role in developing a more dynamic and efficient domestic
capital market.
• The framework for the investment bank has been developed by Bank
Negara Malaysia (BNM) and the Securities Commission (SC) based
on the following principles:-
Enhancing the scope of activities for the merged entity;
Enhancing capacity for growth and business expansion through
industrywide rationalisation; and
Minimising unnecessary regulatory burden that may arise from the
dual regulatory regime.

6. • The Guidelines on Investment Banks (the Guidelines) are therefore
issued jointly by BNM and the SC pursuant to Section 126 of the
Banking and Financial Institutions Act 1989 (BAFIA) and Section 158
of the Securities Commission Act 1993 (SCA).
• It sets out the requirements and processes for the setting up of the
investment bank and the regulatory framework within which the
investment bank would operate.

7. THE STATUTORY RESERVE
REQUIREMENT
• The SRR is a monetary policy instrument available to the Bank
to manage liquidity and hence credit creation in the banking
system. The SRR is used to withdraw or inject liquidity when the
excess or lack of liquidity in the banking system is perceived by
the Bank to be large and long-term in nature.
• This requirement also apply to merchant/investment banks
licensed under the Banking and Financial Institutions Act 1989.
• Effective 16 July 2011, the SRR rate for banking institutions is
4% of EL.
• Any banking institution which fails to comply with the minimum

8. DEFINITION
• It is a financial institution that related to the creation of capital for
other companies.
• Investment banks underwrite new debt and equity securities for all types
of corporations and also provide guidance to issuers regarding the issue
and placement of stock, also aid in the sale of securities in some
instances. Investment banks also aid in the sale of securities in some
instances.
• They also help to facilitate mergers and acquisitions, reorganizations
and broker trades for both institutions and private investors.
• They can also trade securities for their own accounts.

9. 1. Raising Capital & Security Underwriting
• Banks are middlemen between a company that wants to issue new
securities and the buying public.
2. Mergers & Acquisitions
• Banks advise buyers and sellers on business valuation, negotiation,
pricing and structuring of transactions, as well as procedure and
implementation.
3. Sales & Trading and Equity Research
• Banks match up buyers and sellers as well as buy and sell securities
out of their own account to facilitate the trading of securities
FUNCTION

10. 4. Providing brokerage services for trading of stocks, bonds, derivatives,
commodity and equity securities
5. Managing investments
6. Acting as intermediary between an issuer of securities and the
investing public
7. Facilitating private equity, corporate restructuring, placements, merger
and acquisitions and others

11. Financial products offer by Investment Banking are basically
similar to Commercial Banking and Corporate Banking,
however Investment and Corporate Banking normally providing
financial facilities differ with commercial Banking in the
following aspect;
 The amount is larger/ bigger
 Facilities offered in the form of revolving or blanket, e.g
Istisna Revolving Project Financing and Murabahah
Revolving Working Capital Financing etc.
PRODUCTS

12. Various facilities offered in one limit but under multi-
changeable
Providing a financial package according to total
requirement of a customer/ company
Offer high amount of financial facilities through
Syndication or Club Deal
Offering hybrid products such as sukuk, Islamic Private
Debt Security or Islamic Bond.
PRODUCTS

13. SCOPE OF INVESTMENT BANKS

14. PUBLIC OFFERINGS OF DEBT AND EQUITY SECURITIES
There are four general types of public offerings:
a) Initial public offerings (IPOs) of securities issued by companies that have never
before issued any public securities (normally common stock is the first security
to be issued in an IPO);
b) Initial public offerings of new securities that companies that are already public
have not before issued (e.g., a new class of convertible debt security);
c) Further public offerings of securities that are already publicly traded (e.g., the
issuance of additional common stock when its price is sufficiently high so that
cost of capital is sufficiently low);
d) Public offerings by company shareholders of securities that are already publicly
traded (e.g., when an original large shareholder, say a private equity fund,
wants to cash out its position).

15. • Private placement is the selling of securities to investors without the regulatory
requirements of public offerings.
• The regulations defining private placements are complex and the securities
and investment vehicles offered are numerous.
• Ranging from corporate equities to real estate interests, privately placed
securities carry a higher return than similarly structured securities that can
trade in the public markets.
• The loss of liquidity enhances risk and therefore requires a proportionally
higher return.
PRIVATE PLACEMENTS OF DEBT AND EQUITY
SECURITIES

16. MERGERS AND ACQUISITIONS (M&A)
• This is the front-page stuff – the huge acquisitions, takeover battles,
hostile attacks and fierce defences. But it’s not all war. The vast majority
of M&As are friendly.
• Investment bankers seek to optimize price and terms, so that the “best
price” may not be the highest price for client sellers (all cash or
confidence in closing may be more important) nor the lowest price for
client buyers (certainty of getting the deal done may be more vital).
• Investment banks find, facilitate, price, and finance mergers and
acquisitions. Also included in M&A are leverage buyouts by private
equity, the restructuring and recapitalization of companies, and the
reorganization of troubled companies

17. • Financial advisory services have grown dramatically as investment banks work with
the large number of private funds – hedge funds and private equity.
• Services include:
i. raising of capital for general funds,
ii. M&A acquisitions,
iii. financing acquisitions,
iv. IPOs of portfolio companies owned by the funds (when appropriate) and
v. M&A of these companies (when IPOs are not appropriate).
• Investment banks like to involve themselves with hedge funds and private equity since
they are transaction oriented, generate huge fees and are in perpetual deal mode.
FINANCIAL ADVISORY / SPONSOR GROUP
FINANCE

18. • Fairness opinions support M&A, leveraged buyouts and restructurings for public
companies.
• Providing an independent, defensible, expert statement on values and the
“fairness” of those values is an essential part of any such public transaction.
• Investment banks command what may seem to be exorbitantly high fees for
giving fairness opinions, considering the number of hours worked (and the
amount of paper produced). The reason is the significant liability the investment
bank assumes, which can be realized both in the courts via shareholder suits
and in industry reputation. In fact, major investment banks do not like to provide
fairness opinions – the risks are too high for the fees – but generally do so only
to serve important clients.
FAIRNESS OPINIONS

19. • The creation of synthetic financing mechanisms and structures makes possible
allocations of capital with better risk-return features for both issuers and investors.
This is generally achieved by instruments that:
(i) pool assets,
(ii) allocate liabilities into different “trenches” (with different risk-return profiles), and
(iii) are contained within an independent legal entity.
• Securitization is the process by which formerly illiquid assets, mostly small consumer
receivables of all kinds (e.g., home mortgages, automotive loans, credit card
receivables), can be liquefied by their being “rolled up” into large, publicly tradable
securities with improved risk-return for both issuers and investors. (Such innovations
exemplify investment banking’s contribution to financial markets.)
STRUCTURED FINANCE / SECURITIZATION

20. • Securitized obligations are sophisticated in design and often require statistical
analysis and sensitivity testing of key criteria (e.g., default rates, prepayment
profiles, interest rate sensitivity, tax changes, etc.). For example, a change
from forecasted rates of prepayment (e.g., due to interest rate declines and the
resulting refinancing of older, higher-rate mortgages) can result in shocking
differences in returns from initial expectations. (Principal itself can suffer
significantly.)
• Other kinds of structure finance include project finance, which is used to fund
large-scale enterprises such as power plants and infrastructure.

21. RISK MANAGEMENT
• Hedging positions in interest rates, foreign currency exchanges and commodity
positions through swaps, options and futures are an essential building block of
financial markets.
• Swaps are the mechanism by which two or more parties exchange their debt
obligations in order to control more precisely each party’s desired risk/return profile.
Swaps work because different entities have different comparative advantages when
pricing different categories of debt in different financial markets.
• Parties of dissimilar credit ratings or financing needs can exchange their obligations
(e.g., from shorter term to longer term and vice versa) in order to optimize their
financial strategy and structure. Risk management groups combine expertise in
diverse hedging instruments to develop a complete hedging strategy for
enterprises.

22. MERCHANT BANKING
• Merchant banking is the commitment of an investment bank’s own
capital to equity-level investments and participations, seeking very high
returns. Such commitment of capital is made for two general purposes:
1) to facilitate a client transaction (i.e., a bridge loan until permanent
financing is obtained); or 2) to purchase securities in an operating
company for the firm’s own account (i.e., whether 100% ownership by
the investment bank, in partnership with a client, or as the manager of
an LBO[BP1] fund). Bridge loans are highly profitable, combining
commitment fees, placement fees, high interest rates,and equity
kickers.

23. PUBLIC TRADING OF DEBT AND EQUITY SECURITIES
• Most large investment banks maintain strong trading capabilities, which is a
significant though volatile profit center – profits are made both from
commissions generated by trading for clients and from capital appreciation
generated by trading for the firm’s own account. Investment banks act as
brokers, dealers, and/or market makers (which can differ for different
securities). In addition to traditional stocks and bonds, money market
instruments and commodities (e.g., gold, silver, coffee, crude oil, various
metals, various foods), investment banks create “synthetic securities” (e.g.,
striped Treasuries, interest only and principal only instruments), which by
appealing to different investors, enhance the risk-return for all.

24. INVESTMENT RESEARCH AND SECURITY ANALYSIS
• The research capabilities of an investment bank’s security analysts
were often the firm’s most prestigious and visible strength. (More
recently, M&A, IPOs, LBOs, and private equity / hedge funds have
usurped the limelight.)
• Many investment banks used the reputation derived from their
investment analysis expertise to develop underwriting and money
management businesses. Typical subdivisions are Global Equities
and Fixed-Income. Today, after various scandals and prosecutions,
investment banks must enforce strict compartmentalization between
their corporate finance and investment research departments

25. WEALTH MANAGEMENT
• The accumulation of vast wealth by institutional investors (i.e., pension
and insurance funds), and by rich and super-rich individuals, has made
money management a vital business. (For individuals, the departments
are called “private banking” or “private client.”).
• Investment banks compete with one another, and with large commercial
banks and specialized money management firms in accumulating
assets under management. Hundreds of billions of dollars are at stake.

26. INTERNATIONAL INVESTMENT BANKING
• The accumulation of vast wealth by institutional investors (i.e., pension
and insurance funds), and by rich and super-rich individuals, has made
money management a vital business. (For individuals, the departments
are called “private banking” or “private client.”).
• Investment banks compete with one another, and with large commercial
banks and specialized money management firms in accumulating
assets under management. Hundreds of billions of dollars are at stake.

27. WEALTH MANAGEMENT
• The accumulation of vast wealth by institutional investors (i.e., pension
and insurance funds), and by rich and super-rich individuals, has made
money management a vital business. (For individuals, the departments
are called “private banking” or “private client.”).
• Investment banks compete with one another, and with large commercial
banks and specialized money management firms in accumulating
assets under management. Hundreds of billions of dollars are at stake.

28. ALTERNATIVE INVESTMENTS
• The investments in financial products other than exchange-traded stocks and
bonds have become a huge business, such as private equity, real estate,
arbitrage, international, and the like. The development of funds under
management, including private equity and hedge funds, has increased
dramatically, and investment banks both develop their proprietary products
and sell others.

29. INTERNATIONAL INVESTMENT
BANKING
• “Globalization” is the byword of investment banking. Financing has become a multi-
market search for the lowest cost of capital for issuers, and a 24-hour-a-day quest for the
highest return for investors. Growth is highest in emerging markets, the opportunities for
investment, underwriting and M&A are extensive, and all major investment banks have
significant presence in many countries.
• Both issuers and investors seek the optimum level of risk for a given level of return. Such
optimizations cover the uncertainties and volatilities of interest rates, currency exchange
rates, credit availability (for users of capital), credit instability (for providers of capital) and
equity investments. Optimum risk for a given return, or conversely optimum return for a
given level of risk, is achieved by using techniques of finance theory such as hedging
and diversification. The international expansion of one’s investment horizons allows more
efficient optimization procedures for both issuers and investors – i.e., investment
portfolios can be diversified more widely, thereby expanding their risk/return frontier and
achieving higher efficiency.