Economic Update

Moves to transform the investment-banking market by Malaysia’s central bank have been driving change in recent months. Meanwhile, with new licences set to be rolled out, news came in January that two local institutions would be merging.

Avenue Capital Resources announced on January 19 that it would buy the operating units of local rival ECM Libra for a total of RM293m ($78m), funding the purchase by issuing 442m new shares.

The merger has been welcomed by both sides, as it is seen as mutually beneficial.

“The merger synergises both our strengths,” Farid Dato’ Haji Nawawi, Deputy CEO of Avenue Capital Resources, told OBG after the announcement. “Avenue is strong in broking and has strong relationships with second- and third-tier companies. ECM does lots of corporate finance work, including mergers and acquisitions as well as having a great reputation with top-tier companies.”

Analysts concur, saying that the only major duplication is likely to be in back-room securities operations. The move is also likely to change the perception of Avenue away from being an institutionalised, government-linked company to a largely private-sector entity, since government holdings in the company will be diluted.

Operational strengths will also come as a result of the merger. Both sides were hoping to qualify for investment banking status this year and the costs of attaining this will be reduced.

To qualify, both would have had to acquire a discount house licences. Avenue would have needed one, costing RM52.5m ($13.9m), and ECM would have needed two, costing RM105m ($27.7m). Together, the institutions will only need one licence.

Candidates for investment banking status must also have unimpaired capital of RM500m ($132m). Had they remained separate, Avenue and ECM could have mustered RM210m ($55.5m) and RM388.9 ($102.7m) in funds respectively, meaning that each would have had to make cash calls to raise capital.

Merging precludes that need, creating an institution with shareholder’s funds of RM831m ($219.5m) and net tangible assets of RM598m ($158m).

The central bank, Bank Negara Malaysia (BNM), expects 17 new licences under the new framework, which comes as part of the government’s Financial Services Master Plan to create a financial services sector capable of supporting the new economy.

“This wave of rationalisation is the evolution of investment banking,” explained Zeti Akhtar Aziz, Governor of the BNM, when talking to OBG recently. “The stock-broking and merchant banks will merge to become investment banks together with discount houses. This means discount houses will no longer be in the financial landscape.”

It is predicted, however, that there will not be enough business for all 17 of the new investment banks to thrive.

“There will definitely be too many players,” continued Farid. “They will need to consolidate, merge and work together because there won’t be enough work for all of them. Stock-broking firms are in danger of falling behind too if they keep their own ways of doing business and don’t diversify. They can’t rely on broking profits alone, business has to be in other areas like equity, debt, treasury and bond-trading.”

Consolidation is widely acknowledged to be necessary and this will be driven by market needs, not central bank intervention, insists Zeti.

Within this development, institutions are expected to try and find their own strengths and niches to compete. An outlook on demand for investment banking services in the coming year gives some clues as to what, where and how institutions can specialize.

“I think it will mostly be credit, not debt,” explains Baljeet Kaur Grewal, Chief Economist at AseamBankers. “We will see more bonds and retail investors will want to see these higher yield instruments. With interest rates expected to go up through the year the bond market will likely be sustained by infrastructures and utilities developments.”

With the upcoming Ninth Malaysia Plan, many expect to see a re-focus of government fund distribution as well as new impetus to infrastructure development, including some new projects.

Not everyone has the same view though.

“A lot of the activity will be driven by the private sector,” predicted Farid. “The Ninth Malaysia Plan may put some emphasis on infrastructure, but the last couple of years have not seen many large projects. The most activity in capital markets is in mergers and acquisitions.”

Reports in local business media have been predicting consolidation in Malaysian business in general, not just in investment banks. Headlines in recent weeks have even stated that the government shareholding giant, Khazanah, is getting primed for a series of acquisitions.

Some analysts say this government intervention will be necessary to drive restructuring, since the private sector has not taken the lead as was hoped and the stock market has remained flat.

Nonetheless, with a re-focussed and consolidated investment banking sector, the financial foundations for stimulating private sector restructuring will hopefully be in place.