Small investment banks must shape up to survive

THE rush by banking groups to expand into investment banking (IB) business has somewhat put the smaller IB outfits into a spot.

What is going to happen to them once all the big boys have gotten their IB act together? Will they be swallowed or is there still a place and role for them?

One important role the smaller IBs can play is that of independent financial advisor (IFA). Many banking groups that already lend to their customers seeking IB services may not be able to undertake the role of IFA.

That is where smaller but credible IB houses can play a significant role.

Following the proposed merger between RHB Capital and OSK Holdings Bhd, a lot of attention has been given to the fate of the next largest standalone IBs, which are K&N Kenanga Holdings Bhd and Hwang DBS Investment Bank.

K&N Kenanga was in the news, with reports speculating that it was looking to buy the IB business of the ECM Libra financial group.

While nothing conclusive has come out of it, that piece of market talk was enough to fuel further curiosity over K&N Kenanga's plans. Meanwhile, Hwang DBS is keeping very quiet over its plans amidst these recent developments.

While they may be focused on being niche players, these smaller IBs may have to be content with getting smaller deals or just end up as partners with the bigger IBs in major transactions.

A bigger bank-backed group will have the balance sheet to undertake larger transactions. One notable case is the Maybank/Kim Eng partnership that will enable Kim Eng to expand the regional IB business via more investments from Maybank and also to undertake bigger transactions based on the balance sheet and customer base that Maybank has regionally.

Kim Eng is already a successful regional player in six out of 10 Asean countries with international presence in Hong Kong, New York and London. It made a pre-tax profit of S$128.9mil for the year from June 2010 to July 2011. But it recognises the forces of globalisation and the need for further strength in times of crisis.

That does not mean the smaller IBs cannot survive the onslaught of liberalisation and tough times.

They will have to work harder to maintain their strong reputation, client network and marketing skills. While shaping up, they may make themselves beautiful enough to attract some good suitors.

In the case of Kim Eng, it had to be attractive enough to get a big buyer like Maybank that paid a whopping S$1.79bil or 1.9 times book value for the Singapore-based IB that has the top brokerage position in Thailand.

When the CIMB investment banking group bought GK Goh for S$239.14mil back in 2005, it paid 1.3 times book value.

As the offers go higher and supply gets scarce, there is a chance for the smaller but good IBs to fetch a favourable exit price.

Thus lie the challenges for these IBs amidst interesting times.