Investment Banking in Pakistan under the NBFC Structure

LADIES AND GENTLEMEN

Assalam – o – Alaikum
On behalf of the Investment Banks Association of Pakistan, I would like to thank the DAWN Group for providing me with the opportunity to speak to such a distinguished gathering. It is indeed an honor and a pleasure for me.

LADIES AND GENTLEMEN
Two types of Presentations pose an Operational Risk for the speaker - those immediately before Lunch and the ones immediately following the Lunch. The fact that today is a Sunday adds another dimension to this Risk.
I was at LUMS for a Presentation on the Change Management Initiative of Escorts Investment Bank. LUMS had taken it up as a case study.
 A sumptuous Punjabi Lunch had preceded the Presentation and I must confess I had myself abandoned my usual Prudential Lunch Regime. To my surprise, notwithstanding the heavy lunch, I was faced by an amazingly vibrant audience, like the one I see here today. I was half way through the presentation when, talking about the NPAs, i.e Non-Performing Assets, I noticed a young man who had visibly migrated to fairyland. As a realistic banker, I said,
“I am willing to write-off, up to one percent NPAs – and this time NPA stands for Non Performing Audience - The rest of you, please stay with me!”

LADIES AND GENTLEMEN

In the next precise 16 - (one six) minutes, I am going to share with you, some diverse perspectives of Investment Banking, contemporary trends, challenges and our response. I will talk about the Historical Perspective of Investment Banking in Pakistan, Investment Banking under the NBFC Structure, The Vision, Mission and Objectives of the Investment Banking Sector, its present status in the Financial Markets, the Future Outlook, and finally, the factors that we consider crucial to the development of the sector.  

The term Investment Banking invokes different images in the developed countries
than in Pakistan. The historic perspective also differs. In the US or Europe, and more recently the Far and the Middle East, it brings to mind the legendary long hours, the hefty bonuses, the mega billion dollar deals and of course the jet-setting pinstriped investment banker. An intensely competitive, high energy, action oriented, profit hungry environment, dominated by young hotshots; or maybe, some senior persons who may look older, yet feel as young as the youngest hotshot .
I assure you, Ladies and Gentlemen, any resemblance to this humble speaker here is
purely coincidental.
In short, a larger-than-life-world where Mega-Deals are concluded and huge fortunes made overnight – Definitely a high-end activity where the learning curve is very steep!

On the other hand, Commercial Banking is considered more routine, mundane and a
run-of-the-mill activity. Although I must admit that recently, with huge improvement in automation, and creativity with respect to products, services and marketing, the Commercial Banks have also taken a number of innovative and diversified steps.

In Pakistan, the story has been quite different. Contrary to the west, the Commercial Banks were considered relatively “Superior Institutions”. This was probably because of the larger number of branches and the kind of high Brand Visibility that goes with a broader market outreach.

As regards the regulation and development of Investment Banking was concerned, the Investment Banks had always complained that the State Bank of Pakistan, the then regulator, was preoccupied with the larger sector of Commercial Banking. The SBP lacked either the will, or the capacity, or both, to do justice with the smaller, lesser known yet more sophisticated and specialized group of Investment Banking activities.
On the other hand, the SBP had also complained, and with good justification, that the Investment Banks confined themselves to Pseudo Commercial Banking and did little to develop Investment Banking Products suited to the peculiar local environment.

LADIES AND GENTLEMEN
It was against this background that the Regulation of Investment Banking was passed on, from the State Bank of Pakistan to the SECP.
This shift in itself implied a recognition of the need for “Specialization of the Function of Regulation.”
In the yesterday’s session, a comment was addressed to the Governor State Bank of Pakistan, on the need for one single Regulator, for the whole Financial Sector. We
feel that who regulates us is not important. It is all about how we are regulated. Regulators of today are not merely watchdogs. They are expected to  also be promoters, facilitators and motivators. In order to be able to do so they have to have the capacity in terms of the expertise, human resource and the tools like Automation
to understand, monitor and manage the different Risks, inherent in all Financial Transactions. In the context of the Capital Market Dynamics, these Risks take on a different meaning, as they have to be monitored in a Real-time or Near-real-time environment.  
The SECP may be conspicuous by their absence from this conference, but I feel that
we would not be honest if we do not recognize here, the valuable contribution of SECP towards development of Investment Banking in Pakistan.
One major change made, by the SECP, through the NBFC Rules 2003 has been the introduction of the NBFC Structure. This framework entails the permission to provide a number of services under the same corporate structure. The rationale was to consolidate the activities relating to Non-Banking Financial Sector, under one umbrella and promote these activities by strengthening the capital base and thereby reducing capital costs. A Capital-Based Structure, where minimum paid up capital requirements were identified for each Form of Business Activity.

The multiple-tier business structure brought about a Paradigm Shift and resulted in benefits like:

	Consolidation and Strengthening of NBFC sector through better capitalization.
	Economies of scale and cost efficiency to capture synergies across complementary Financial Services.
	Broad Capital Base, reduced Cost of Capital, enhanced Operating leverage and better Capital Utilizations.
	Increased shock absorbing capacity, and
	A wider range of products with improved innovation resulting in better solutions to customers.

With the passing of the Regulation of Investment Banking from SBP to SECP, there
was a new focus and an understanding of the issues relating to reforms and the development of Capital Markets, in order to make them more efficient, transparent, accessible and acceptable in terms of capping of Systemic Risk and an efficient Settlement Process. These reforms included those pertaining to:

	T+3 Settlements
	Increase in Net Capital Balance requirements
	Imposition of Capital Adequacy Ratio
	Exposure limit margins
	Prohibition of Insider Trading
	Monitoring of variations in scrip-wise price movements, turnover and deliveries
	Restriction on Blank Selling, and the
	Establishment of CDC and National Clearing System

Although this reform process is still incomplete and in progress, all these factors have created an atmosphere that enables, inspires and encourages Investment Banks of
the country to play their real role of providing high-end services, related to Financial & Capital Markets.

LADIES AND GENTLEMEN

It is against this background that the Investment Banks Association of Pakistan has taken up the Mission to develop and deliver a portfolio of genuine Investment Banking Services related to Advisory, Research, Intermediation in Securities, Underwriting & Asset Management and compliment these services by providing peripheral Financing Products. In doing so, we intend to contribute significantly to our national economy in general and financial markets in particular.

Our Vision is to transform the Pakistan Investment Banking Sector into an Elite Group of Institutions that take the broadest view of their responsibilities, and are geared with a combination of customer focus, innovative products and quality service, supported by a committed human resource and operating within an accountable framework of social, ethical and corporate responsibility.

Our Objectives are:

	Value creation for shareholders and Customers on a sustainable basis
	Shift from Pseudo Commercial Banking towards genuine, high-end Investment Banking Activities
	Maintaining High Asset Quality
	Good Governance & Best Business Practices, and
	High Professional Efficiency and Constant Improvement Policy

Our Operational focus is on
Enhanced Profitability and Sustainable Growth through a broader range of Products & Services and Capacity Building in terms of Human Resource, Infrastructure, Systems Support and Risk Management Capabilities.

The Investment Banks Association feels that there is no substitute for competent and responsible management.

Institutions are built on Values; their Viability on know-how!

Our association has, in addition to Quantitative measures also identified, specific Qualitative Performance Measures for our Member Institutions.

LADIES & GENTLEMEN

We can now proudly say that Investment Banking is our preferred profession. With the implementation of this Investment Banking Model, we have now come to a point where Investment Banks of Pakistan no longer have to be apologetic about their performance.
The Annual Reports of the Investment Banks reflect that during the last three to four years, an overwhelming majority of the Investment Banks have shown remarkable improvement in their Financial Results, both in qualitative and quantitative terms. Most of us are now rated “A” or above. 

Our Financial Statements also reflect:

	A significant growth in profits indicating impressive returns on Capital Employed, good Earnings per Share, and
	A Diversified revenue base with emphasis on Fee based products

To quote from a real-life example, when I took charge of Escorts Investment Bank in December 2001, the earning per share was 3 paisas only. For the three quarters ended March 31, 2006, our EPS is Rs. 3.73 (this is for nine months). Our Return on Average Equity is 32.4  % P.A.

In order to implement the essence of Investment Banking in Pakistan, the following Factors are critical.

	Consistency of Policies
	Resolution of Issues arising out of the Accounting Treatment of New Investment Banking Products
	Enforcement of Quality Governance at the Stock Exchanges
	An early resolution of the long outstanding issue of Rate of Taxation, and
	Successful implementation of the current set of Reforms and introduction of the next Generation of Reforms

LADIES AND GENTLEMEN

As you are aware, Brokerage is the most important activity for the functioning of the Capital Markets. There is a rising trend of Investment Banks taking up brokerage activities and even a number of conventional brokerage houses have voluntarily embraced a corporate structure. A number of members of our association have acquired corporate membership of either Karachi or Lahore or both Exchanges. This is a healthy trend as these institutions are properly rated, regulated, documented and have high levels of compliance with Regulatory and Corporate Governance Standards.

We hope that confident that these institutions will continue to enjoy the full support of the Regulatory Authorities.

It is said that: The distance in nothing, it is the first step that is difficult!

LADIES & GENTLEMEN
The Investment Banks of Pakistan have taken that step.

Thank you.

May 13 , 2006
Lahore.