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A: For about two decades we have been operating investment banking as a small unit. BOC had a lot of activity in the stock market but not in the investment banking space, so we thought of exploring and establishing ourselves in the area so we can give our customers a variety of service under one umbrella.
We have observed that currently there is a lack of portfolio management and structured products for debt management in the investment banking unit. Since almost all of the top conglomerates in the country bank with BOC, we wanted to give them a full package by making available various avenues for investment banking. That is why we started our investment banking unit under a different AGM division. We have obtained the licence for portfolio management and investment management from SEC.
The first remarkable achievement for us in this sphere was the issue of the largest rupee debenture. BOC structured and managed the issue of Rs. 10 billion debenture for the UDA. That is how we started off our operations in the investment banking.
Earlier all our debentures were structured by third parties, but now we have started structuring in house to suit our requirements.
I must admit that we might not be the biggest in the investment banking space, but we will soon be there as our target is to offer a fully-fledged investment banking activities to our customers.
Q: How has the bank progressed since the establishment in 2009?
A: We have certainly done well in offering trustee and custodian services. A number of institutions approach us to obtain our services in this regard.
In certain instances where we lend to our corporate customers and when they are faced with financial difficulties we arrange equity through investors to support the said sick projects. We offer a complete solution in such manner. We are also accelerating our pace in this area since the time is just right for investment banking.
When the yield is high in the range of 16%-20%, there is no need for investment banking since having a deposit in a savings account will generate decent returns. Now however it is difficult as the exchange rate is stabilised and the rupee is appreciating. Further, with the interest rates coming down to a single digit, people will now have to be prudent when investing their money. They have a choice of keeping their funds in banks for 5% or investing same in any other instruments. In this scenario we can structure new products to suit their requirements.
In the current economic scenario certain institutions such as pension funds are faced with difficulties in earning a minimum return of 10%, at the current interest rates their return is about 7-8%. BOC can manage their portfolios and give a better return.
With the support of the developing derivative market we see a lot of potential in the immediate and long term future.
Q: Could you share your current portfolio?
A: At present we manage a fund base of more than Rs. 10 billion. We facilitate our customers to actively participate in the share market through our extensive branch network. We ourselves have invested a substantial amount and have been an active player in the stock market. Also in certain years we have earned very high returns. Further, we were able to raise Rs. 6 billion in 2012 and Rs. 8 billion in 2013 through debentures.
Q: What new instruments do you plan on introducing?
A: Investment banking does not offer readymade products. All products are structured to meet the specific need of our customers. We have the necessary expertise to conceptualise any product. Only recently we were the first local bank to launch the first-ever rupee derivative.
Q: What different is BOC offering to its customers?
A: BOC is a highly liquid bank and has good investor relationships with foreign banks. Therefore if we structure a debenture for our customers, we ourselves can subscribe to it or it is possible to find investors to subscribe for the same. When a company wishes to raise funds, irrespective of the size of the organisation they have to find investors on their own. With us that hassle is not there.
Also mostly all fund managers are our customers and we have a very sound rapport with them. On the other hand we can give our customers a number of avenues as we have the largest government securities portfolio, 22%. So customers can find investments within the bank itself. That is a strength we have.
Q: What are the typical hurdles you face when trying to introduce these tailor made products?
A: Looking at the last 10-15 years the interest rates were high and the exchange rates were volatile. Even though the environment is good for investment banking activities, the perception of majority of the people are an issue. Only a few think they should diversify their investments and go for better products.
Also when issuing a debentures we have observed that investors mainly form Colombo area subscribe to it. The general perception is that traditional and conventional banking instruments are a safer and better option. It is imperative to change the perception of the people. We must allow them to go beyond that.
Q: How can the attitude towards investment banking be changed?
A: This could be done by conducting awareness programs among individual investors. BOC, People’s Bank and NSB can play a big role in this since at branch level we have the capabilities to educate people. This cannot be done overnight.
Q: Would you be able to share with us if investment banking products has shown an increase or decrease in the recent years?
A: There has been a significant increase in the debt market. Last year we issued Rs. 8 billion compared to the Rs. 6 billion the year before. This increase is due to the tax concessions. It has affected the credit growth as well. Gradually investors are moving into investment banking products. There has been some improvement. It will pick up in the near future.
Q: In terms of regulation what issues is the investment banking space faced with?
A: For securitisation we still don’t have a law as yet. It is a problem. The securitisation we currently do is not how it ideally should be. It has yet to be regulated. This has been in discussion for nearly a decade now.
Q: Why the delay?
A: There is no proper consensus among the parties involved, especially with regard to taxes. There were active discussion but seen no progress.
Q: What are the prospects of investment banking today, and what will it be in the future?
A: Sri Lanka, with that all the fundamentals are in place is growing to become a middle income economy. On derivatives new regulation will be issued in the near future. The government is also keen on capital market activities.
When thinking of lending in the market, borrowers need investment banking in order to obtain guidance on the alternative means of financing to improve their business.
Another scenario is that gold prices have dropped sharply and as a result market has lot of NPLs. In that area also investment banking can play a role.
Q: How so?
A: We can use some derivatives to hedge the gold prices. This is the scenario where we need investment banking practices in the market.
Q: What is the percentage income you have from investment banking in the past and to what extent do you intend to increase it to?
A: It varies. Some years we get high returns, some years we don’t. On profitability certain years we have contributed more than 10% and sometime it was around 5%. We cannot say it is improving, but we aim to maintain over 10%.
