BUSINESS STRATEGY WITH ADVANCES THROUGH CORPORATE FINANCE AND INVESTMENT BANKING
SAAD ANWAR HASHMI
Nov 19 - 25, 2012
Working in Corporate Finance or Corporate and Investment Banking is a high profile fast driven career where decision making is done analyzing a number of facts from issues internal to the organization, financial health, industry viability, laws, rules and regulations that may impact the business of the client being considered for financing. The career revolves around the drive to know about the industry, economy in general with application of technical knowledge of finance and accounting. Career progression is based on performance and number of years in the line of business. Specific professional qualifications which include Chartered Financial Analyst (CFA), Chartered Alternative Investment Analyst (CAIA) for international markets, Financial Risk Management (FRM) and Omega Performance are becoming increasingly pivotal to ensure career progression moves on track. The job profile includes tough decision as each decision involves billions if not millions of rupees. The selection process therefore for those who aspire to have career in Corporate and Investment Banking is considered the toughest, yet at the end of the day highly rewarding. Being a male dominated environment, women are gradually finding their way into this field. Late sitting beyond the standard 9am to 5pm life is a norm. With the quantum of transactions, monitoring, reporting and constant need of multitasking, those who fail often choose to exit the field altogether.
Each finance decisions involves large sums, therefore, deposits placed as advances are required to be safeguarded at all times. An approach where long term disbursements are involved, the lending decision becomes more critical as the future brings uncertainty and early warning signals of deterioration of the loans are either missed or considered in a superficial manner as otherwise the banking relationship is acceptable without any glitch. A forward looking approach, to foresee and analyze the future repayment capacity of the borrower based on a financial model at times is based on intuition beyond numbers as future is uncertain. In a high interest rate scenario, corporate clients are deterred with debt financing and aim to reduce financing cost to the minimum. In most instances, clients in today's market where made to suffer with financial strength due to recession, devaluation in currency increasing costs of inputs, gas curtailment, price of fuel, law and order situation and political uncertainty increasing country risk to name a few. These factors however go hand in hand with the Textiles as witnessed in 2008 and 2009 after the US subprime mortgage crisis. Further disbursements during the same period were put on hold due to unfavorable industry dynamics due to rising defaults. Long term disbursements were avoided whereas short term advances where only given to selective clients upon request who maintained an acceptable track record with the bank. With the need of the country, exports were encouraged and clients with a strong export base were given financing to further strengthen their exports.
Banks filed suit against clients who defaulted on their loans. Based on the rules of investment management internationally, if a loan goes into default, the course of action is either to file a suit or consider rehabilitation. The intended purpose of filing a suit is to dispose the assets and use the proceeds to settle the debt. In Pakistan, suits are only filed as a mode to put pressure on the client for repayment whereas the solution after the court hearing leads to eventual restructuring of the debt. In rehabilitation, restructuring is considered for financial support of the client without going into litigation. Even if recommendations are put forth in litigation for disposal of assets, the clients argue based on the ongoing nature of the business and jobs of workers and employee. It is also argued that if the intended purpose of the bank as per rules of investment management is never to dispose the assets, litigation should not be considered as a mode to put pressure on the client. As a medium of rehabilitation for that matter, some banks avoid litigation and almost always consider restructuring if not exit from the relationship to avoid stress of litigation and costs associated with the same.
Often at times, clients would complain that banks do not entertain the financing request. With reduction in discount rate by 150 bps, the strategy with advances would vary from bank to bank. Larger banks with an existing strong portfolio would attempt to yield the maximum out of the current portfolio. Sector targeting and seeking new relationships would not be carried out as part of marketing since portfolio is diversified. For smaller and midsized banks, exposures are dependent on the viability and sectors which are attractive that would ensure that no defaults occur that hampers the banks equity through provisioning and write-offs. Industries which include the utility sector, FMCG's, oil and gas, chemicals, cement, steel, pharmaceuticals, power an energy, automobile, consumer durables and electronics will continue to be attractive sectors. With the need of low cost Urea in the country, the fertilizer sector would also be viable if the gas curtailment issue is resolved on continuing basis to ensure consistent production Urea. This is by no means is an exhaustive list of industries, however, each bank would develop an own sector targeting strategy to hold, pull back or further disburse in a given sector.
Wall Street Banks are considered the benchmark for Corporate Finance and Investment banking transactions. The systems, software's, availability of industry data, industry wide ratios and financial innovation are part of western financial markets. Venture Capital, Private Equity and Leverage Buyout transactions are done regularly. Hedge and Equity funds part of investment banking with an investment arm reaching global stock markets are considered the yardstick for trading. Transactions are regularly mapped with Exotics (Derivatives structured based on transaction need) to hedge against risk. The Corporate and Investment Banking environment in Pakistan is far behind western markets as SBP encourages a conservative approach with lending and to avoid unnecessary risk. The best example is such that the big fish (banks on Wall Street) swim with the waves at the top of the sea whereas small fish (banks in Pakistan) at the bottom of the sea are unaffected with waves. If we say that banks in Pakistan are safe, the reason is we have yet to test our banking in rougher seas with high tides. SBP needs to encourage financial innovation and allow domestic banks to broaden their spectrum to a try and swim with the big fish.