Strong growth seen for investment banking
Good flow of deals and robust economic expansion to drive sector
WITH a healthy pipeline of deals, among other positives, the investment banking (IB) business in the country is poised for strong growth next year despite geopolitical risks and external headwinds.
Bankers are upbeat about their IB portfolios, driven by a healthy flow of deals, strong economic growth, improvement in prices of key commodities and a stronger ringgit.
Many observers are of the view that geopolitical risks and the upcoming general election will be only a temporary setback for IB.
These factors will increase market volatility, but will stabilise and pick up after that.
Maybank Investment Bank Bhd CEO Datuk John Chong tells StarBizWeek that he is positive on the outlook of the IB business as the bank itself currently has a healthy pipeline of deals.
“The domestic equity capital markets (ECM) and mergers and acquisitions (M&A) business have seen an increased flow of deals in 2017 compared to 2016 and we believe that this trend will continue into 2018 on the back of a much stronger gross domestic product (GDP) growth in the second half of this year, which is likely to continue into 2018,’’ he notes.
In ECM, Chong says the IB business in Malaysia saw a continued pick-up in activity as a number of large transactions were delayed for various reasons this year and are likely to come to market next year, in addition to several new deals we are expecting in 2018.
Initial public offering (IPO) volume and deal value are expected to be larger as compared to 2017, he says, adding that besides IPOs, the bank also expects to see increased capital raising via equity placements and right issues as the equity market continues to gain momentum.
CIMB Investment Bank Bhd CEO Datuk Kong Sooi Lin notes that over RM5.8bil of proceeds had been raised by companies that were listed on Bursa Malaysia this year.
“In the year ahead, we expect IPO volumes to remain robust with companies from the energy, infrastructure, financial services, consumer sectors, among others, pursuing IPOs on Bursa Malaysia. We expect 2018 to be another exciting year for Malaysian equity capital markets,’’ Kong says.
OCBC Bank (M) Bhd senior banker and head of global investment banking and corporate development Tan Ai Chin says the catalyst for growth is the rapidly growing mid-corporate segment which will fuel the growth of IB activities beyond just the public sector and conglomerates, which are all typically overly well-banked.
“The other catalyst would be the project funding requirements estimated at about US$8bil from the Rapid project spearheaded by Petronas specifically for those which will be operated under joint ventures with other prominent industry players like Saudi Aramco amongst others. With ample liquidity within the banking system, we believe there is ample room to support such funding requirements.
“This year has seen better IPO activities compared to 2016 with several large IPOs such as Lotte Chemical and EcoWorld International. Going into 2018, we expect several significant IPOs including Bank Islam Brunei, Edra Energy Global and potentially foreign insurers in Malaysia,’’ Tan notes.
Debt market
Chong adds the debt market will remain positive next year given the various funding requirements for infrastructure projects that are due to be rolled out. He reckons many of these to be large ticket sized projects which will be financed through debt capital market, sukuk issuances, or project financing and loan syndication.
Furthermore, last year was a strong year for the bond market with the highest amount of bonds issued since 2012 and he expect the momentum to continue into 2018.
“We are, however, mindful of the potential interest rate hikes, both globally and domestically, which may affect the bond market,’’ he says.
Kong says she foresee about RM90bil in corporate bond issuance next year.
“Primary deals with no fixed drawdowns may optimise offerings in the first half of next year,’’ she says.
“We remain confident that interest rates in general will remain accommodative even with potential policy rate adjustments and is unlikely to affect the borrowing requirements and the corporate bond pipeline.
“Demand for long-dated Malaysian government securities (MGS) will remain resilient, supported by natural duration requirements by players like pension funds and insurers. As announced in the Budget 2018, there are several infrastructure projects that are expected to kick off in 2018, with funding requirements of up to RM1.0 trillion, and we expect a large proportion of this to be funded via the bond markets over the next few years,’’ Kong says.
RAM Ratings in its latest note said gross issuance of MGS and Government Investment Issue (GII) in the 11 months of this year reached RM102.5bil.
As at the time of publication, year-todate (YTD) issuance had already surpassed the high end of the rating agency’s projection range (RM100bil-RM110bil) at RM113.9bil. On the corporate side, gross issuance summed up to RM111.2bil as at end-November.
Akin to the issuance of government securities, RAM said YTD corporate bond issuance has currently also exceeded its expectation (RM105bil-RM115bil) at RM118.5bil.
Commenting on this scenario, RAM’s head of research and economist Kristina Fong say this year’s robust issuance has been supported by quasi-government entities and the private sector. with respective y-o-y increases of 34.3% and 27.0%, as fund raising was brought forward to 2017 to lock in better rates in anticipation of higher interest rates in 2018.
“Taking this into account as well as the projected issuance pipeline, we expect gross corporate issuance to moderate to around RM90bil-RM100bil in 2018,” she says.
On the M&A front, Chong says the bank expect the inbound and outbound M&A activities to sustain, led by not only government-linked investment companies but also the private sector.
“We believe that 2018 will be a year that corporates will be looking to strengthen their core businesses, which may involve acquisitions of targets in similar businesses or divestment of activities deemed noncore. We are seeing attractive opportunities across all sectors but in particular consumer, real estate and infrastructure sectors,’’ he adds.
Kong believe 2018 will see an increase in M&A activities supported by strong economic fundamentals regionally. Asian Development Bank is projecting Asean GDP growth of 5.1% in 2018.
Key themes/industries which will support the M&A and advisory activities include e-commerce and digital boom, banking and insurance M&A, construction and infrastructure play, consumer related industries as well as potential consolidation in the oil & gas industry.
Kong says: “We also observed increased interest from foreign investors on M&A opportunities into Asean as they look for higher growth markets and establishing a strong platform to take advantage of rising income levels within the region, buoyed by the positive currency outlook.”
With regards to M&A activities, Tan says Malaysia has recorded a significant uptick in 2017 with the highest M&A deal value in the past five years with RM7.1bil registered to date, after recording an uptrend in deal activities in 2016 with transactions worth RM22.1bil.
This is mainly driven by the Saudi’s inbound investment in oil and gas sector, M&A involving GLCs and private equities (PE)/venture capital investments.
“Going into 2018, we expect the M&A activities will continue to be a key theme which will involve investments and divestments by PE as well as strategic acquisition to strengthen market position and foster integration.
“M&A in the food and beverage sector is also likely to continue to see more activities in 2018 following some significant announcements recently while the increasing M&A interest in the SME space is expected to show some significant M&A activities in 2018 and beyond,’’ Tan explains.
Potential challenges
Kong says there will be some challenges as she expect an uptick in risk appetite as the cost of capital ratchets up in 2018 led by the US Federal Open Market Committee.
The world, she says is shifting from an environment of cheap capital to one with increasing cost of capital as central banks re-assess their monetary policy positions and execute changes to their past policies.
Analysts are expecting three US Fed rate hikes next year and also at least one hike in the overnight policy rate by Bank Negara sometime by the first half of next year. Most analysts expected bond yields to rise at a measured pace in the event of interest rate hikes rather than a sell-off in the local bond market.
Malaysian government bond prices, they opined are holding up despite a global selloff in bonds on positive economic growth outlook, ample liquidity, among others. The benchmark 10-year MGS price has risen since early November, indicating appetite among investors for Malaysian government bonds.
Bond yields and prices have an inverse relationship.
Upwards adjustments in policy rates in developed markets, Kong says may cause capital reallocation/repatriation if relative values of investing in developed and emerging markets narrow.
“There are also the mid-term elections in the US, as well as the Malaysian general election which will take place no later than the third quarter of next year. Finally, geopolitical risks may continue to flare up such as the North Korean provocations that we’ve observed much throughout 2017 and the Qatar blockade.
“Other market-shifting factors may include higher global and regional growth and improving sentiments.
“These factors bode well for commodity prices, which in turn are expected to benefit commodity-based economies such as Malaysia, Indonesia and Australia,’’ she says.