three-tier financial structure not less than 3 months 24 hours call not restricted maturity of each...

Three-tier Financial StructureThree-tier Financial Structure

Not less than Not less than 3 months3 months

24 Hours 24 Hours CallCall

Not Not restrictedrestricted

Maturity of Maturity of each depositeach deposit

Not less than Not less than HK$100,000HK$100,000

Not less than Not less than HK$500,000HK$500,000

Not Not restrictedrestricted

Amount of Amount of each depositeach deposit

HK$25 HK$25 MillionMillion



Paid-up Share Paid-up Share CapitalCapital

Deposit-Deposit-Taking Taking

CompanyCompany

Restricted Restricted License BankLicense Bank

Licensed Licensed BankBank

Authorized Authorized InstitutionInstitution

Merchant Banking in Hong KongMerchant Banking in Hong Kong

In Hong Kong most merchant In Hong Kong most merchant banks are registered as banks are registered as restricted license banksrestricted license banks or or deposit-taking companies deposit-taking companies under the Banking Ordinance. under the Banking Ordinance.

Merchant Banking in the pastMerchant Banking in the past

““Merchant Bankers” is a term of English origin. Merchant Bankers” is a term of English origin. In its earliest form, it was “Merchants and In its earliest form, it was “Merchants and Bankers.” It meant that a firm that began as Bankers.” It meant that a firm that began as merchant or trader extended its activities by merchant or trader extended its activities by offering credit to its clients. Thereafter, some offering credit to its clients. Thereafter, some firms gave up acting as goods merchants and firms gave up acting as goods merchants and concentrated on trade finance, securities, concentrated on trade finance, securities, investment management and venture capital.investment management and venture capital.

Categories of Merchant BanksCategories of Merchant Banks

Bulge-bracket firms: blue-chip houses that disBulge-bracket firms: blue-chip houses that distinguish themselves by reputation, size, mtinguish themselves by reputation, size, market power and clientele. Examples are Market power and clientele. Examples are Morgan Stanley, Goldman Sachs, Merrill Lynorgan Stanley, Goldman Sachs, Merrill Lynch, Credit Suisse First Boston, etc.ch, Credit Suisse First Boston, etc.


Major bracket firms: Large full-line (all-roundeMajor bracket firms: Large full-line (all-rounded) firms that do not have the same merchad) firms that do not have the same merchant banking status as the bulge-bracket firnt banking status as the bulge-bracket firms. Examples are Lehman Brothers, Prudems. Examples are Lehman Brothers, Prudential-Bache, SSBntial-Bache, SSB


Specialized firms: Small firms which are stronSpecialized firms: Small firms which are strong in only a few areas. g in only a few areas.

Research firms: Finance houses that make theResearch firms: Finance houses that make their reputation on the quality of their securitiir reputation on the quality of their securities analysts. Naturally, their merchant banes analysts. Naturally, their merchant banking business is an extension of their reseaking business is an extension of their research capabilities.rch capabilities.

Organization of a merchant bank Organization of a merchant bank

1.1. Capital Markets (the largest of the four areas) Capital Markets (the largest of the four areas) – include:– include:

Corporate FinanceCorporate Finance Securities underwritingSecurities underwriting Mergers & Acquisitions (M&A)Mergers & Acquisitions (M&A) Venture capitalVenture capital Private placementsPrivate placements

Organization of a merchant bank Organization of a merchant bank

2. Consumer Markets2. Consumer Markets Securities tradingSecurities trading

Private bankingPrivate banking

3. Research3. Research

4. Miscellaneous Products4. Miscellaneous Products Commodity trading, insurance, etc.Commodity trading, insurance, etc.

Financial DisintermediationFinancial Disintermediation

Merchant Banks’ Customers and Merchant Banks’ Customers and FeesFees

Major customers of merchant banks are governmeMajor customers of merchant banks are governments, public utilities, corporations and wealthy indivnts, public utilities, corporations and wealthy individuals. The following fees charged for their serviciduals. The following fees charged for their services are the main sources of income:es are the main sources of income:

Retainer feeRetainer fee Success feeSuccess fee ExpensesExpenses Engagement feeEngagement fee Incentive feeIncentive fee

Retainer feeRetainer fee

• To cover professional timeTo cover professional time• Usually a monthly payment and fixed in Usually a monthly payment and fixed in

amountamount• Not refundable, but often creditable Not refundable, but often creditable

against success feeagainst success fee

Success feeSuccess fee

Usually a percentage of the amount of the Usually a percentage of the amount of the dealdeal

Debt raising: range in 1-2%Debt raising: range in 1-2% Equity (private placement): range in 2-5%Equity (private placement): range in 2-5% Equity (Floatation): range in 2-3% (HK) or 5-Equity (Floatation): range in 2-3% (HK) or 5-

8% (U.S.)8% (U.S.) M&A: fees are negotiable, but usually M&A: fees are negotiable, but usually

capped by a maximum amount for a capped by a maximum amount for a benchmark price of the deal.benchmark price of the deal.

ExpensesExpenses

•All reasonable out-of-pocket All reasonable out-of-pocket expenses reimbursed expenses reimbursed periodically against documented periodically against documented claimclaim

•Usually invoiced monthly or Usually invoiced monthly or quarterlyquarterly

Engagement feeEngagement fee

Used when the probability of Used when the probability of success of the deal is low or success of the deal is low or the early expenses are high, the early expenses are high, or bothor both

Usually a one-time, up-front Usually a one-time, up-front payment, creditable against payment, creditable against success feesuccess fee

Incentive feeIncentive fee

On top of the success fee, as On top of the success fee, as reward for the exceptional reward for the exceptional pricing achievement beyond a pricing achievement beyond a benchmark price, or in the benchmark price, or in the event the merchant bank is event the merchant bank is able to earn an extraordinary able to earn an extraordinary benefit for the clientbenefit for the client

Usually a percentage of the Usually a percentage of the “extraordinary benefit”“extraordinary benefit”

Merchant Banks’ Underwriting and Merchant Banks’ Underwriting and Advisory Roles in Hong Kong Advisory Roles in Hong Kong

Merchant banks may act as both Merchant banks may act as both brokers and dealers in a wide variety of brokers and dealers in a wide variety of securities. Income is earned on the securities. Income is earned on the spread between the purchase price and spread between the purchase price and the sale price. the sale price.

They provide research services and give They provide research services and give consultancy services on all varieties of consultancy services on all varieties of management problems that are caused management problems that are caused by financial concerns. by financial concerns.

The segregation of duties in a The segregation of duties in a commercial bankcommercial bank

Banking Operation DivisionBanking Operation Division Banking Operation Division gives support to Banking Operation Division gives support to

the Risk Management & Marketing Division the Risk Management & Marketing Division through the following back-up services :through the following back-up services :

The Accounting Department is the planner The Accounting Department is the planner and controller of the bank’s budgets, and controller of the bank’s budgets, provides management information and provides management information and keep track records of the financial status keep track records of the financial status of the bank.of the bank.

The Remittance Department deals with the The Remittance Department deals with the process of transferring funds to and from process of transferring funds to and from customers’ accounts, either instructed by customers’ accounts, either instructed by the customers or by other banks.the customers or by other banks.


Treasury DivisionTreasury Division The Treasury Division buys funds to The Treasury Division buys funds to

cover the bank’s exposure in lending cover the bank’s exposure in lending and sell the surplus funds to earn and sell the surplus funds to earn interests. The funds can be Hong interests. The funds can be Hong Kong currency and foreign Kong currency and foreign currencies.currencies.


Administration DivisionAdministration Division The Administration Division looks after The Administration Division looks after

the bank’s premises, maintains the bank’s premises, maintains supplies of stationery and supplies of stationery and equipment, and provides other equipment, and provides other services like printing, messengers, services like printing, messengers, security, etc.security, etc.


Human Resource DivisionHuman Resource Division The Human Resource Division is The Human Resource Division is

responsible for recruiting and responsible for recruiting and allocating the bank’s manpower, allocating the bank’s manpower, administration of salary and fringe administration of salary and fringe benefits, and staff training.benefits, and staff training.


Credit and Marketing DivisionCredit and Marketing Division Credit and Marketing Division is the Credit and Marketing Division is the

front line to contact, liaise, negotiate front line to contact, liaise, negotiate and serve the customers. It is and serve the customers. It is responsible for retail marketing and responsible for retail marketing and wholesale marketing.wholesale marketing.


Marketing DivisionMarketing Division The target customers of wholesale marketing The target customers of wholesale marketing

group are composed of corporate group are composed of corporate customers with a constant need of bank customers with a constant need of bank financing. By making use of the funds financing. By making use of the funds absorbed by the retail marketing group, absorbed by the retail marketing group, the wholesale marketing group earns the wholesale marketing group earns interest income through successfully interest income through successfully selling the products like letter of credit, selling the products like letter of credit, bills collection, foreign exchange, bills collection, foreign exchange, overdraft, etc.overdraft, etc.


Risk Management DivisionRisk Management Division

It performs the credit review and It performs the credit review and monitoring duties. It ensures the risk monitoring duties. It ensures the risk of the advances granted by the of the advances granted by the Credit and Marketing Division is of Credit and Marketing Division is of acceptable level. As a result, the acceptable level. As a result, the credit risk will not be high and asset credit risk will not be high and asset quality is good.quality is good.


Internal Audit DivisionInternal Audit Division The Internal audit Division inspects the The Internal audit Division inspects the

operations from checking of operations from checking of accounting records and counting accounting records and counting cash in vaults to interviewing of staff cash in vaults to interviewing of staff to discuss management problems. It to discuss management problems. It ensures that the bank is operating in ensures that the bank is operating in accordance with the government’s accordance with the government’s regulations and management’s regulations and management’s objectives and policies.objectives and policies.


Investment Services DivisionInvestment Services Division Bank offers a full spectrum of investment products Bank offers a full spectrum of investment products

and services to both private and corporate and services to both private and corporate investors. The funds cover different asset classes investors. The funds cover different asset classes including global equities, bonds, money markets including global equities, bonds, money markets and foreign exchange markets. Banks also and foreign exchange markets. Banks also provide asset management services for provide asset management services for retirement schemes, institutional investors and retirement schemes, institutional investors and charitable organisations. charitable organisations.


The Information and Technology DivisionThe Information and Technology Division

But now it deploys the latest technologies to meet But now it deploys the latest technologies to meet changing customer needs and enhance bank’s changing customer needs and enhance bank’s leading edge. It develops customer-oriented leading edge. It develops customer-oriented systems to ensuring that customers can enjoy a systems to ensuring that customers can enjoy a sophisticated range of banking products in the sophisticated range of banking products in the most efficient and convenient way. Innovative e-most efficient and convenient way. Innovative e-banking services such as Internet Banking and banking services such as Internet Banking and other wireless financial services allow customers other wireless financial services allow customers to manage their wealth with ease any time to manage their wealth with ease any time around the world.around the world.


Compliance DivisionCompliance Division

There are many laws and regulations There are many laws and regulations governing the operation of banks. governing the operation of banks. The Compliance Division ensures that The Compliance Division ensures that the regulations set by the the regulations set by the supervisory institution (e.g. HKMA supervisory institution (e.g. HKMA and HKAB) have been adhered. and HKAB) have been adhered.

Personal Banking ServicesPersonal Banking Services Deposit AccountsDeposit Accounts Current AccountsCurrent Accounts Time DepositsTime Deposits Deposit linked with investment of share or foreign curDeposit linked with investment of share or foreign cur

rencyrency Personal loansPersonal loans Debit Card and Payment ServicesDebit Card and Payment Services Hire purchaseHire purchase Credit CardsCredit Cards Foreign currency exchangeForeign currency exchange

Banking Services for Banking Services for Business CustomersBusiness Customers

Deposit AccountsDeposit Accounts Payroll ServicesPayroll Services OverdraftOverdraft Loans and advancesLoans and advances Global cash managementGlobal cash management Financial AdviceFinancial Advice

three-tier financial structure not less than 3 months 24 hours call not restricted maturity of each...

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