Corporations or governments that make the decision to sell ownership in their company through an initial public offering generally engage the services of an investment bank to assist in structuring the transaction and to raise capital.

Investment banks differ from commercial banks in that commercial banks take deposits from customers and use these deposits to provide financing to individuals and corporations through loans.

Investment banks assist corporations and governments in raising capital by underwriting the issuance of securities.

The services of investment banks include the promotion and trading of securities, known as the “sell-side” and distribution to individuals and institutions, known as the “buy-side”.

The investment bank will work with the company in deciding the amount of financing required, percentage of the company to be sold, the type of security to be offered, the offering price, and may assist with the filing and registration with the relevant exchange and regulatory body.

Once this is achieved the company or government issuing the securities, the issuer, appoints an investment bank to underwrite the offering.

Underwriting is the process whereby an investment bank bears the risk of being able to sell the securities and the cost of holding them on its books, until they are sold.

The most common form of the underwriting of securities is a firm commitment, also known as a bought deal. In this scenario the investment bank will buy the new securities for an agreed price and resell to the public at a mark-up.

The company issuing the securities is guaranteed the funds whether the underwriter is able to sell the securities or not.

For larger issues, a syndicate of underwriters may be formed involving several investment banks who share joint responsibility at an agreed ratio.  This is known as a syndicate underwriting. In this case a syndicate manager selects members, determines the allotment of shares for each member, and manages the overall process.

The members may further have selling groups, consisting of other investment banks and broker-dealers. The underwriters sell the securities at a higher price than the issuer receives.

This mark-up is known as an underwriting spread and is usually divided into a management fee for the syndicate manager and an underwriting allowance for the members of the syndicate, who can further compensate the selling group with a selling concession.

Another form of underwriting is a best-efforts underwriting.

This usually occurs for issues which may be considered risky or difficult to sell.

In this case the investment bank will not will not guarantee the sales of securities and the company bears the risk if the full issue is not sold, which would result in less monies being received.

Underwriters play a critical role in bringing securities to the market which involves a web of players before the securities are purchased by the end investor – a role with significant risk and compensation.

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Talking Finance: Underwriters bear risk

The International Monetary Fund has claimed the oversight responsibilities of Cambodia’s central bank “clearly outstrips its capacity and resources” and believes it should consider a temporary halt on licensing new banks.

Human resources, crisis management and enforcement were marked as concerns for the National Bank of Cambodia (NBC) in the IMF report, which called Cambodia’s financial system “relatively shallow”.

“[IMF] staff strongly recommended that a moratorium on new bank licensing be formally placed as long as supervisory capacity and resources are inadequate,” today’s 2010 Country Report stated.

“Robust financial sector oversight is a precondition for a more resilient financial system that would enable Cambodia to meet its economic potential.”

New NBC director general Nguon Sokha said today that there was an ongoing effort to strengthen the central bank, adding it would take a better approach to licensing rather than considering a freeze.

“We need to strengthen the competition in the banking sector,” she said.

The NBC was addressing its constraints through measures such as adding more staff and improving its approach.

Internal changes to improve the effectiveness of its Banking Supervision Department had been made, she said, and the bank was working with the IMF on training.

Representatives from the banking sector remained supportive of the NBC today, but raised some sector concerns.

Canadia Bank vice president Dieter Billmeier said he felt the NBC generally did well in terms of oversight.

“As far as we are concerned, so far so good,” he said today.

But with more than 30 banks operating in the Kingdom, he said a lack of human resources was a concern for both public and private industry players.

One suggestion to alleviate the problem was to make the definition of a financial year more flexible, he said.

Currently, the financial year for banks and companies must coincide with the calendar year, meaning oversight bodies as well as independent overseers are annually overworked for a short period.

Billmeier said a more flexible definition for the end of the year – such as allowing the end of a financial year to coincide with the end of a quarter – would help to alleviate this.

Kookmin Bank Cambodia chief executive officer Jang Ki-sung said that tightening the criteria for a banking licence would also strengthen the players in the sector.

The NBC had also taken policy positions to improve the sector as of late, such as tripling the minimum amount of registered capital for banks to 150 billion riel, or US$37.07 million, at the end of 2010.

As a result, Angkor Capital Bank shareholders changed the firm from a commercial to a specialised bank.

“I think they [the NBC] were going the right way,” said Jang Ki-sung today.

The IMF added in its report that five banks constituted nearly 80 percent of total credit in Cambodia.

The economic recovery was an opportunity to clean up bank balance sheets and reduce vulnerabilities while maintaining sector confidence, it said.

Meanwhile, the IMF projected GDP growth for 2010 would be 6.8 percent, and 6.5 percent in 2012.

“Cambodia was hit harder than comparator countries by the global recession, given vulnerabilities that are in part a legacy of a generation lost by civil strife,” it said.

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IMF hits out at banking oversight

Since mid-April, Cambodia’s currency goes down nearly 2 percent against dollar but it has held steady after the NBC has taken immediately action to stabilized Riel by purchasing the riel in a bid to create artificial demand for the notes and raising its value against greenback.

Tay Nay Im, The National Bank of Cambodia’s Director General, said that in general, appreciates staring October. She added that “the riel depreciates seasonally. We do not see anything abnormal.”

The NBC will auction the next $5 million in five separate $1 million lots from September 01 to 10 at the Central bank’s headquarters in Phnom Penh.

Last year, NBC purchased $54 million.

A total of US$ 3 million was to be auctioned off to purchase riel in separate lots Monday, Wednesday and Friday of this week. The first, NBC auctioned US$ 4 million late last month and the second is US$ 3 million last week but NBC’s intervention failed to stop the decrease of riel.

Kang Chandararot, Cambodia Institute for Development Study President was quoted by the Post as saying that the depreciation of the domestic currency is not unique to Cambodia, as the US dollar has strengthened against many foreign currencies, including the euro.

“It’s good the NBC releases US currency to appreciate the riel,” he said. “The riel will likely rise as euro currency recovers in value.”

“Today, the banking industry is growing both in scope and operations, attracting large foreign banks to open, and the amount of deposits and loans have consistently increased – this reflects confidence from the public in this industry,” he said, encouraging banks to list on the long-awaited Cambodian stock exchange, according to the Phnom Penh Post.

The premier also said that Foreign exchange reserves had climbed 21.48 percent so far this year.

International Monetary Fund (IMF) data shows that reserves reached a record high of $2.594 billion in May after climbing steadily at the beginning of the year from $2.076 billion at the end of 2008, the Post quoted Hun Sen as saying.

The global financial crisis since October of last year, also plagued Cambodia’s economy such as tourism sector, garment industry, construction sector and real estate as well as Cambodia’s commercial bank sector. Even though, Cambodia’s commercial banks cushioned from the global economic slowdown, because Cambodia’s banking sector is not strongly dependent on international loans and capital market and Cambodia has yet to establish its own stock market.

Speaking at a roundtable discussion on banks and public confidence, which was organized by the Club of Cambodian Journalists on August 26, 2009, Tal Nay Im, National Bank of Cambodia’s Director General said that the bank deposits had increased to almost 29 percent of gross domestic products (GDP) in 2008, up from 14 percent in 2000.

Tal Nay Im also said that Cambodian banking system did not directly suffer from the consequences of the financial crisis, even if Cambodia’s economy is free and open to the world.

While the growth in bank deposits gives banks more liquidity, banks will be able to make more loans to aid the economy. At the mean time, commercial banks also carefully lend loans to bank’s clients because the slow recovery of nation economy makes customers to be facing difficulty for loan repayment on times.

Due to the time of economic turmoil, Cambodians keep their money at home rather than deposit at banks.

The Cambodia Daily quoted Kang Chandararot, executive director of the Cambodian Institute of Development Study as saying that there is no guarantee that the deposits will spawn economic growth, but growth needs the confidence that the deposits represent.

“You have to establish the confidence first before the market can function,” he said, adding that “at this moment it is encouraging, not guarantee.”

National Bank of Cambodia Director General Tal Nay Im gave speech at the Cambodian Club of Journalism that non-performing loans at the commercial banks reached 5.2 percent by the end of May, 2009, up 1.8 percentage points from the beginning of the year. She warned the rate could reach as high as 10 percent by the end of the year.

Bad loan was on rise when bank’s borrowers struggled with repayments amid declining cash flow following the World economic recession.

Tal Nay Im said that the Central Bank was not overly worried by the defaults.

According to the National Bank of Cambodia’s 2008 annual banking supervision report, the bad loans in 24 commercial banks was up to 3.7 percent of total outstanding loans, about US$2.4 billion, at the end of the last year, up from 3.4 percent the year before.

15 of 24 commercial banks had no non-performing loans as of the end of 2008, a situation described by some people in the sector as unlikely. And another four had NPLs ratios under 4 percent, according to the report.

The total value of loans soared 54.7 percent from US$1.51 billion to $2.35 billion. The absolute value of NPLs decreased to US$87.44 million at the end of 2008 from $52.95 million a year earlier.

The VOA reported, the Foreign Trade Bank’s bad loan rate went from 30.7 percent to 32 percent in 2008. Canadia bank rose from 6.8 percent to 11.1 percent in that period. By the way, ANZ Royal bank saw an increase from 0.4 percent to 2.6 percent in that period.

In the mean time, the International Monetary Fund (IMF) and the World Bank also warned of rising rates of non-performing loans in the major banks in Cambodia.

“Last year, some banks had zero NPL ratios because they did not have bad loans when we audited them, but since the start of this year all the banks have NPLs,” the Phnom Penh Post quoted Tal Nay Im as saying.

Gui Anvanith, FTB’s managing director, was quoted by the VOA as saying that “Our bank works with big companies, and we have collateral, which has the highest rate of non-performing loans in the country.” He added that “We will continue to be cautions and to strengthen the banking system.”

The Phnom Penh Post quoted In Channy, ACLEDA president as saying that the bank’s NPLs were actually 0.44 percent of outstanding loans at the end of the last year and had increased to 1 percent, largely as a result of loans to large-scale business in the construction-materials sector.

According to the circular on non-performing loans, provisions and interest accounting, commercial banks must apply the following regulation for non-performing loans and interest accounting. The Central Bank issued Prakas B7.02-145 from June 7, 2002 on classification and provisioning for bad and doubtful debt specifies the minimum mandatory level of specific provisioning depending on the classification concerned.

The non-performing loans must be classified in three categories according to the late payment, including substandard (10%), doubtful (30%) and loss (100%).

The National Bank of Cambodia is the Central Bank which is an autonomous public entity of a commercial and industrial nature. Its principal mission is to determine and direct the monetary policy aimed at maintaining price stability in order to facilitate economic development within the framework of the Kingdom’s economic and financial policy.

The lack of US dollars flowing through the Cambodian market is because of a major decline in the garment sector, tourism industries and limited agriculture production.

Therefore, commercial banks, licensed money changers and listed businesses would be able to buy dollars from NBC.

In early August, the NBC bought US$2 million worth of riels daily for five days after the local currency hit a low of 4,191 against the greenback during the first week of the month. It is necessary for the Central Bank’s policy to inject foreign currency into the market to stop the devaluation of national currency.

“Given the small market for the riel, this sharp rebound clearly reflects the NBC’s intervention,” the Economist Intelligence Unit’s (EIU) Cambodia economist Danny Richards was quoted by the Post earlier this month as saying.

Neou Seilha, an economist at the Economic Institute of Cambodia was quoted by the Cambodia Daily as saying that the dropping value of Cambodia’s national currency was due to a major slowdown in the garment and tourism industries, sectors of the economy that naturally bring US dollars into Cambodia.

Tal Nay Im said that official exchange rates were determined by the NBC as an average of exchange rates at “five large markets in Phnom Penh”, according to the Post.

Tal Nay Im, NBC’s director general, was quoted by the Phnom Post as saying that she was not aware of the value of the deal, but confirmed that negotiations are complete and BIDV will be recognized as the bank’s new owner. She added that she was not aware of the value of the deal, but confirmed that negotiations are complete and BIDV will be recognized as the bank’s new owner.

“After the purchase BIDV will invest US$50 million of capital [in Prosperity] for its business operations,” she said. “It’s very good for Cambodia’s economy that large foreign banks are coming to invest … they bring with them capital and modern banking technology,” the Post reported.

The BIDV is a largest state-owned bank in Vietnam. It is the nation’s number one bank in net income ($70 million USD) and the second biggest bank in revenue ($10.48 billion USD) (behind Agribank). According to the United Nations Development Programme report on the 100 largest enterprises in Vietnam, BIDV came in at the 4th position after Agribank, VNPT and EVN, according to Wikipedia.

The bank was established on 26 April 1957 as the Bank for Construction of Vietnam, under which name it operated until 24 June 1981, at which point it changed its name to the Bank for Investment and Construction of Vietnam. It adopted its present name on 14 November 1990.

In January 2007, the government announced that it would sell a minority stake in the BIDV and three other banks. In March of that same year, they sought the government’s permission to invest in highway projects. In September, they announced that they would form Vietnam’s first aircraft finance group in Hanoi in a joint venture with Vietnam Airlines, PetroVietnam, and Vietnam Post and Telecommunication.