Three-tier Financial Structure

Authorized
Institution

Licensed
Bank

Restricted
License Bank

DepositTaking
Company

Paid-up Share
Capital

HK$150
Million

HK$100
Million

HK$25
Million

Amount of
each deposit

Not
restricted

Not less than

HK$500,000

Not less than

HK$100,000

Maturity of
each deposit

Not
restricted

24 Hours
Call

Not less than

3 months

Merchant Banking in Hong Kong

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

Merchant Banking in the past

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

Categories of Merchant Banks

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

Categories of Merchant Banks

Major bracket firms: Large full-line (allrounded) firms that do not have the
same merchant banking status as the
bulge-bracket firms. Examples are
Lehman Brothers, Prudential-Bache,
SSB

Categories of Merchant Banks

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

Research firms: Finance houses that

make their reputation on the quality of
their securities analysts. Naturally,
their merchant banking business is an
extension of their research capabilities.

Organization of a merchant bank

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

Corporate Finance
Securities underwriting
Mergers & Acquisitions (M&A)
Venture capital
Private placements

Organization of a merchant bank

2.

Consumer Markets

3.
4.

Securities trading
Private banking

Research
Miscellaneous Products

Commodity trading, insurance, etc.

Financial Disintermediation

Merchant Banks Customers and

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

Retainer fee
Success fee
Expenses
Engagement fee
Incentive fee

Retainer fee
To cover professional time
Usually a monthly payment and fixed in
amount
Not refundable, but often creditable
against success fee

Success fee

Usually a percentage of the amount of the

deal
Debt raising: range in 1-2%
Equity (private placement): range in 2-5%
Equity (Floatation): range in 2-3% (HK) or
5-8% (U.S.)
M&A: fees are negotiable, but usually
capped by a maximum amount for a
benchmark price of the deal.

Expenses
All reasonable out-of-pocket
expenses reimbursed periodically
against documented claim
Usually invoiced monthly or
quarterly

Engagement fee
Used when the probability of
success of the deal is low or
the early expenses are high,
or both
Usually a one-time, up-front
payment, creditable against
success fee

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

Merchant Banks Underwriting and

Advisory Roles in Hong Kong

Merchant banks may act as both

brokers and dealers in a wide variety
of securities. Income is earned on the
spread between the purchase price
and the sale price.
They provide research services and
give consultancy services on all
varieties of management problems
that are caused by financial concerns.

The segregation of duties in a

commercial bank
Banking Operation Division
Banking Operation Division gives support to
the Risk Management & Marketing Division
through the following back-up services :

The Accounting Department is the planner

and controller of the banks budgets,
provides management information and
keep track records of the financial status
of the bank.

The Remittance Department deals with the

process of transferring funds to and from
customers accounts, either instructed by
the customers or by other banks.

The segregation of duties in a

commercial bank
Treasury Division
The Treasury Division buys funds to
cover the banks exposure in lending
and sell the surplus funds to earn
interests. The funds can be Hong
Kong currency and foreign currencies.

The segregation of duties in a

commercial bank
Administration Division
The Administration Division looks after
the banks premises, maintains
supplies of stationery and equipment,
and provides other services like
printing, messengers, security, etc.

The segregation of duties in a

commercial bank
Human Resource Division
The Human Resource Division is
responsible for recruiting and
allocating the banks manpower,
administration of salary and fringe
benefits, and staff training.

The segregation of duties in a

commercial bank
Credit and Marketing Division
Credit and Marketing Division is the
front line to contact, liaise, negotiate
and serve the customers. It is
responsible for retail marketing and
wholesale marketing.

The segregation of duties in a

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

The segregation of duties in a

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

The segregation of duties in a

commercial bank
Internal Audit Division
The Internal audit Division inspects the
operations from checking of
accounting records and counting
cash in vaults to interviewing of staff
to discuss management problems. It
ensures that the bank is operating in
accordance with the governments
regulations and managements
objectives and policies.

The segregation of duties in a

commercial bank
Investment Services Division
Bank offers a full spectrum of investment products
and services to both private and corporate
investors. The funds cover different asset classes
including global equities, bonds, money markets
and foreign exchange markets. Banks also
provide asset management services for
retirement schemes, institutional investors and
charitable organisations.

The segregation of duties in a

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

The segregation of duties in a

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

Personal Banking Services

Deposit Accounts
Current Accounts
Time Deposits
Deposit linked with investment of share or
foreign currency
Personal loans
Debit Card and Payment Services
Hire purchase
Credit Cards
Foreign currency exchange

Banking Services for

Business Customers

Deposit Accounts
Payroll Services
Overdraft
Loans and advances
Global cash management
Financial Advice