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:
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Corporate Finance
Securities underwriting
Mergers & Acquisitions (M&A)
Venture capital
Private placements
Organization of a merchant bank
2.
Consumer Markets
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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:
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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
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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
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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 bank’s 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 bank’s 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 bank’s 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 bank’s 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 government’s
regulations and management’s
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 bank’s
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
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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
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Deposit Accounts
Payroll Services
Overdraft
Loans and advances
Global cash management
Financial Advice