KARACHI, Sept 9: Sindh Governor Mohammadmian Soomro has said that with the declining trend of profitability through commercial lending, investment banking is playing a dominant role in income generation as well as towards economic development of the countries world over.

He was delivering a lecture on the “Role of investment banking in international perspective” at the Institute of Business Administration (IBA) at its evening campus here on Saturday.

Mr Soomro, who is also Patron of the IBA, further stated that with the changing competitive environment commercial banks besides their other functions constantly search for good investments to supplement earnings.

He said that a commercial bank investment portfolio consisted of many different types of instruments such as money market instruments with short maturities and duration as well as capital market instruments with longer maturities and duration.

The Governor pointed out that the fundamental objective of the investment portfolio of banks is to maximize earnings while limiting risk. He said banks investments contributed to earnings in the form of periodic interest income, reinvestment income and principal appreciation or depreciation which represent a cash flow when calculating total returns.

Globally, Mr Soomro went on, investment encompasses three broad functions, namely underwriting public offering of new securities, trading existing securities and advising and financing mergers and acquisitions.

He said the issuers of large blocks of securities typically used investment banks as underwriters, who bought the new securities from the issuers at agreed price and redistributed them to investors. An underwriter normally pre-sells the issue by obtaining commitments from investors.

The Governor informed the participants that investment banks also serve as brokers or dealers and secondary market transactions. Internationally, they perform three basic functions within their trading activities.

Mr Soomro further said that acting as dealers the traders set bid and ask prices for every security traded. The bid indicates the price at which the firm agrees to buy securities and the price for security stands for the sale price.

Advising and financing mergers and acquisitions function of investment banks represent the quickest route to general stipulating profits. Investment banks aggressively pursue merger and acquisition business which activity has essentially restructured corporate finance. Mergers and acquisitions continue to be a significant force in the restructuring of the financial services industry.—APP