Investment Banking CourseJanuary 16, 2015
We come across a lot of finance aspirants who wish to understand the banking world. Broadly, it’s bifurcated in 2 divisions. A. Retail Banking/Commercial Banking, B. Investment Banking. Here’s a detailed explanation to answer all your questions related banking.
Retail Banking/Commercial Banking:
The primary bread and butter of this arm is to Lend and accept deposits. The margins are earned by lending money at higher rate of Interest in comparison to what is paid to creditors or depositors. For Eg: JP Morgan has retail presence all across United states, Deutsche bank has huge retail presence in Frankfurt and Europe and some retail presence in India as well.
Investment Banking: Investment banking arm is broadly classified into three core activities or functions:
- Raising Capital (Underwriting Services).
- Advisory Services
- Sales and Trading.
Here Financial institutions helps corporate and Govts to design the plan and help them raise capital either through Equity or through Debt.
It is one of the most important functions of IB arm as it involves lot of ground work where Investment banks need to run the entire IPO process on behalf of the company and help it go public and thus raise desired capital. This function involves meeting all regulatory requirements, submitting prospectus or offer document, reaching to general public through various means of communication and finally selling the shares.
IB’s take all key decisions as to what should be price of the IPO, how much money should be raised through Equity and how much through debt, when should the IPO be launched, who should be target audience etc.
Investment Banks helps firms who need capital by raising capital on their behalf. They do this by selling securities, thus they represent Sell Side Firms.
Under this arm, IB’s offer expert advice in terms of Research, valuations, market trends and sector specific information to clients. The primary bread and butter business is assisting clients in Merger and Acquisition deals by doing the most appropriate valuations of any company a client wishes to merge with or acquire.
For e.g. (Face book acquired or bought whatsapp at 19bn $, so definitely there was some math to arrive at this figure, this is performed by Investment banks).They make good commissions in this business and is one of the most important driving factor which keeps competition alive amongst Investment banks.
Sales and Trading:
Under this arm banks assist institutional clients and wealthy investors in trading into Equity and Debt (secondary markets essentially).It also helps client to take exposures into complex derivative exotic products and contracts. It also designs customised products to suit client requirements and create a market for the same. They not only help trade in domestic markets but across all the markets around the globe, with the help of their global presence and relevant infrastructure which makes it possible for them to facilitate this service.
Whole Sale banking:
Whole sale banking largely captures three important functions (Trade finance, Project finance, and Loan Syndication)
A simple example of Project finance could be Reliance going to bank for financing the Metro project, stating their fund requirement for the entire project, their expected cash flows, potential earnings and repayment methodology of this loan. This is Project finance.
Trade finance involves financing International Trades (Importers and Exporters), come to banks for assistance in such trades. They generally require Letter of Credits which acts as guarantee from buyer’s bank to seller’s bank as transactions are on credit.
Loan syndication simply means group of lenders (syndicate) coming together to loan or lend funds to the borrower. Depending upon the requirement the number of syndicate members may vary. One of the banks acts as lead bank or arranger and contributes major share of loan amount and other banks contribute as per their respective share in the syndication.
Asset Management simply means professional management of Portfolio and assets within that portfolio. It primarily captures two important products (Mutual funds and Hedge funds).While both are Investment vehicles which pools money from Investors but the way they operate and their investment decisions, strategies differ significantly. While Mutual funds are less risky, Hedge funds are extremely risky pool. The ultimate objective of both the funds is to align their investment decisions with investment objective of investors. Both are managed by professional Fund Managers who specialise in this field of Investments.
Mutual Funds, Hedge funds, Pension Funds have lots of capital collected through Investment pool and they need to invest these funds into financial securities to generate returns and meet investment objectives. Thus they represent Buy side firms as they have capital and need securities.
All businesses are categorised in three broad categories and accordingly roles and responsibilities are also aligned:
- Front Office
- Middle Office
- Core Operations