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investment banking
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Investment BankingSESSION 1: INVESTMENT BANKING FUNCTIONS
Functions of Investment Bank Core Business
‒ Underwriting‒ Distributing‒ Advising‒ Others
Back Office‒ Operations‒ Technology
Middle Office‒ Risk Management‒ Corporate Treasury‒ Financial Control‒ Corporate Strategy‒ Compliance
Underwriting Key function performed by an investment bank during capital raise
Assuming the risk of selling a security issue at a satisfactory price
If the issue is undersubscribed, underwriters subscribe to the balance portion of the issue
Act as market makers for the issue
M&A and Financial Advisory M&A Advisory
‒ Buy-side Advisory to corporations and Private Equity funds (financial sponsors)
‒ Sell-side Advisory
‒ Providing fairness opinions to boards
Advisory on capital restructuring, share buybacks, etc.
Market Makers Buy and sell various financial products across a variety of asset classes (equity, debt,
mezzanine, futures, options, swaps, etc.)
Perform the above function on behalf of clients as well as on a proprietary basis
Additionally, investment banks also have a research wing whose resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients
There is a potential conflict of interest between the investment bank and its analysis
What are the conflicts of interest? Example: Worldcom – Jack Grubman
Other Functions Global transaction banking
Asset Management / Investment Management
Merchant Banking
Private Equity
Prime brokerage functions
Middle Office: Risk Management Involves analyzing the market and credit risk that traders are taking onto the balance sheet
in conducting their daily trades
Setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall
Middle Office: Corporate Treasury Responsible for an investment bank's funding, capital structure management, and liquidity
risk monitoring
Middle Office: Financial Control Tracks and analyzes the capital flows of the firm
Adviser on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses
Middle Office: Compliance Responsible for an investment bank's daily operations' compliance with government
regulations and internal regulations
Back Office: Operations and Technology Data-checking trades that have been conducted, ensuring that they are not erroneous, and
transacting the required transfers
Distribution Models for Capital Raises Negotiated Purchase
Competitive Bid Price
Commission / Best Efforts Basis
Privileged Subscription
Direct Sale
Major Global Investment Banks
Major Boutique Shops
Indian Investment Banks
Major Global Investment Banks in India
The Investment Banking Environment Investment banks at the cusp of transition
Average RoE dropped to 10% from 15 – 20% pre 2007
Historically profitable market for fixed income products has been battered by regulatory action, more onerous capital requirements and diminishing demand from clients
Some banks have changed business models to focus on non-traditional areas like wealth management (Morgan Stanley and UBS)
Some banks have ramped up operations as current players have reduced their scale (DB)
Banks like Goldman Sachs have not changed their traditional business model
Recent Trends in Investment Banking Focus on deleveraging post the 2008 crisis
Revenue Diversification – Put lesser capital at risk and focus on diverse revenue sources
Globalization
Dodd-Frank regulation in the US set to have a major impact on business operations and behavior of investment banks
Concentration on emerging markets
The Investment Banking Environment Thomson Reuters 3Q 2014 Report
Where it all started: The 2008 Crisis VIDEO
Timeline of Financial Institution Failures in US
Impacts of the Global Financial Crisis Stock market declines
Large financial institutions collapsed or were bailed out
Governments went bankrupt
Governments even in the wealthiest nations had to come up with rescue packages to bail out their financial systems
Concentration on emerging markets
Global Investment Banking Revenue - $ Bn
Investment Banking Losses
Share Price Performance of Investment Banks
Market Capitalization ($ Bn)
Return on Assets and Return on Equity
Return on Assets and Return on Equity