Department of Investment Banking

Contents

 

Introduction.…………………………………………………….……………..….3

1. Banking industry…………………………………………….…………………4

1.1 What is Investment banking……………………………………….….…4

1.2 Stock market participants………………………..…………….…..….....6

1.3 Types of market………………………………………………….......….8

2. Department of Investment Banking………………………………………….11

2.1 Corporate finance………………………………………………………11

2.2 Sales and trading……………………………………………….………12

2.3 Research……………………………………………………..…………14

Conclusion………………………………………………………...……….…..…16

References………………………………………………………..………….……18

Glossary…………………………………………………….………………......…19

Appendices……………………………………………………..………….…...…20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Introduction

 

Investment Banking as term suggests, is concerned with the primary function of assisting the capital market in its function of capital intermediation, i.e., the movement of financial resources from those who have them (the Investors), to those who need to make use of them for generating GDP (the Issuers). Banking and financial institution on the one hand and the capital market on the other are the two broad platforms of institutional that investment for capital flows in economy. Therefore, it could be inferred that investment banks are those institutions that are counterparts of banks in the capital markets in the function of intermediation in the resource allocation. Nevertheless, it would be unfair to conclude so, as that would confine investment banking to very narrow sphere of its activities in the modem world of high finance. Over the decades, backed by evolution and also fuelled by recent technologies developments, an investment banking has transformed repeatedly to suit the needs of the finance community and thus become one of the most vibrant and exciting segment of financial services. Investment bankers have always enjoyed celebrity status, but at times, they have paid the price for the price for excessive flamboyance as well.

Investment banks help companies, governments, and their agencies to raise money by issuing and selling securities in the primary market. They assist public and private corporations in raising funds in the capital markets (both equity and debt), as well as in providing strategic advisory services for mergers acquisitions and other types of financial transactions.

 

Object of study – Investment Banking.

Subject of investigation - history, trends and activities of investment banks in the world.

 

 

 

1. Banking industry

1.1 What is Investment banking

 

Investment banking, or I-banking, as it is often called, is the term used to describe the business of raising capital for companies and advising them on financing and merger alternatives. Capital essentially means money.

Companies need cash in order to grow and expand their businesses; investment banks sell securities to public investors in order to raise this cash. These securities can come in the form of stocks or bonds, which we will discuss in depth later.

 

Generally, the breakdown of an investment bank includes the following areas:

• Corporate finance
• Mergers & acquisitions (M&A)
• Equity sales
• Fixed income sales
• Equity trading
• Fixed income trading
• Equity research
• Fixed income research

 

The functions of all of these areas will be discussed in much more detail later in the preject. In this overview section, we will cover the nuts and bolts of the business, providing an overview of the stock and bond markets and how an I-bank operates within them.

 

Before analyzing how an investment bank operates, let’s explore the differences between commercial banking and investment banking—but also what they have in common.

 

The fundamental profit-generating business activity of both commercial and investment banks is the provision of funds for borrowers. Commercial banks provide loans for the full spectrum of borrowers, from private individuals, through small businesses, to major “corporates”—large private companies, governments at the municipal, regional and national levels and other public entities. Commercial

banks make loans to borrowers from the funds provided by the other side of their business—taking deposits from individuals and firms.

Investment banks mostly deal with corporate-level clients, though some have credit card arms, and many have begun offering a wider range of services. Investment banks do not take deposits—as result, some people dispute whether they should be called banks at all. They raise funds for borrowers by acting as intermediaries for them in the financial markets. To do this effectively, investment bankers must understand the funding needs of their clients and have an intimate knowledge of the market— hence living off their wits. Since the bulge bracket’s breakup, though, the only “pure” investment banks left are small and midsized firms. Most of the world’s investment banking activity is now carried out by I-bank divisions of large diversified financial services companies, many which also carry out commercial banking activities.

 

Commercial banks

A commercial bank is licensed to take deposits—the funds that are paid into current (checking) and deposit (savings) accounts by its customers. Banks are highly regulated across Europe, though laws and regulatory arrangements vary from country to country. One reason is to protect the funds of depositors. Another is to safeguard the stability of the financial system, which is vitally important for

the economy as a whole—see, for example, the impact of risky mortgage lending on the global economy.

The typical commercial banking process is fairly straightforward. You deposit money into your bank, and the bank loans that money to consumers and companies in need of capital (cash). You borrow to buy a house, finance a car or finance an addition to your home. Companies borrow to finance the growth of their company or meet immediate cash needs. Companies that borrow from commercial banks can range in size from the dry cleaner on the corner to a multinational conglomerate. The commercial bank generates a profit by paying depositors a lower interest rate than the bank charges on loans.

 

Investment banks

Historically, investment banks have operated differently. An investment bank does not have an inventory of cash deposits to lend as a commercial bank does. In essence, an investment bank acts as an intermediary, matching sellers of stocks and bonds with buyers of stocks and bonds. Note, however, that companies use investment banks toward the same end as they use commercial banks. If a company needs capital, it may get a loan from a bank, or it may ask an investment bank to sell equity or debt (stocks or bonds). Because commercial banks already have funds available from their depositors and an investment bank typically does not, an I-bank must spend considerable time finding investors in order to obtain capital for its client. Still, even before the shake-ups of 2008, many investment banks were seeking to become “one-stop” financing sources by setting aside part of their own capital in order to make direct loans to clients.

 

1.2 Stock market participants

There are two basic financial market participant categories, Investor vs. Speculator and Institutional vs. Retail. Action in financial markets by central banks is usually regarded as intervention rather than participation.

A market participant may either be coming from the Supply Side, hence supplying excess money (in the form of investments) in favor of the demand side; or coming from the Demand Side, hence demanding excess money (in the form of borrowed equity) in favor of the Demand Side. This equation originated from Keynesian Advocates. The theory explains that a given market may have excess cash; hence the supplier of funds may lend it; and those in need of cash may borrow the funds as supplied. Hence, the equation: aggregate savings equals aggregate investments.

The demand side consists of: those in need of cash flows (daily operational needs); those in need of interim financing (bridge financing); those in need of long-term funds for special projects (capital funds for venture financing).

The supply side consists of: those who have aggregate savings (retirement funds, pension funds, insurance funds) that can be used in favor of demand side. The origin of the savings (funds) can be local savings or foreign savings. So much pensions or savings can be invested for school buildings; orphanages; (but not earning) or for road network (toll ways) or port development (capable of earnings).

The earnings go to owner (Savers or Lenders) and the margin goes to the banks. When the principal and interest are added up, it will reflect the amount paid for the user (borrower) of the funds. Thus, an interest percentage for the cost of using the funds.

An investor is any party that makes an Investment.

However, the term has taken on a specific meaning in finance to describe the particular types of people and companies that regularly purchase equity or debt securities for financial gain in exchange for funding an expanding company. Less frequently the term is applied to parties who purchase real estate, currency, commodity derivatives, personal property, or other assets.

Speculation, in the narrow sense of financial speculation, involves the buying, holding, selling, and short-selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives or any valuable financial instrument to profit from fluctuations in its price as opposed to buying it for use or for income via methods such as dividends or interest. Speculation or agiotage represents one of three market roles in western financial markets, distinct from hedging, long term investing and arbitrage. Speculators in an asset may have no intention to have long term exposure to that asset.

 

 

 

 

1.3 The Fixed Income Markets

 

Further important components of the bond market are:

• Agency bonds

• High-grade corporate bonds

• High-yield (junk) bonds

• Municipal bonds

• Mortgage-backed bonds

• Asset-backed securities eurobonds

 

The yield curve

Bond “yields” are the current rate of return to an investor who buys the bond. (Yield is measured in “basis points”; each basis point = 1/100 of 1 per cent.) A primary measure of importance to fixed income investors is the yield curve. The yield curve (also called the “term structure of interest rates”) depicts graphically the yields on different maturity US government securities. To construct a simple

yield curve, investors typically look at the yield on a 90-day US T-bill and then the yield on the 30-year US government bond (called the Long Bond). Typically, the yields of shorter-term government T-bill are lower than Long Bond’s yield, indicating what is called an “upward sloping yield curve.” Sometimes, short-term interest rates are higher than long-term rates, creating what is known as an “inverse yield curve.”

 

Types of Securities

Treasury securities

United States government-issued securities. Categorised as treasury bills (maturity of up to—but not including—two years), treasury notes (from two years to 10 years maturity), and treasury bonds (10 years to 30 years). As they are government-guaranteed, Treasuries are considered “risk-free.” In fact, US Treasuries have no default risk, but do have interest rate risk—if rates increase, then the price of US Treasuries issued in the past will decrease.

 

Fixed income definition

The following glossary may be useful for defining securities that trade in the markets as well as talking about the factors that influence them. Note that this is just a list of the most common types of fixed income products and economic indicators. Thousands of fixed income products actually trade in the markets.

Types of Securities

Treasury securities - United States government-issued securities. Categorised as

treasury bills (maturity of up to—but not including—two years), treasury notes (from two years to 10 years maturity), an treasury bonds (10 years to 30 years). As they are government-guaranteed, Treasuries are considered “risk-free.” In fact, US Treasuries have no default risk, but do have interest rate risk—if rates increase, then the price of US Treasuries issued in the past will decrease. Bonds with a Standard & Poor’s rating of at least a BBB-. Typically big, blue-chip companies issue highly rated bonds. Bonds with a Standard & Poor’s rating lower than BBB-.

Typically smaller, riskier companies issue high-yield bonds. Bonds collateralized by a pool of mortgages. Interest and principal payments are based on the individual homeowners making their mortgage payments. The more diverse the pool of mortgages backing the bond, the less risky they are typically considered.

 

Investment grade (high grade) corporate bonds - Bonds with a Standard & Poor’s rating of at least a BBB-. Typically big, blue-chip companies issue highly rated bonds.

High-yield (junk) bonds

The market for securities (typically corporate, but also Treasury securities) maturing within one year, including short-term CDs, repurchase agreements, and commercial paper (low-risk corporate issues), among others. These are low-risk, shortterm securities that have yields similar to Treasuries.

Money market securities

The market for securities (typically corporate, but also Treasury securities) maturing within one year, including short-term CDs, repurchase agreements, and commercial paper (low-risk corporate issues), among others. These are low-risk, shortterm securities that have yields similar to Treasuries.

Agency bonds - Agencies represent all bonds issued by the federal government and federal agencies, but excluding those issued by the Treasury (i.e., bonds issued by other agencies of the federal government). Examples of agencies that issue bonds include Federal National Mortgage Association (FNMA) and Guaranteed National Mortgage Association (GNMA).

 

Mortgage-backed bonds - Bonds collateralized by a pool of mortgages. Interest and principal payments are based on the individual homeowners making their mortgage payments. The more diverse the pool of mortgages backing the bond, the less risky they are typically considered.

 

 

 

 

 

 

 

2.  Department of Investment Banking

2.1 Corporate Finance

 

The definition of “corporate finance” varies considerably across the world. In the US, for example, it is used in a much broader way than in the UK – to describe activities, decisions and techniques that deal with many aspects of a company’s finances and capital.

In the UK, the terms “corporate finance”  and “corporate financier” tend to be associated with transactions in which capital is raised in order to create, develop, grow or acquire businesses

It is often associated in the UK with some degree of change of ownership in a business, connected to a corporate transaction that leads to the creation of a new equity structure or shareholder base, and the related issue, underwriting, purchase or exchange of equity (and related warrants) or debt.

Types of transactions

• Raising seed, start-up, development or expansion capital
• Mergers, demergers, acquisitions or the sale of private companies
• Mergers, demergers and takeovers of public companies, including public-to-private deals
• Management buy-out, buy-in or similar of companies, divisions or subsidiaries - typically backed by private equity
• Equity issues by companies, including the flotation of companies on a recognised stock exchange in order to raise capital for development and/or to restructure ownership
• Raising capital via the issue of other forms of equity, debt and related securities for the refinancing and restructuring of businesses
• Raising capital for specialist corporate investment funds, such as private equity, venture capital, real estate and infrastructure funds
• Financing joint ventures, project finance, infrastructure finance, public-private partnerships and privatisations
• Secondary equity issues, whether by means of private placing or further issues on a stock market, especially where linked to one of the transactions listed above
• Raising debt and restructuring debt, especially when linked to the types of transactions listed above

 

Corporate Finance advisers

In the UK, the term generally refers to those who act as advisers on the types of transactions listed above. This may also include sponsors or nominated advisers for IPOs.

Such lead advisers may be from investment banks, accountancy/professional services firms or independent advisory firms (sometimes known as "boutiques"). In some cases, they may also include individual consultants who specialise in such work.

 

2.2 Sales and trading

Securities sales and trading is where the rubber meets the road in the investment banking industry. An investment bank relies on its sales department to sell bonds or shares of stock in companies it underwrites. Investors who want to buy or sell a certain stock or bond will place an order with a broker or sales representative, who writes the ticket for the order. The trader makes the trade.  
 
What are they do

Securities sales and trading are high-profile, high-pressure roles in the investment banking industry. Unlike other I-banking careers, such as corporate finance, public finance, and M&A, where the emphasis is on the team, securities salespeople and traders are independent, working on commission to bring to market the financial products that others create.

 
Salespeople and traders are independent agents working under a simple contract:

The firm provides a place to do business in return for a percentage of the business that salespeople and traders generate.

 
Salespeople are called brokers or dealers. As one of them, you're expected to build a "book" of clients. No matter how long you've been working, and no matter how many clients you have, you're expected to cold call. New brokers make as many as 600 cold calls a day. Most of the work takes place over the telephone: soliciting clients or selling a particular stock or bond issue. You'll use analyst research and every sales trick in the book to push your securities to investors.

 
Traders make money by trading securities. Although they're the ones who transact trades for the brokers and their clients, traders are primarily responsible for taking a position in a security issue and buying or selling large amounts of stocks or bonds using an employer's (or their own) capital. When they bet right, they win big; when they bet wrong, they lose big.

 
Brokers and traders build their lives around market hours. On the West Coast, you'll start working before 6:00 a.m., so that you're ready to go when the opening bell rings. There's no flextime, no long coffee breaks, and no time to run errands.

 
Who Does Well

Securities sales and trading is a high-pressure career. You're responsible for the financial fortunes of your clients-or yourself, if you're a lone trader. Every day you're making $100,000 (or more) decisions under severe time constraints. The daily fluctuations of stock prices can make you rich one day and break you the next. Brokers eat a lot of antacid.

 
Securities salespeople and traders work independently, usually with little supervision and very little interaction with management-provided they succeed. If they don't, they're quickly out of a job. To do well, you need a good head for numbers and a hidebound determination to make money.

 
If you're on the sales side, you'll need exceptional customer service skills; if you're a trader, you'll need to be able to handle huge risk-and stomach huge losses. The upside of these careers is the money brokers can make. Successful salespeople and traders can get very rich.

 

2.3 Research

 

Research departments are generally divided into two main groups: fixed-income research and equity research. Both types of research can incorporate several different efforts, including quantitative research (corporate financing strategies, specific product development, and pricing models), economic research (economic analysis and forecasts of U.S. and international economic trends, interest rates, and currency movement), and individual company research. It's important to understand that these are "sell-side" analysts (because they in effect "sell" or market stocks to investors), rather than the "buy-side" analysts who work for the institutional investors themselves.