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