Investment

Banking
SESSION 1: INVESTMENT BANKING FUNCTIONS

Functions of Investment Bank

Core Business

Middle Office

Underwriting

Risk Management

Distributing

Corporate Treasury

Advising
Others

Back Office
Operations
Technology

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

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