Investment banking

• An investment banking is a financial

institution that raises capital, trades
securities and manages corporate
mergers and acquisitions.
•

• Another term for investment banking is

corporate finance.



 History
1. Glass–Steagall Act
 The Banking act 1933 was a law that established the
Federal Deposit Insurance Corporation (FDIC) in the
United States and introduced banking reforms, some
of which were designed to control speculation It is
most commonly known as the Glass–Steagall Act,
after its legislative sponsors, Carter Glass and Henry
B. Steagall.
 Glass–Steagall Act was a reaction to the collapse of a
large portion of the American commercial banking
system in early 1933. It introduced the separation of
bank types according to their business (commercial
and investment banking),
 The Glass-Steagall Act prohibited any one institution
from acting as any combination of an investment
bank, a commercial bank, and/or an insurance
company.
 H isto ry co n td …..
2.The Gramm-Leach-Bliley Act
 The Gramm-Leach-Bliley Act allowed commercial
banks, investment banks, securities firms and
insurance companies to consolidate. For
example, Citicorp (a commercial bank holding
company) merged with Travelers Group (an
insurance company) in 1998 to form the
conglomerate Citigroup.
 Large financial-services conglomerates combine
commercial banking and investment banking,
and sometimes insurance. Such combinations
were common in Europe but illegal in the United
States prior to passage of the Gramm-Leach-
Bliley Act of 1999.
 The Gramm-Leach-Bliley Act (GLBA), also known as
the Financial Services Modernization Act of 1999

List of invest bank
 Bank of America (Bank of America Merrill Lynch)
 Barclays (Barclays Capital)
 BNP Paribas (BNP Paribas CIB)
 Citigroup (Citi Institutional Clients Group)
 Credit Suisse
 Deutsche Bank
 Goldman Sachs
 JPMorgan Chase (J.P. Morgan Investment Bank)
 Morgan Stanley
 Nomura Holdings Inc
 UBS (UBS Investment Bank)
 RBS (RBS Global Banking and Markets)
 Wells Fargo Securities

Large financial-services conglomerates
combine commercial banking and investment
banking, and sometimes insurance
 ABN Amro
 Bank of Montreal (BMO Capital Markets)
 BNP Paribas (BNP Paribas CIB)
 Fortis
 HSBC
 ING Group
 KBC Bank
 Kotak Mahindra Bank
 Nomura Securities Co.
 Royal Bank of Canada (RBC Capital Markets)
 Royal Bank of Scotland Group (RBS Securities)
 Standard Bank
 Standard Chartered Bank
•
Evolution of investment banking
in India
 The origin of investment banking in India can be
traced back to the 19th century when European
merchant banks set-up their agency houses in
the country to assist in the setting of new
projects.


 In the early 20th century, large business houses

followed suit by establishing managing agencies
which acted as issue house for securities,
promoters for new projects and also provided
finance to Greenfield ventures.
•

 A few small brokers also started rendering

Merchant banking services, but theirs was
limited due to their small capital base.
Contd…….
 It was soon followed by Citibank, which started
rendering these services.

 The banking committee, in its report in 1972, took
note of this with concern and recommended
setting up of merchant banking institutions by
commercial banks and financial intuitions.
•

 State bank of India ventured into this business by

starting a merchant banking bureau in 1972.
•

 In 1967, ANZ Grindlays bank set - up a separate

merchant banking division to handle new capital
issues.

Contd…….
 By 1980, the number of merchant banks rose to 33
and was set-up by commercial banks, financial
institutions and private sector.


 JM finance was set-up by Mr. Nimesh Kampani as

an exclusive merchant bank in 1973.
•

 In 1972, ICICI became the first financial institution

to offer merchant banking services.



A ctivitie s o f in ve stm e n t
b a n kin g
ACTIVITIES OF INVESTMENT
BANKERS


 Underwriting (Public offering of
securities)
 Trading of Securities
 Private Placement of Securities
 Mergers and Acquisitions
 Merchant Banking
 Securitization of Assets
 Trading and Creation of Risk Control
Instruments
 Money Management
Underwriting
Function:-
•

• Public offering of securities.

•

• Helping firms raise funds thru stocks

or bond issues.
•

• It is a traditional activity --
"sponsoring.“
•
Underwriting involves
 Origination: advising the issuer on the
terms (what type and how much) and
timing of the offering
•

 “Underwriting”: a kind of insurance

•

ØIBs buy securities from issuers and re-sell

them to customers.
ØIf demand is lower than expected, IBs
take loss.
Ø
Contd……
 Making a market afterwards:
•

Ø IBs may act as a dealer later, giving the issue

extra liquidity.

Ø
Ø Investors are more willing to buy the issue if
they know there will be a market later.

Ø
•

 Sales and distribution:

•
Trading of Securities
 The trading arm of an investment bank
provides important input for the pricing
of a security, the selling of the issue, and
the subsequent liquidity for the issue.
 IBs must take a principal position in a
transaction.
 Revenue from trading is generated via
Ø bid-ask spread, and
Ø appreciation of the price of the securities
held in inventory
Private Placement of
Securities
 Investment banks assist the
placement of securities with a
limited number of institutional or
wealthy individual investors.
 Fee for private placement:
Size (in million) fee
 $ 5 - 10 1.5 - 4.0%

10 - 15 1.0 - 3.0%

25 - 50 0.7 - 2.0%

over 50 0.5 - 1.5%

Mergers and Acquisitions
Role of investment banking in M&A

 Find M&A candidates:

•

Øvertical merger
Øhorizontal merger
Øuse for excess cash/way to expand
Øfind undervalued business (bad
management?)
Øaccess to another market

Contd…
 Advise acquiring firms or target firms
with respect to price and nonprice
terms of an exchange or help target
firms fend off an unfriendly takeover
attempt.
•

 Assist acquiring firms in obtaining

financing.
•
MERCHANT BANKING
 Merchant banking refers to a transaction in
which an investment banking firm
commits its own funds by either taking
an equity interest or creditor position in
companies.
 An example is bridge financing wherein an
investment banking firm loans funds to a
client to consummate a takeover. Bridge
financing is not only important for its
potential source of interest income, but
also to attract clients who are
considering an LBO.
Securitization of Assets
 Securitization of assets refers to the
issuance of securities that have a pool
of assets as collateral.

 Example: Citibank and Cheung Kong
Holding's Mortgage-backed securities.
•

 Revenue from securitization:

ØThe underwriting of an issue
ØPrice difference
•
Trading and Creation of Risk
Control Instruments
 There are risk control instruments which an
investment banking firm creates for its
clients and in which it acts as a
counterpart to the agreement.
 Examples of contracts that can be used to
control risk for both investors and issuers
include futures, options, interest rate
swaps, and customized interest rate
agreements.
 Risk control instruments are also used by
 Money Management

 Investment banking firms have

created subsidiaries that manage
funds for either individual investors
or institutional investors such as
pension funds.
•
Competition
• Investment banking firms are facing competition from:
•

Ø Commercial banks with the virtual elimination of

Glass-Steagall
Ø New trading technology that is allowing
institutional investors to execute trades without
employing investment banking firms as
intermediaries.
Ø Direct purchase by institutional investors of
publicly registered securities from issuers.
Ø some of the more sophisticated corporations
themselves who are establishing in-house groups
to perform some of the activities traditionally
Size of industry
 Global investment banking revenue increased for
the fifth year running in 2007, to $84.3 billion.
This was up 22% on the previous year and more
than double the level in 2003. Despite a record
year for fee income, many investment banks
have experienced large losses related to their
exposure to U.S. sub-prime securities
investments.
•

 The United States was the primary source of

investment banking income in 2007, with 53% of
the total, a proportion which has fallen
somewhat during the past decade. Europe (with
Middle East and Africa) generated 32% of the
Pre se n te d b y K e ta n Ja in