Investment banking

An investment banking is a financialinstitution that raises capital, tradessecur

ities and manages corporatemergers and acquisitions.

Another term for investment banking iscorporate finance.

.

.
History

1.
Glass
Steagall
Act

.
The Banking act 1933 was a law that established theFederal Deposit Insurance Cor
poration (FDIC) in theUnited States and introduced banking reforms, someof which
were designed to control speculation It ismost commonly known as the Glass Steaga
ll Act,
after its legislative sponsors, Carter Glass and Henry
B. Steagall.
.
Glass Steagall Act was a reaction to the collapse of alarge portion of the America
n commercial bankingsystem in early 1933. It introduced the separation ofbank ty
pes according to their business (commercial
and investment banking),
.
The Glass-Steagall Act prohibited any one institutionfrom acting as any combinat
ion of an investment
bank, a commercial bank, and/or an insurance
company.
H
istory
contd ..

2.The Gramm-Leach-Bliley Act

.
The Gramm-Leach-Bliley Act allowed commercialbanks, investment banks, securities
firms andinsurance companies to consolidate. Forexample, Citicorp (a commercial
bank holdingcompany) merged with Travelers Group (an
insurance company) in 1998 to form theconglomerate Citigroup.
.
Large financial-services conglomerates combinecommercial banking and investment
banking,
and sometimes insurance. Such combinations
were common in Europe but illegal in the UnitedStates prior to passage of the Gr
amm-Leach-
Bliley Act of 1999.
.
The Gramm-Leach-Bliley Act (GLBA), also known asthe Financial Services Moderniza
tion Act of 1999
.
enacted on November 12, 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 conglomeratescombine commercial banking and investmentb
anking, 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 bankingin India
.
The origin of investment banking in India can betraced back to the 19th century
when European
merchant banks set-up their agency houses in
the country to assist in the setting of newprojects.
.

.
In the early 20th century, large business housesfollowed suit by establishing ma
naging agencieswhich acted as issue house for securities,
promoters for new projects and also providedfinance 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 startedrendering these services.
.

.
The banking committee, in its report in 1972, took
note of this with concern and recommended
setting up of merchant banking institutions bycommercial banks and financial int
uitions.

.
State bank of India ventured into this business bystarting a merchant banking bu
reau in 1972.

.
In 1967, ANZ Grindlays bank set -up a separatemerchant banking division to handl
e new capitalissues.
.

.
Contd .
.
By 1980, the number of merchant banks rose to 33and was set-up by commercial ban
ks, financialinstitutions and private sector.
.

.
JM finance was set-up by Mr. Nimesh Kampani asan exclusive merchant bank in 1973
.

.
In 1972, ICICI became the first financial institution
to offer merchant banking services.
.

.
Activities
ofinvestm
ent
banking
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 stocksor bond issues.

It is a traditional activity -"

sponsoring.
Underwriting involves
.
Origination: advising the issuer on theterms (what type and how much) and
timing of the offering

.
Underwriting : a kind of insurance

ØIBs buy securities from issuers and re-sellthem to customers.

ØIf demand is lower than expected, IBstake loss.
Ø
Contd

.
Making a market afterwards:

ØIBs may act as a dealer later, giving the issueextra liquidity.

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

.
Sales and distribution:

IB hbil l k ll
Trading of Securities
.
The trading arm of an investment bankprovides important input for the pricingof
a security, the selling of the issue, andthe subsequent liquidity for the issue.

.
IBs must take a principal position in a
transaction.

.
Revenue from trading is generated via
Øbid-ask spread, and
Øappreciation of the price of the securities

held in inventory
Private Placement of
Securities
.
Investment banks assist the
placement of securities with alimited number of institutional or
wealthy individual investors.
.Fee for private placement:
.
Size (in million) fee
-$510. -. % 1540
-1015. -. % 1030
-2550. -. % 0720over50. -. % 0515
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 nonpriceterms of an exchange or help targetfirms fend
off an unfriendly takeover
attempt.

.
Assist acquiring firms in obtaining
financing.
MERCHANT BANKING
.
Merchant banking refers to a transaction inwhich an investment banking firmcommi
ts its own funds by either takingan equity interest or creditor position incompa
nies.
.
An example is bridge financing wherein an
investment banking firm loans funds to a
client to consummate a takeover. Bridgefinancing is not only important for itspo
tential source of interest income, butalso 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 KongHolding's Mortgage-backed securities.

.
Revenue from securitization:
ØThe underwriting of an issue
ØPrice difference
Trading and Creation of RiskControl 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 tocontrol risk for both investors and iss
uers
include futures, options, interest rateswaps, and customized interest rate
agreements.
.
Risk control instruments are also used byinvestment banking firms to protect the
ir
Money Management
.
Investment banking firms havecreated subsidiaries that managefunds for either in
dividual investors
or institutional investors such as
pension funds.
Competition
Investment banking firms are facing competition from:

ØCommercial banks with the virtual elimination of

Glass-Steagall
ØNew trading technology that is allowinginstitutional investors to execute trade
s without
employing investment banking firms asintermediaries.
ØDirect purchase by institutional investors ofpublicly registered securities fro
m issuers.
Øsome of the more sophisticated corporationsthemselves who are establishing in-h
ouse groupsto perform some of the activities traditionallydone by investment ban
king firms.
Size of industry
.
Global investment banking revenue increased forthe fifth year running in 2007, t
o $84.3 billion.
This was up 22% on the previous year and morethan double the level in 2003. Desp
ite a recordyear for fee income, many investment bankshave experienced large los
ses related to theirexposure to U.S. sub-prime securities
investments.

.
The United States was the primary source ofinvestment banking income in 2007, wi
th 53% ofthe total, a proportion which has fallensomewhat during the past decade
. Europe (with
Middle East and Africa) generated 32% of thetotal slightly up on its 30% share a
decade ago
Presented
by
Ketan
Jain