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Investment banks

Investment banks. Prepared by NASIYA V K. INTRODUCTION.

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Investment banks

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  1. Investment banks Prepared by NASIYA V K

  2. INTRODUCTION • An investment bank is a financial services company or corporate division that engages in advisory-based financial transactions on behalf of individuals, corporations, and governments. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by underwriting or acting as the client's agent in the issuance of securities.

  3. An investment bank may also assist companies involved in mergers and acquisitions (M&A) and provide ancillary services such as market making, trading of derivatives and equity securities, and FICC services (fixed income instruments, currencies, and commodities). Most investment banks maintain prime brokerage and asset management departments in conjunction with their investment research businesses

  4. Activities • Unlike commercial banks and retail banks, investment banks do not take deposits. • All investment banking activity is classed as either "sell side" or "buy side". The "sell side" involves trading securities for cash or for other securities or the promotion of securities. The "buy side" involves the provision of advice to institutions that buy investment services

  5. An investment bank can also be split into private and public functions. • The private areas of the bank deal with private insider information that may not be publicly disclosed, while the public areas, such as stock analysis, deal with public information.

  6. Organizational structure • Investment banking is split into front office, middle office, and back office activities. • Front office: Front office is generally described as a revenue generating role. There are two main areas within front office: investment banking and markets. • Investment banking involves advising organizations on mergers and acquisitions, as well as a wide array of capital raising strategies. • Markets is divided into "sales and trading" (including "structuring"), and "research".

  7. Middle office • Risk management • Risk management involves analyzing the market and credit risk .Credit risk focuses around capital markets activities, such as syndicated loans, bond issuance, restructuring, and leveraged finance. Market risk conducts review of sales and trading activities utilizing the VaR model and provide hedge-fund solutions to portfolio managers. Other risk groups include country risk, operational risk, and counterparty risks which may or may not exist on a bank to bank basis.

  8. Back office • The back office data-checks trades that have been conducted, ensuring that they are not wrong, and transacts the required transfers. Many banks have outsourced operations. It is, however, a critical part of the bank.

  9. Other businesses[ • Global transaction banking is the division which provides cash management, custody services, lending, and securities brokerage services to institutions.  • Investment management is the professional management of various securities (stocks, bonds, etc.) and other assets (e.g., real estate), to meet specified investment goals for the benefit of investors. • Merchant banking can be called "very personal banking"; merchant banks offer capital in exchange for share ownership rather than loans, and offer advice on management and strategy

  10. Let’s understand how an investment bank earns money by providing acquisition advisories Think of company ABC buying another company XYZ. ABC is not sure how much company XYZ is really worth and what will be the long-term benefits in terms of revenues, costs, etc. In this scenario, the investment bank will go through the process of due diligence to determine the value of the company, settle the deal by helping ABC prepare necessary documents and advising it on the appropriate timing of the deal.  • Here the investment bank works on the buy side and some other investment banks may be working on the sell side to help XYZ. The bigger the deal size, the more commission the bank will earn.

  11. Bank of America, Barclays Capital, Citigroup Investment Banking, Deutsche Bank, and JP Morgan are some of the largest investment banks in India.

  12. Functions • Corporate Finance:1)Help firms raise capital, through equity or debt2)Advise firms on their optimal debt:equity ratioRisk Management:1)Help firms manage financial risks - currency/ liquidity/ default etc2)Transfer funds across time, industries, geographies • Sales & Trading:Increase liquidity in the markets by acting as big ticket institutional buyers of securities (bonds/ stocks etc) - "market making"

  13. Asset Management:Advise firms individuals on what to do with their surplus funds  • M&A Advisory:1)Seek out targets for acquisition for big firms2)Help small firms protect themselves from being acquired by a big firm3)Assist in leveraged buyouts4)Help in post-merger integration if the deal goes through successfully.

  14. Credit Research:Conduct thorough research on other firms/ industries/ economies and publish these reports and provide a "credit rating" to these entities to help others decide if they are worth investing in the area.

  15. Every function represents the conversion of some asset into another asset or cash. And the investment bank makes its money for performing this service.

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