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CHAPTER 3 : INTERNATIONAL INVESTMENT BANK (1.0 Introdction (specialize in…
CHAPTER 3 : INTERNATIONAL INVESTMENT BANK
2.0 Features
manage buying and selling of stocks, bonds and other financial instruments for their own portfolio and on behalf of clients.
IPO : enables a company to raise new funds or cash in private stock for public stock (for company that has never issued equity to public)
IPO may consists of :-
common stock - equity stock that has voting rights, but no security if firm goes bankrupt
bonds - legal debt commitment by issuing company to pay bondholder a fixed amount of money in future.
preferred stock - has some characteristics of both common stock and bonds
3.0 Functions
A. Revenue Generating Activities
involve making of primary and secondary market, trading, corporate restructuring, financial engineering, advisory services, investment management
assist with corporate reorganization and advising on strategic matters.
strategic matters
corporate defence strategies
spin offs - increase return of shareholders
joint ventures
divestitures - selling stock because of government order
M&A
assist public & private corporations in raising funds in primary capital market (equity and debt)
B. Support Activities
involve clearing, internal finance/funding, information service
as intermediaries between corporations or gov that want to attract investment capital and investors (who want to invest capital)
intermediaries in trading for clients
1.0 Introdction
specialize in helping business and governments sell new security issues in the primary markets to finance capital expenditure
Can be defined as banking activities whose functions involved provision of long term equity and finance for industrial and other corporations
provide advisory service to corporate clients, esp on securities issues and M&A activities
after sold, investment bankers make secondary markets
deal with companies and large institutions and do not deal with retail customers
eg : Citigroup, J.P Morgan, Swift Investment Bank, Labuan Branch
4.0 International Investment Banking Operational System
A. Front Office
main areas are investment banks and markets
primary activities of Inv Bank include advise big firms on M&A, help in wade array of fundraising strategies, help in negotiating with merger targets and coordinate with bidders
in market, InvB help customers to raise funds in capital market, identify potential partners of JV, do sales and trading, conduct research, etc
under sales and trade - traders buy and sell securities/financial products and calling on institutional and high-net-worth investors to suggest trading ideas and take orders
in conducting research - bank review and evaluate potential corporations and make reports about their prospects particularly on income generation
assist traders in making transactions, suggest ideas to customers and acting as fund managers for their clients' investments
this is the most prestigious and highest paid department in that particular bank.
C. Back Office
Underwriting New Issue
:red_flag: activity of providing long - term equity and debt finance for corp and gov through issuing new securities
:red_flag: underwriting activity includes equity and bond issues and hybrid (PS & CB)
:red_flag: inv bank also provide advise, documentation, actual writing, private placement and offshore activities
:red_flag: company raise capital by selling CS to the public for first time known as initial public offering (IPO)
:red_flag: firms involved : Merrill Lynch, Salomon Smith Barney, Credit Suisse First Boston
:red_flag: commercial bank involved : J.P. Morgan and Chase Manhattan Bank
Trading Securities and Risk Arbitage
:red_flag: inv bank serves as securitis broker and dealer in secondary market
:red_flag: as broker, it makes arrangements to help buyers and sellers complete business transaction and it receives commission
:red_flag: services include
:fountain_pen: recommendation of security purchase or disposal to its clientele based on its research
:fountain_pen: help client obtain margin credit on collateral of securities
:red_flag: inv bank also manage mutual funds specifically focusing on state region
New Product Development
:red_flag: trend of inv bank is more on creativity and innovation or creation of new product called as hybrid which can generate profitable opportunities for particular bank
:red_flag: for example - Islamic Banking (in inv bank or comm bank) have been introduced in order to meet the needs and wants of the Muslim and non-Muslim clients
:red_flag: creativity and innovation are created to stabilize the financial market imperfections, including taxes, transaction costs, regulation, and ignorance of market participants
Providing Advice
:red_flag: particular service is offered from corporate restructuring exercises to rearrange a company's operations
:red_flag: offers independent evaluation on corporate transactions including valuation of companies/securities/assets
B. Middle Office
it relates to risk management issues
focus on identifying and managing the level of risk that company assumes in order to do business
work with front office to identify the risk of doing business with certain clients
relies heavily on data collected by back office in terms of risks, profits and losses and underlying reasons for those activities
functions of middle office
risk management
corporate treasury
compliance
financial control
5.0 Differences between Commercial Bank and Investment Bank
COMMERCIAL BANK
:pen: Deposit taking
:pen:Loan provider
:pen:May have millions of customers
:pen: A transactional day – to – day service provider.
Eg : current account, saving account, credit and debit cards, mortgage and personal loans and insurance
:pen: Not a strategic advisor to companies
INVESTMENT BANK
:pen: No deposit taking
:pen: Not loan provider
:pen: Have few hundred core customers or less
:pen: Not a transactional day – to –day service provider.
Eg : fund based and fee based services
:pen: A strategic advisor to companies with regards to their structure, acquisitions, divestments and capital markets products.
Eg : debts and equity instruments