Chapter 3: International Investment Banking ( INTRODUCTION (:check: Do…
Chapter 3: International Investment Banking
🧀 Revenue generating activities
🍭 Venture Capital
😍 It is a financing that investor provide to start-up such as companies and small business.
🍭 Investment Management
😻 Reffered as money management, port-folio management or private banking covers the professional management of different securities & assets.
🍭 Financial Engineering
😻 It is a technique to solve financial problems.
😻 The action or activity of buying and selling goods and services in the international levels.
🍭 Corporate Restructuring
😻 May involve Financial or organizational restructuring.
🍭 Advisory services
😻 Allow private company to consult with investment professionals before making changes to their portfolios.
🍭 Secondary market making
😻 After a security has been issued in the primary market, the investor might decide to dispose/sell the shares that he/she had bought earlier.
😻 International investment banking will help clients resolve systematic global development needs with strategies across the area of trade , competitive , and infrastructure.
🍭 Primary market making
😻 deals with new issue of securities that involve the issuer and investor.
🧀 Support activuties
🍦 Serve as intermediaries between corporations or government that want to attract investment capital and investors wanting to invest capital.
🍦 Act as intermediaries in trading for clients.
🍦 Support activities involve clearing, internal finance or funding and information services.
PAST SEMESTER QUESTIONS
(JUNE 2018 - MARCH 2016)
JAN 2018/ OCT 2016
Explain 4 features of International Investment Banks
:check: Manage the buying and selling of stocks, bonds, and other financial instruments for their own portfolio and on behalf of clients
:check: Securitization or bundling of assets to sell in the secondary market
:check: Bringing an Initial Public Offering (IPO) of a new financial security to the market.
:check: An IPO, is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it's known as an IPO. Companies fall into two broad categories, private and public.
5 top ten International Investment Banks in 2015
:star: J.P. Morgan & Co.
:star: Bank of America Merrill Lynch
:star: Goldman Sachs
:star: Morgan Stanley
JUNE 2018/ JAN 2018
Elaborate 3 operational systems of International Investment Banking
a) Front office
Two main areas of the front office are investment bank and markets
As in the market, investment banks help customers to raise funds in the capital market
b) Middle office
it relates to risk management issues
It focuses on identifying and managing the level of risk that the company assumes in order to do business
c) Back office
Company raises fund/capital by selling common stock to the public for the first time (IPO)
Trading securities & risk arbitrage, Investment serves as a securities broker & dealer in the secondary market
:pencil2: (5 marks)
List 4 functions of Middle Office
:<3: Risk Management
:<3: Corporate Treasury
:<3: Financial Control
Explain the following facilities offered by back office of International Investment Banks:
i) UNDERWRITING NEW ISSUES
ii) NEW PRODUCT DEVELOPMENT
JUNE 2018/ MAR 2017/ MAR 2016
5 differences between Commercial Bank and Investment Bank
No deposits taking
Not loan provider
Have a few hundred core-customers/less
Provider of a very custom-made/tailored service
Not a transactional day-to-day service provider.
Eg: Fun-based and free-based services
A strategic advisor tl companies with regards to their structur, acquisition, divestments, and capital market products
Eg: debts and equity instruments
May have millions of customers
Provider of a very standardized service
A transactional day-to-day service provider
Eg: current account, saving account, credit and debit cards, mortgage and personal loans and insurance
Not a strategic advisor to companies/corporations
:checkered_flag: OCT 2016/ MAR 2016 :checkered_flag:
Revenue Generating Activities
as provided by the Investment Bank worldwide (10marks)
Revenue Generating Activities
:!: Activities:Primary market making, secondary market making, trading, corporate restructuring, financial engineering, advisor services, investment management, venture capital and consulting.
:!: Investment bank assist with
corporate reorganizations and advising on strategic matters such as M&A, divestitures, corporate defence strategies, joint ventures, privatizations, spin-offs and leveraged buyouts.
:!:Clearing,internal finance and information services.
:check: 16th century -investment banking system emerged
:check: 18th century - emerged in USA during American Civil War and the Birth of Famous J.P. Morgan, Goldman Sachs
:check: 19th & 20th - prominent banking partnerships & dramatic expansion
:check: Based on book written by Huges &MacDonald (2002)
:check: Specialize in helping business & governments sell their new security issues in primary markets to finance capital expenditures
:check: After the securities are sold, they make secondary markets for the securities as brokers & dealers
:check: Also provide advisory service to corporate clients (securities issues and M&A activities)
:check: Deal with companies & other large institutions (do not deal with retail customers)
:check: Do not take deposits
:explode:Swift Investment Bank
:explode: Labuan Branch
DIFFERENCES BETWEEN COMMERCIAL AND INVESTMENT BANK
:snail: No deposits taking.
:snail: Not loan provider.
:beach_with_umbrella: Have a few hundred core customer or less.
:ramen: Provider of a very custom made/tailored service.
:bear: Not a transactional day-to-day service provider.
:bear: example: fund-base and fee-base services.
:skier: a strategic advisor to companies with regard to their structure, acquisitions, divestment and capital markets products.
:skier: Example: Debts and equity instruments.
:snail: Deposits taking.
Legal fees, communication judges, the information cost of finding the price, or the labour required to bring a good of service to market.
:snail: Loan provider.
:beach_with_umbrella: May have million of customers.
:bear: A transactional day-to-day service provider.
:bear: Example: Current account, savings account, credit and debit cards, mortgage and personal loan, and insurance.
:skier: Not a strategic advisor to companies/corporation
:ramen: Provider of a very standardized service.
3.1 Features of International Investment Banks
:love_letter: One of the specialties of investment banks is bringing an Initial Public Offering (IPO) of a new financial security to the market.
:love_letter: An IPO enables a company to raise new funds, or to cash in private stock for public stock.
:love_letter: Another trend in investment banking is securitization, or bundling of assets, to sell in the secondary market.
:love_letter: An IPO, is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it's known as an IPO. Companies fall into two broad categories, private and public.
:love_letter: Investment bankers also manage the buying and selling of stocks, bonds, and other financial instruments for their own portfolio and on behalf of clients.
:love_letter: An IPO may consists of common stock, bonds, or preferred stock .
FACILITIES OF INTERNATIONAL INVESTMENT BANKING
Main areas of the front office are investment banks and markets
This department receive highest paid department
😘 This department helps to assist customer
raise fund in capital market
identify potential partners for JV
sales and trading
conduct and research
UNDERWRITING NEW ISSUE
Underwriting - The activity of providing long-term equity & debt finance for corporations and government
Company raise capital by selling common stock to the public for the first time (IPO)
It include both basic securities (equity and bond) and hybrids ( preferred stock and convertible bond)
Other services provided by IB including advising, documentation, private placement, and offshore activities
The issuer - industrial firm, public utilities, high-tech companies, bank, insurance companies and government
Firm that involves actively in underwriting - Merril Lynch, Nomura etc.
TRADING SECURITIES AND RISK ARBITRAGE
Investment bank serves as a securities broker & dealer in the secondary market
➢As a broker – make arrangements to help buyers & sellers complete a business transaction & rec. Commission
➢Service include – recommendation of security & helping the client obtain margin credit on the collateral of securities
➢They also manages mutual funds
NEW PRODUCT DEVELOPMENT
In islamic banking – many hybrid products have been introduced in order to meet the needs & wants of the muslim & non-muslim
Trend in investment banking is more on creativity & innovation / creation of new products (hybrid) can generate profitable opportunities
Creativity & innovation activities created to stabilize the financial market imperfections
➢Offered - corporate restructuring exercises and rearrange company’s operations
Offers independent evaluation on corporation transactions – valuation of companies/businesses/securities/assets
financial research, bridge financing & currency exchange
This department relates with risk management
focusing on identifying and managing the level of risk that the company assumes in order to do business
working together with front office to identify risk of doing business with certain clients
middle office relies heavily on data collected by back office in terms of risk, profits & losses and the underlying reasons for those activities
Defined as the activity of providing long-term equity and debt finance for corporations and governments, mainly through the issuance of new securities
Trend in investment banking is more on creativity and innovation or creation of new products called as ‘hybrid’ which can generate profitable opportunities for particular banks