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3.0 INTERNATIONAL INVESTMENT BANKING (Features of International Banks…
3.0 INTERNATIONAL
INVESTMENT BANKING
Features of International Banks
Investment bankers also manage the buying and selling of stocks, bonds, and other financial instruments for their own portfolio.
Another trend in investment banking is securitization or bundling of assets, to sell in the secondary market.
Bringing initial public offering (IPO) to the market
Top ten International Investment banks
J.P. Morgan & Co.
Bank of America Merrill Lynch
Goldman Sachs
Morgan Stanley
Citigroup
Deutsche Bank
Credit Suisse
Barclays
Wells Fargo
UBS
Introduction to International Investment Banking
An investment banking system emerged in the early 16th century
Based on the book written by Hughes & MacDonald (2002), investment can be defined as banking activities whose functions involved provision long-term equity and loan finance for industrial and other corporations, particularly new securities.
Investment banks are the financial institutions that specialize in helping businesses and governments sell their new security issues in the primary markets to finance capital expenditures
Functions of International Investment Banks
Revenue generating activities
Revenue-generating activities involve primary market making, secondary market making, trading, corporate restructuring, financial engineering, advisory services, investments management, venture capital and consulting
Investment banks 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,
They assist public and private corporations in raising funds in the primary capital markets
Support activities
Support activities involve clearing, internal finance and information.
Investment banks primarily serve as intermediaries between corporations or governments that want to attract investments capital and investors wanting to invest capital.
They also act as intermediaries in trading for clients
International investment banking operational system can be divided into three which are front office, middle office, and back office.
Front Office
Two main areas of the front office are investment banks and markets.
The primary activities of international investments banks include advising big firms in M&A, helping in wide array of fund raising strategies, helping in negotiating with a merger target and coordinating with bidders.
On average, this is the most prestigious and highest paid department in that particular bank.
As in the market, investment banks help customer to raise funds in the capital market, identify potential partners for joint ventures, do sales and trading, conduct research and many more.
Middle Office
Related to the risk management issues.
Focuses on identifying and managing the level of risk that the company assumes in order to do business.
Working together with front office to identify the risk of doing business with certain clients.
They relies heavily on data collected by the back office in term of risks, profits and losses, and underlying reasons for those activities.
Back Office
The bank office provide the administration so that the front office can do the job needed to make money for the investment bank.
Types of facilities offered by back office of International Investment Bank
Underwriting new issues
Underwriting can be defined as the activity of providing long-term equity debt finance for corporations and governments, mainly through the issuance of new securities.
The company raise fund by selling common stock to the public for the first time.
It includes both basic securities like equity and bond issues, and hybrids such as preferred stock and convertible bonds
Trading securities and risk arbitrage
An investment bank serve as a securities broker and dealer in the secondary market.
As a broker, it makes an arrangement to help buyers and sellers complete a business transaction and it receives commission for their services
New product development
Trend in investment banking is more on creativity and innovation or creation of new products called "hybrid" which can generate profitable opportunities for the particular banks.
In Islamic banking, whether commercial or investment banks, many hybrid products have been introduced in order to meet the needs and wants of the Muslim and non-Muslim clients from all over the world.
Creativity and innovation activities are created in order to stabilize the financial market imperfections including taxes, transaction costs, regulations, and ignorance of market participants.
Providing advice
The particular service is offered from corporate restructuring exercises to rearrange a company's operations.
Also offers independent evaluation on corporate transactions including valuation of companies or businesses.
Others
Financial research, bridge financing, and currency exchange
Differences between Commercial Bank and Investment Bank
Commercial Bank
No deposits taking.
Not loan provider.
Have a few hundred core customers.
Provider of a very custom-made service.
Not a transactional day-to-day service provider. For an example, fund-based and fee-based services.
A strategic advisor to companies with regards to their structure, acquisitions, divestments and capital markets products. For an example, debts nad equity instruments.
Investment Bank
Deposits taking.
Loan provider.
May have millions of customers.
Provider of a very standardized service.
A transactional day-to-day provider. For an example, current account, savings account, credit and debit cards, mortgage and personal loans, and insurance.
Not a strategic advisor to companies