INVESTMENT BANKING

A Project Submitted to
University of Mumbai for partial completion of the degree of
Bachelor in Commerce (Financial Markets)
under the faculty of commerce

By
Mayuri Umale
Roll no – 54
Semester – 6
Under the guidance of
Priyanka Gogri

SIES College of Arts , Science and Commerce

Sri Chandrashekarendra Sarasvati Vidyapuram Plot No. 1C, Sector 5,
Nerul, Navi Mumbai, Maharashtra 400706
 INDEX

Ch.no Topic Page no.

1 1.1 Introduction
1.2 Definition
1.3 Evolution on investment banking
1.4 2008 financial crisis
1.5 Growth of investment banking
1.6 Organisational structure
1.7 Services
1.8 Current Challenges
1.9 Major investment banks with market share
1.10 Careers in investment banks
2 Research and methodology
3 Data interpretation and analysis
4 Conclusion and suggestions
 INTRODUCTION

Investment banking is among the most complex financial mechanisms

in the world. They serve many different purposes and business
entities. They provide various types of financial services, In this
respect, investment banks operate along two main lines: a "buy" side
and a "sell" side. "Buy" side operations include services such as
securities trading or portfolio management , "Sell" side activities
include services such as mergers and acquisitions advisory which
involves helping organisations in M&As,; leveraged finance that
involves lending money to firms to purchase assets and settle
acquisitions, restructuring that involves improving structures of
companies to make a business more efficient and help it make
maximum profit, and new issues or IPOs, where these banks help new
firms go public.
Investment Banking Is a result of oriented profession, commanding
high degree of skill and expertise in finding business solutions,
assisting in investment and financial decision making assisting in
laying corporate strategies, assessing capital needs and helping in
procuring the owned funds for achieving balanced capital structure of
the corporate client.
Investment Banking is one of the most global industries, and is hence
continuously challenged to respond to new developments and
innovation in the global financial markets.

DEFINITION

SEBI – An Investment bank is defined as a financial institution or an

organization that underwrites corporate securities and advices such
clients on issue like mergers, etc. involved be a bank, corporate body,
a firm or a proprietary concern.

In the strictest definition, Investment banking helps in the raising of

funds both in debt and equity, and the division handing this in an
investment bank is often called the “Investment Banking
Division”(IBD). However, any a few small firms solely provide this
services. Almost all investment banks are heavily involved of fixed
income, foreign exchange, commodity, and equity securities.
An Investment bankers acts as an intermediary between the issuers
and the ultimate purchasers of securities in the primary securities
market. These institutions provide guidance in raising capital, issue
management services, underwrites corporate securities and provides
other advisory services.
Investment banks help companies and government (or their agencies)
raise money by issuing and selling securities in the capital markets
(both equity and Debt)

Almost all investment banks also offer strategies advisory services for
mergers, Acquisitions, divestiture or other financial services for
clients, such as the trading of derivatives, fixed income, foreign
exchange, commodity. Trading securities for cash or the promotion of
securities or referred to as “sell side.” The “buy side” constitutes the
pension funds, mutual funds, hedge funds, and investing public who
consume the products and services of the sell-side in order to
maximize their return on investment. Many firms have both buy and
sell side components.
 EVOLUTION OF INVESTMENT
BANKING
The term “ Investment bank ” does not have a precise definition, but
is generally applied to financial houses which, starting from trading as
merchants, expanded their role to financing the trading and
commercial activities of others, especially in the international market
place. For many years, the British houses were know as investment
banks reflecting their origins, Investment banks have retained this
string international flavour and often have offices in many other
countries, particularly in the major financial centers.

Investment Banking in one of the most global industries, and hence

continuously challenged to respond to new development and
innovation in the global financial markets. Throughout the history of
investment banking, many have theorized that all investment banking
products and services would be commoditized. New products with
higher margins are constantly invented trading know-how in new
markets. However, since these can usually not be patented or
copyrighted, they are very often copied quickly by competing banks,
pushing down trading margins.

For example, trading bonds and equities for customers is now a

commodity business, but structuring and trading derivatives is highly
profitable. Each OTC contract has to be uniquely and could involve
complex pay-off and risk profiles. Listed option contracts are traded
through major exchanges, and are almost as commoditized as general
equity securities, products have been commoditized.

In addition, while many products have been commoditized, an

increasing amount of profit within investment banks has come from
proprietary trading, where size a positive network benefit (since the
more trades an investment bank does, the more it knows about the
market flow, allowing it to theoretically make better trades and pass
on better guidance to clients).
 2008 FINANCIAL CRISIS
The 2008 financial crisis is the worst economic disaster since
the Great Depression of 1929 . It occurred despite Federal
Reserve and Treasury Department efforts to prevent it.

In the early-to-mid 2000s, interest rates on house payments were

actually quite low. In what looked to be a solid economy after a
brief early 2000s recession, more and more people with struggling
credit were able to qualify for subprime mortgages with manageable
rates, and happily acted on that.

This sudden increase in subprime mortgages was due in part to the

Federal Reserve's decision to significantly lower the Federal funds
rate to spur growth. People who couldn't afford homes or get
approved for loans were suddenly qualifying for subprime loans
and choosing to buy, and American home ownership rose
exponentially.

Real estate purchases rose not only for subprime borrowers, but for
well-off Americans as well. As prices rose and people expected a
continuation of that, investors who got burned by the dot com
bubble of the early 2000s and needed a replacement in their
portfolio started investing in real estate.

Housing prices were rising rapidly, and the number of subprime

mortgages given out was rising even more. By 2005, some began to
fear that this was a housing bubble. From 2004-2006, the Federal
Reserve raised the interest rate over a dozen times in an attempt to
slow this down and avoid serious inflation. By the end of 2004, the
interest rate was 2.25%; by mid-2006 it was 5.25%.

This was unable to stop the inevitable. The bubble burst. 2005 and
2006 see the housing market crash back down to earth. Subprime
mortgage lenders begin laying thousands of employees off, if not
filing for bankruptcy or shutting down entirely.

Lehman Brothers was one of the largest investment banks in the

world for years. It was also one of the first investment banks to get
very involved with investing in mortgages, something that would
pay off until it became their downfall.

The plummeting price of real estate and the widespread defaulting

on mortgages crushed Lehman Brothers. They were forced to close
their subprime lenders, and despite their many attempts to stop the
bleeding (such as issuing stock) they continued to take on losses
until, on Sept. 15, 2008, Lehman Brothers applied for bankruptcy.

Lehman Brothers was one of the most prominent financial-service

firms in the world. Its rapid descent into bankruptcy was a major
cause of the 2008 stock market crash.
 GROWTH OF INVESTMENT BANKING

Investment banks will typically be concerned with several business

units, including Corporate Finance (concerned with managing the
finances of corporations, including mergers, acquisitions and
disposals), often called the Investment Banking Division of the firm;
Research (concerned with investigating, valuing and making
recommendations to clients-both individual investors and larger
entities such as hedge funds and mutual funds-regarding shares and
corporate and government bonds); and Equities or sales and trading
(concerned with buying and selling shares both on behalf of the
bank’s clients and sometimes also for the bank itself).Management of
the bank’s own capital, or Proprietary Trading, is often one of the
biggest sources of profit; for example the banks may structure their
books so the they profit form a fall of bond yields (a rise of bonds
prices).

An Investment bank provides its clients expert advice, innovative

solutions, outstanding execution and comprehensive access to the
world’s capital markets. Whether the clients require investment
banking, equities, fixed income or foreign exchange, investment
banks have the intelligence, markets insight and global coverage to
help them to capture opportunities and manage risk.
 ORGANISATIONAL STRUCTURE
Investment banks are split up into front office, middle office, and
back office. Each sector is very different yet plays an important role
in making sure that the bank makes money, manages risk, and runs
smoothly.

FRONT OFFICE

The front office generates the bank’s revenue and consists of three
primary divisions: investment banking, sales & trading, and research.
Investment banking is where the bank helps clients raise money in
capital markets and also where the bank advises companies on mergers
& acquisitions. At a high level, sales and trading is where the bank (on
behalf of the bank and its clients) buys and sells products. Traded
products include anything from commodities to specialized derivatives.
Research is where banks review companies and write reports about
future earnings prospects. Other financial professionals buy these
reports from these banks and use the reports for their own investment
analysis.
Other potential front office divisions that an investment bank may have
include: commercial banking, merchant banking, investment
management, and global transaction banking.

MIDDLE OFFICE
Risk management involves analyzing the market and credit risk that
traders are taking onto the balance sheet in conducting their daily
trades, and setting limits on the amount of capital that they are able to
trade in order to prevent ‘bed’ trades having a detrimental effort to
desk overall. Another key Middle Office role is to ensure that the
above mentioned economic risks are captured accurately (as per
agreement of commercial terms with the counterparty) correctly ( as
per standardized booking models in the most appropriate systems) and
on time (typically within 30 minutes of trade execution). In recent
years the risk of errors has become known as “optional risk” and the
assurance Middle Office provide now include measures to address
this risk. When this assurance is not place, market and credit risk
analysis can unreliable and open to deliberate manipulation.

BACK OFFICE

Operations involve data-checking trades that have been conducted,

ensuring that they are not erroneous, and transacting the required
transfers. Whilst it provides the greatest job security of the divisions
within an investment bank, it is a critical part of the bank that
involves managing the financial information of the bank and ensures
efficient capital markets through the financial reporting function. The
staff in these are often highly qualified and need to understand in
depth the deals and transaction that occur across all the division of the
bank.
 SERVICES
An Investment banks offers a plethora of services to its clients. These
services include providing valuable advice to the clients on the type of
finance to be raised, issue management process, corporate
restructuring strategies, underwriting services, project feasibility and
planning, etc. They provide various pre-issue services to the clients.

UNDERWRITING

Underwriting is the process of raising capital through selling stocks or

bonds to investors (e.g., an initial public offering IPO) on behalf of
corporations or other entities. Businesses need money to operate and
grow their businesses, and the bankers help them get that money by
marketing the company to investors.

There are generally three types of underwriting:

 Firm Commitment – The underwriter agrees to buy the entire

issue and assume full financial responsibility for any unsold
shares.

 Best Efforts – Underwriter commits to selling as much of the

issue as possible at the agreed-upon offering price but can return
any unsold shares to the issuer without financial responsibility.
  All-or-None – If the entire issue cannot be sold at the offering
price, the deal is called off and the issuing company receives
nothing.

Once the bank has started marketing the offering, the following book-
building steps are taken to price and complete the deal.

MERGERS AND ACQUISITIONS

It is the process of helping corporations and institutions find,

evaluate, and complete acquisitions and mergers of businesses. This is
a key function in i-banking. Banks use their extensive networks and
relationships to find opportunities and help negotiate on their client’s
behalf. Bankers advise on both sides of M&A transactions,
representing either the “buy-side” or the “sell-side” of the deal.
Mergers & Acquisitions can take place:
• by purchasing assets
• by purchasing common shares
• by exchange of shares for assets
• by exchanging shares for shares

The mergers and acquisitions (M&A) process has many steps and can
often take anywhere from 6 months to several years to complete.

SALES, TRADING & CORPORATE BROKING

Under sales and trading, the primary function of an investment bank

is to facilitate the buying and selling of securities and other financial
instruments between the investment bank and large institutional
clients or high net-worth investors. Here the investment banks
approach large clients to suggest profitable trading ideas. They
conduct and complete the trade on behalf of their client, and charges
commission or brokerage from buying and selling.

It is important to note that the transactions done by investment banks

are very different from those done by the brokerage houses. These
transactions are different in two ways. Firstly, the investment banks
only entertain large investors, who have the capacity to make high-
value transactions while brokerage houses offer its services to even a
small investor. Secondly, the flow of the transaction of an investment
bank is that the investors trade on the advice of investment banks,
whereas in brokerage houses the brokers usually instrument the
transactions as the investors ask them to.

In recent years the investment banks have started making its own
financial products to pitch to the investors. The products can be a mix
of equities, equities plus debts or a mix of all securities such as
equities, debt, commodity, and derivatives.
Also, the investment banks help investors in hedging risks through
derivative trading.

ASSET MANAGEMENT SERVICES

Asset management is the direction of all or part of a client's portfolio

by a an investment bank. Institutions offer investment services along
with a wide range of traditional and alternative product offerings that
might not be available to the average investor.
In many cases, investment banks serve as personalized asset managers
to their clients. Clients of an investment bank for their asset
management services include large insurance companies, government
provident fund departments, and the likes. Investment banks create an
efficient portfolio for their client which yields maximum returns for a
certain risk that the client is ready to bear. It is obvious that in such
cases the assets under management is very large, and investment
banks charge a commission which is a percentage of the asset under
management.
RESEARCH

Research is not the main profit center for the investment banks, but it
is necessary to support the other profit-making divisions. Most
investment banks host an in-house research department where
analysts work on research of equities and other securities. The equity
research helps the sales and trading department to come up with high-
profit trading ideas. The investment banks hire high-quality buy-side
and sell-side analysts to come up with extremely precise equity
valuation.
Furthermore, investment banks also do high-quality research in the
areas of macroeconomics, market scenario, political scenarios, credit
analysis, and other quantitative analysis. This aids all the other profit-
making divisions of investment banks in making a precise informed
decision. For example, it is important to have thorough credit analysis
before making an investment for underwriting services, or it would be
fruitful to understand the market scenario and macroeconomic factors
before deciding the best timing to launch an initial public offering.

Thus we can conclude that investment banking services are large and
complex but is a very lucrative business.

RISK MANAGEMENT
Hedging positions in interest rates, foreign currency exchanges
and commodity positions through swaps, options and futures are
an essential building block of financial markets. Swaps are the
mechanism by which two or more parties exchange their debt
obligations in order to control more precisely each party’s desired
risk/return profile. Swaps work because different entities have
different comparative advantages when pricing different
categories of debt in different financial markets. Parties of
dissimilar credit ratings or financing needs can exchange their
obligations (e.g., from shorter term to longer term and vice versa)
in order to optimize their financial strategy and structure. Risk
management groups combine expertise in diverse hedging
instruments to develop a complete hedging strategy for
enterprises.
LOAN SYNDICATION
Loan syndication refers to the services rendered by an organization in
arranging and procuring credit from financial institutions, banks,
other lending and investment companies for financing the project or
meeting lending capital requirements. The loan syndication work
involves identification of sources where from funds could be
arranged. Approaching these sources with requisite application and
supporting documents and complying with all formalities involved in
the sanction and disbursal of loan.
ADVISORY SERVICES
Investment banker’s offer customized solutions to solve the financial
problems of their clients. Advice is sought in areas off financial
structuring. Merchant bankers study the working capital practices that
exist within the company and suggest alternative policies. They also
advise the company on rehabilitation and turnaround strategies, which
would help companies to recover from their current position. They
also provide advice to appropriate risk management strategies like
hedging strategies.
RESTRUCTURING SERVICES
Investment bankers assist the management of the client company to
successfully restructure various activities, which include mergers and
acquisitions, divestitures, management buyouts, joint venture among
others. To help companies achieve the objectives of these
restructuring strategies, the investment bankers participates in
different activities at various states which include understanding the
objectives behind the strategy (objective could be either to obtain
financial, marketing or production benefits), and help in searching for
the right partner in the strategic decision and financial valuation of the
proposal.

CURRENT CHALLENGES
The challenge for the investment banking industry revolves around
higher capital charges, market electronification & digitalisation, stuck
cost base, inflexible and layered technology with increased
complexity of regulation and reporting.
1. Regulation drives business behaviour – Banks are already
fully engaged in meeting the IFRS 9 requirements and the
resulting changes to their business model with specific focus
on provisioning. Pressure to build appropriate models and
data requirements only leads to greater complexity. Basel III
has increased focus on maintaining core liquidity and
leverage ratios with pressure on reducing short term funding,
holding more liquid assets, raising long-term wholesale
funding, while reducing leverage both on and off balance
sheet.
2. Capital is scarce - The effect of Basel III ( The Basel
III regulations are designed to reduce damage to the economy by
banks that take on excess risk. ) has resulted in fundamental
shifts in product profitability. Structured derivatives and long
dated transactions pre-crisis & Basel 3 in many cases are now
a drag on ROE. This has resulted in the shift towards the
creation of non-core divisions to dispose of unprofitable
transactions & portfolios. Commoditised exchanged traded
OTC products has resulted in a fundamental change in
margins and capital management.

3. Banks are required to utilise their customer knowledge

to not only retain but grow their customer returns
through more effective cross sell - The ability to measure
 and cross sell products has become increasingly important to
a company’s ability to remain competitive, while best
servicing all bank customers with an eye on capital returns.

4. Outdated, inflexible physical infrastructure restricts

movement and growth in the current digital age - The
traditional infrastructure of banks (both physical and
technical) has proven to be inflexible to change and this
renders their ability to survive “as is” in a disruptive
marketplace potentially unlikely.

5. Cyber Security - Number of cases of digital theft from Banks

through bypassing risk controls within Swift. Swift processes
$6tn transfers daily with 11 000 members. EBA to stress test
financial institutions to assess vulnerability to hackers &
Swift to implement “two factor” authentication.

MAJOR INVESTMENT BANKS

Goldman Sachs – The Goldman Sachs Group, Inc., is an
American multinational investment bank and financial
services company headquartered in New York City. One of
the best and oldest banking firms founded in 1869 . It has a
market capital of USD 85.90 billion and $917 billion in
assets .
 JP Morgan Chase - JPMorgan Chase & Co. is an American
multinational investment bank and financial services holding
company headquartered in New York City, JPMorgan Chase
is ranked by S&P Global as the largest bank in the United
States. It has a market capital o $431.08 billion and $2.5
trillion in assets.

Barclays - Barclays is a british multinational investment

bank and financial services headquartered in
London . Barclays was founded in 1896 and
holds £1.1 trillion in assets (around $1.5 trillion
USD)

Morgan Stanley - Morgan Stanley is an American multinational

investment bank and financial services
company headquartered in 1931at Mamhattan
New York city. It has a markrt capital of $82
billion and $1.3 trillion assets.
Bank of America Merrill Lynch – is an American
multinational investment investment bank division
under the auspices of bank of America . Bank of
America completed the acquisition of Merrill lynch
and Co. On 1st January 2009. It is a second biggest
bankin USA with $23. Trillion assets .

Credit Suisse - is a multinational investment bank and

financial services company founded and based in
Switzerland. Headquarters in zurich. It was founded in 1856
it has a market capital od $34.4 billion and hold $800 billion
assets.

Deutsche Bank – is a german multinational investment

bank and financial company headquartered in
Frankfurt, Germany. it was founded in 1870
It holds $600 billion assets.
 CARRERS IN INVESTMENT BANKS
Investment banks have a rigid and strict hierarchy, where each rank
means a great deal and carries specific, significant perks as you
advance. The typical hierarchy of investment banks is common to
almost all investment banks, although non-US banks may have different
job titles. However, regardless of the titles, job descriptions tend to be
consistent from one investment bank to another.

1. Investment Banking Analyst

Almost all investment banking analysts enter the industry as fresh

graduates from the best business schools. Most investment banks have a
two-year program, after which the analyst rises to the associate rank.
The majority of an analyst’s work involves researching companies,
building financial models in Excel, and creating PowerPoint
presentations that the bank uses to communicate ideas to potential
clients. An analyst earns between $100,000 and $150,000 annually.

2. Investment Banking Associate

After working for two or three years as an analyst, you are promoted to
the associate rank. Alternatively, you can sometimes enter the associate
rank directly, skipping over being an analyst, if you arrive with a
graduate degree from a top MBA program. Apart from watching over
the analysts, an associate spends most of their time talking to clients and
seeing what they need. They may also work alongside analysts in
preparing pitch book materials and in financial modeling. The salary of
an associate varies between $110,000 and $300,000.

3. Vice President

An associate typically rises to the rank of a vice president after working

at the bank for a period of three to four years. A vice president speaks to
clients and updates them on how deals or transactions are progressing.
By default, the analysts and associates fall under the vice president,
whose responsibilities include ensuring that PowerPoint presentations
and financial models are built in the right way. VPs have an active role
in executing deals with clients and, therefore, earn a substantially higher
salary than associates or analysts. The pay usually ranges between
$150,000 and $450,000.

4. Director/Senior Vice President

A senior VP may also be called a director or principal, depending on the

company. To become a Senior VP, you must have worked in an
investment bank and risen up the hierarchy. It is unheard of for someone
to be hired to the position from outside the bank. A senior VP deals
directly a lot with clients and acts as a bridge between the clients and the
team in the lower ranks. Senior VP pay ranges between $250,000 and
$1.5 million, inclusive of bonuses.
5. Managing Director

The Managing Director sits at the highest level of the investment bank
hierarchy, and he/she is responsible for the profitability of the bank. It
takes a long time, considerable skill, and even some good fortune to get
to this level. The work of the Managing Director is to know how all the
deals are progressing and to be aware of what is happening in the
political or economic environment that is likely to affect the bank’s
operations or their clients. Most of a Managing Director’s time is spent
on soliciting new clients, meeting potential investors, and building
relationships. They make between $500,000 and $4 million – in a good
year, their gross income may hit $10 million. If the bank is not making
money, then the Managing Director takes the blame. If the bank is doing
well, then they take the credit, in the form of higher and higher levels of
compensation.
 RESEARCH AND MEATHODOLOGY
Exploratory research design is used to perform the study. The random
sampling method used to collect the primary data from the customers
in Navi Mumbai / Mumbai city. The sample of 50 respondents was
collected. Both primary and secondary data is used to perform the
study. A questionnaire was prepared for customer’s survey.
Introductory question included all multiple choice / multiple response
type of questions. Main body of customer questionnaire included
objective of the research study which was drafted in English.
The main purpose of the research was to customers views on a range
of services offered by investment banks. Which services are of
greatest value? Which services are seen as a natural part of any
offering? Which additional services are clients willing to pay the most
to receive?

The study falls under the category of descriptive research and uses
survey method. Descriptive research includes survey and fact finding
enquiries of different kinds..it is description of state of affairs as exists
at present.
To collect the necessary information, carious parameters were
developed with the help of literature. The responses to these
parameters were gathered, coded, tabulated and analyzed. To measure
the intensity of parameters close ended questionnaire was used. To
measure the attributes were measured on a point scale and the final
score has calculated by using weighted ranking method.
.