Introductionto bankingcoursepresentation 200522-110557-converted
- 1. Introduction to Banking Corporate Finance Institute®
- 2. Understand the different types/structures of financial services firms Determine the different types of banking services that are provided Understand who the customers are for each type of service Course Objectives Learn how a bank makes money Corporate Finance Institute® Differentiate the various banking career paths
- 3. Categories and Types of Financial Institutions Corporate Finance Institute®
- 4. There are four main categories of financial institutions: Main Categories of Financial Institutions Investment Banks Retail Banks Central Banks Commercial Banks Oversee and manage all banks in their respective country and set monetary policy Provide products and services to individual consumers Work with businesses to serve their financial needs Operate in the capital markets to help clients raise capital through underwriting and issuance of securities Corporate Finance Institute®
- 5. How Financial Institutions Are Organized 2. Large Banks 1. Universal Banks 8. Savings & Loans Associations 7. Building Societies 6. Credit Unions 5. Online Banks 4. Community Banks 3. Investment Banks Corporate Finance Institute®
- 6. 1. Universal Banks Universal Banks Investment Banking Retail Banking Commercial Banking CitiGroup Corporate Finance Institute® HSBC Group Deutsche Bank ICBC Bank of China Examples:
- 7. 2. Large Banks Large Banks Retail Banking Commercial Banking Wells Fargo Corporate Finance Institute® Bank of America Lloyds Bank Examples: Banco Santander
- 8. 3. Investment Banks Investment Banking Investment Banks Goldman Sachs Corporate Finance Institute® Barclays Credit Suisse Examples:
- 9. 4. Community Banks Community Banks Retail Banking Small Business Banking In US: • Over 18,000 community banks ─ majority have < $250MM in assets Corporate Finance Institute® In India: • Created by members of a local community ─ pooling capital resources and lending to the members In Nigeria: • Community banks exist as the Credit Development Division ─ making credit more accessible in rural areas
- 10. 5. Online/Digital Banks Online Banks Retail Banking Small Business Banking Digibank Corporate Finance Institute® Hello Bank Ally Bank Mashreq Neo Examples:
- 11. 6. Credit Unions Credit Unions Retail Banking Small Business Banking Credit unions serve a specific demographic and are member-owned. Clients are members who hold shares of the credit union. Corporate Finance Institute® Guidelines on who can be a member might be: • The member needs to live in a specific geographic area. • The member must be part of a specific segment of society such as teachers or military.
- 12. 7. Building Societies Building Societies Retail Banking Only found in the UK and Australia, building societies are owned by members and primarily offer home mortgages. Corporate Finance Institute® Nationwide Building Society Example:
- 13. 8. Savings & Loans Associations Savings & Loans Associations Retail Banking Small Business Banking Also referred to as mutual savings banks, these associations are primarily found in the United States. Corporate Finance Institute® It is possible to be a joint- stock company: • Membership component • Publicly traded Thrifts can have no more than 20% of their lending in commercial loans.
- 14. Banking Services: What They Are and Who Uses Them Corporate Finance Institute®
- 15. Banking services are structured by the type of client and the complexity of their needs: Banking Services Complexity of Needs Type of Client • Individuals • Entities • Businesses • Governments • Institutions Corporate Finance Institute® • Cash management requirements • Complexities arising through supply chain management • Amount of financing required
- 17. Retail banking is the provision of banking services to all individual consumers. Examples of retail services: Retail Banking Checking and Savings Accounts Mortgages Personal Loans Debit and Credit Cards Corporate Finance Institute®
- 18. Private banking is a subset of retail banking that caters to high-net-worth and ultra-high-net-worth individuals. Customer service is provided on a personal basis through a dedicated relationship manager. Services include retail banking products, asset management, brokerage, and limited tax advisory. Private Banking High-Net-Worth Liquid net worth of over $1MM (cash or easily convertible assets) Ultra-High-Net-Worth Liquid net worth of over $5MM Corporate Finance Institute®
- 19. Business banking refers to banking services provided to small businesses that are owner-operated and have annual revenues of up to $5 million. These businesses have very simple banking needs: Business Banking Working Capital Management Business Checking and Savings Accounts Merchant Services (e.g. Debit and Credit Cards Payment) Line of Credit or Loan (< $1MM) Corporate Finance Institute®
- 20. Businesses using business banking services could include: • Mechanic repair shops • Plumbing and heating companies • Hair salons • Owners of a franchise • Dentist offices • Small law and accounting firms Business Banking Corporate Finance Institute®
- 21. What are the likely reasons for financial support to small businesses from the bank? Business Banking Capital Investment Working Capital Buying another business Buying raw materials/ stock (inventory) Building new operating facility plant & equipment Buying new property Financing customers (receivables) Corporate Finance Institute®
- 22. Commercial banking is larger in scale than business banking and serves clients with more complex needs. Clients are typically: Commercial Banking 3. May include other financial institutions and local / regional governments 2. Multiple locations and possibly various geographic locations 1. Medium-sized (~500 employees) Corporate Finance Institute®
- 23. The needs of commercial banking clients are focused around: Commercial Banking Advisory Services Operating Accounts and Loan Finance Products Trade Finance and Foreign Exchange Transaction Banking (Cash and Treasury Management) Corporate Finance Institute®
- 24. Corporate banking services are for those clients whose needs are even more complex than in commercial banking. Corporate Banking Mid-sized companies Companies growing through mergers and acquisitions Publicly traded companies Large domestic and multinational corporations Financial and other institutions Governments Corporate Finance Institute® Revenue of $100MM – $1B
- 25. Corporate banking services are largely credit-related with an advisory component and act in between the commercial banking services the client will be using. Corporate Banking Structure complex needs around working capital management Help accessing debt capital markets products Assist with deal execution of over $100MM in value Provide credit expertise Corporate Finance Institute®
- 26. Investment banks do not offer traditional banking products and are non-deposit taking. They serve large, publicly traded corporations, institutions, and governments looking for banking services associated with large or complex financial transactions in: Investment Banking Corporate Finance Capital Markets • Mergers & acquisitions • Advisory services Corporate Finance Institute® • Underwriting • Research • Sales and trading
- 27. Three market segments: Investment Banking Boutique Market Middle Market Bulge Bracket Relevant to specialized businesses Relevant to mid-sized companies Dealing with very large deals for multinational corporates Corporate Finance Institute®
- 28. Investment Banking vs . Corporate Banking Investment Banking • Act as an intermediary • Maintain banking relationship with clients Corporate Finance Institute® • Directly offers advisory services for M&A transactions and structuring of capital markets products • Assisting organizations to raise capital through equity or debt • E.g. Initial public offering (IPO)
- 29. How Financial Institutions Generate Return Corporate Finance Institute®
- 30. A Bank’s Balance Sheet A Typical Non-Bank Current Assets Non-current Assets Current Liabilities Equity Assets Liabilities + Equity A Typical Bank Loans Trading Assets Other Assets Deposits Trading Liabilities Debt Equity Assets Liabilities + Equity Non-current Liabilities Corporate Finance Institute®
- 31. A typical bank classifies its financial assets and liabilities into the following categories: A Bank’s Balance Sheet 1. Loans & advances to clients 2. Financial assets and liabilities at fair value through profit and loss 3. Financial assets and liabilities held for trading 4. Financial assets and liabilities held to maturity/ at amortized cost Corporate Finance Institute®
- 32. A Bank’s Balance Sheet The value of the financial assets and liabilities changes during the year: Fair value of financial assets A gain in a bank’s income statement during the year Fair value of financial liabilities Fair value of financial assets Fair value of financial liabilities A loss in a bank’s income statement during the year Corporate Finance Institute®
- 33. A Bank’s Income Statement Net Interest Income Non-interest Revenue Total Interest and Similar Income X X X Provision for Credit Losses Net Gains/(Losses) on Financial Assets and Liabilities Total Non-interest Expense Income Before Tax Income Tax Provision (X ) (X ) (X ) X (X) Net Income X Corporate Finance Institute® (Interest Income – Interest Expense)
- 34. Net interest income is a key metric used in the banking industry that is closely monitored internally and externally. Net Interest Income Net Interest Income Interest Earned on Customer′s Advances, Loans, and Trading Assets Interest Paid on Customer′s Deposits, Trading Liabilities, and Long & Short−term Debt Corporate Finance Institute®
- 35. Net Interest Income – Example Corporate Finance Institute® What is the net interest income? Assets $MM Yield Loans to Customers 2,000 5.5% Trading Assets 500 3.0% Deposits with Banks 200 4.5% Property 100 Total Assets 2,800 Liabilities & Equity $MM Yield Deposits 1,300 3.0% Trading Liabilities 1,100 3.0% Long-term Debt 200 4.5% Equity 200 Total L&E 2,800
- 36. Net Interest Income – Example Net Interest Income 53 Interest Income $MM Interest on Loans (5.5% x 2,000MM) 110 Interest on Trading Assets (3% x 500MM) 15 Interest on Deposits with Banks (4.5% x 200MM) 9 134 Interest Expense $MM Interest on Deposits (3% x 1,300MM) (39) Interest on Trading Liabilities (3% x 1,100MM) (33) Interest on Long-term Debt (4.5% x 200MM) (9) (81) Assets $MM Yield Loans to Customers 2,000 5.5% Trading Assets 500 3.0% Deposits with Banks 200 4.5% Property 100 Total Assets 2,800 Liabilities & Equity $MM Yield Deposits 1,300 3.0% Trading Liabilities 1,100 3.0% Long-term Debt 200 4.5% Equity 200 Total L&E 2,800 Corporate Finance Institute®
- 37. Components of Total Revenue Total Interest and Similar Income X Interest (Loans and Deposits) Interest Expense Net Interest Income X (X ) X Net Interest Income Corporate Finance Institute® Non-interest Revenue Commission and Fees from Income X Net Commission Broker Fees, Mark-up on Security X Underwriting and Other Security Activities Profit on Sale of Investments X Other Customer Service Fees X Non-interest Revenue X
- 38. This ratio tree represents the key levers the executives of a bank can use to improve the performance of the bank. Measuring Returns in a Bank Generate greater profit from assets ‒ how? Return on Equity Profit After Tax Equity Return on Assets Profit After Tax Total Assets Leverage Total Assets Equity Increase the leverage of the bank ‒ what are the risks? Optimize the return to shareholders Corporate Finance Institute®
- 39. Let’s compare two banks with different levels of leverage: The Impact of Leverage Assets 1,000 (5% return) Debt 800 (3% cost) Equity 200 Low leverage Assets 1,000 (5% return) Debt 900 (3% cost) Equity 100 High leverage ROA 50 ‒ 24 1,000 Leverage 1,000 200 = 2.6% = 5 RO E 13% ROA 50 ‒ 27 1,000 = 2.3% Leverage 1,000 100 = 10 RO E Corporate Finance Institute® 23%
- 40. Target Ratio The Importance of Operating Efficiency Non−interest Expenses Net Interest Income + Other Income Operating Efficiency Ratio The operating efficiency ratio shows a bank’s efficiency by comparing non-interest expenses to net interest income and other income. Salaries, occupancy costs, technology expenses, etc. Leading Edge Financial Institutions Most Financial Institutions 60% 70% – 80% Corporate Finance Institute®
- 41. What is the bank’s profit and operating efficiency ratio? Corporate Finance Institute® What Is the Bank’s Profit Exercise Interest Income/Expense $MM Net Interest Income 7,500 Controllable – Bank Salaries 2,000 Controllable – Travel and Meals 500 Non-controllable – Rent, Technology, Utilities, Etc. 2,500
- 42. Profitability: What Is the Bank’s Profit Exercise Interest Income/Expense $MM Net Interest Income 7,500 Controllable – Bank Salaries 2,000 Controllable – Travel and Meals 500 Non-controllable – Rent, Technology, Utilities, Etc. 2,500 Total Expenses 5,000 Net Profit Before Tax 2,500 Operating Efficiency Ratio: Non−interest Expense $5,000 Net Interest Income $7,500 66.7% Corporate Finance Institute®
- 43. Asset-Liability Matching is the practice of investing, buying, liquidating, and adjusting one’s assets to cover its liabilities when needed. Treasury managers need to carefully manage assets in a portfolio and ensure there is sufficient liquidity to cover cash needs. Asset–Liability Matching (ALM) Liability Asset Corporate Finance Institute®
- 44. Asset–Liability Matching (ALM) Reduce interest rate risk and liquidity risk impacting a bank’s balance sheet Ensure the bank can meet its medium- and long-term financing needs Minimizes the risk of losses due to movement in interest rates Corporate Finance Institute®
- 45. Securitization is a risk management tool used to reduce idiosyncratic risk associated with the default of individual assets. Securitization One common example of securitization is a mortgage-backed security (MBS), which is a debt security collateralized by a mortgage or a collection of mortgages. 1. The bank combines multiple assets into a single compound asset which generates a return equivalent to the weighted average return of the individual assets. 2. The bank sells the compound asset to third- party investors as securities (bonds / collateralized debt obligations). Corporate Finance Institute®
- 46. Banking Careers Corporate Finance Institute®
- 47. Career Map Corporate Finance Institute®
- 48. Career Map Banking Careers Investment Banking Sales and Trading Research Corporate Advisory Commercial and Corporate Banking Credit Corporate Advisory Relationship Management Retail Banking Credit Financial Planning Relationship Management Corporate Finance Institute®
- 49. Banking Careers Investment Banking Sales and Trading Research Corporate Advisory Commercial and Corporate Banking Credit Corporate Advisory Relationship Management Retail Banking Credit Financial Planning Relationship Management Investment Banking Career Investment banking helps governments, corporations, and institutions raise capital and complete mergers and acquisitions (M&A). The competition for investment banking positions is intense, compensation is very high, and the work is very high profile. Common career paths: Analyst Associate VP / Director / Managing Director Corporate Finance Institute®
- 50. Sales and Trading Career The sales and trading division of a bank helps mutual funds, hedge funds, and pension funds facilitate equities transactions. A career in sales & trading can be extremely strenuous with a very fast-paced environment. The competition for positions is intense. Common career paths: Associate VP / Director Banking Careers Investment Banking Sales and Trading Research Corporate Advisory Commercial and Corporate Banking Credit Corporate Advisory Relationship Management Retail Banking Credit Financial Planning Relationship Management Corporate Finance Institute®
- 51. Equity Research Career Equity research roles provide research coverage of public companies and distribute that research to the bank’s clients. It’s common for an analyst to move from the sell side to the buy side where they perform similar research to be used by the firm’s portfolio managers. Common career paths: Analyst Associate Banking Careers Investment Banking Sales and Trading Research Corporate Advisory Commercial and Corporate Banking Credit Corporate Advisory Relationship Management Retail Banking Credit Financial Planning Relationship Management Corporate Finance Institute®
- 52. Commercial Banking Career Commercial banking provides clients with credit products such as term loans, lines of credit, syndicated facilities, cash management services, and other fixed- income products. They deliver financial advice and solutions tailored to the clients’ needs, such as buying new equipment, funding working capital, and day-to-day banking. Common career paths: Credit Analyst Account Manager Banking Careers Investment Banking Sales and Trading Research Corporate Advisory Commercial and Corporate Banking Credit Corporate Advisory Relationship Management Retail Banking Credit Financial Planning Relationship Management Corporate Finance Institute®
- 53. Retail Banking Career Retail banking provides clients with credit products such as term loans, lines of credit, syndicated facilities, cash management services, and other fixed income products. They deliver financial advice and solutions tailored to the clients’ needs, such as buying new equipment, funding working capital, and day-to-day banking. Common career paths: Account Manager Credit Analyst Banking Careers Investment Banking Sales and Trading Research Corporate Advisory Commercial and Corporate Banking Credit Corporate Advisory Relationship Management Retail Banking Credit Financial Planning Relationship Management Customer Advisor Corporate Finance Institute®
- 54. Other Roles in Banking – Mid Office and Back Office Front office: • Client-facing Middle office: • Supports the work of front office • Includes risk management, corporate treasury, internal audit, strategic management, and data analytics Back office: • Supports the overall operations of the bank • Includes financial planning and analysis, regulatory compliance, settlements, and information technology services Corporate Finance Institute®
- 55. Course Summary Corporate Finance Institute®
- 56. Understand the different types/structures of financial services firms Determine the different types of banking services that are provided Understand who the customers are for each type of service Course Objectives Learn how a bank makes money Corporate Finance Institute® Differentiate the various banking career paths