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Introduction to Banking
Corporate Finance Institute®
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
Corporate Finance Institute®
Learn how a bank makes money Differentiate the various banking
career paths
Categories and Types of Financial Institutions
Corporate Finance Institute®
Corporate Finance Institute®
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®
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®
1. Universal Banks
Universal Banks
Investment
Banking
Retail
Banking
Commercial
Banking
CitiGroup
HSBC Group
Deutsche Bank
ICBC Bank of China
Examples:
Corporate Finance Institute®
2. Large Banks
Large Banks
Retail
Banking
Commercial
Banking
Wells Fargo
Bank of America
Lloyds Bank
Examples:
Banco Santander
Corporate Finance Institute®
3. Investment Banks
Investment
Banking
Investment Banks
Goldman Sachs
Barclays
Credit Suisse
Examples:
Corporate Finance Institute®
4. Community Banks
Community Banks
Retail
Banking
Small Business
Banking
In US:
• Over 18,000 community
banks ─ majority have <
$250MM in assets
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
Corporate Finance Institute®
5. Online/Digital Banks
Online Banks
Retail
Banking
Small Business
Banking
Digibank
Hello Bank
Ally Bank
Mashreq Neo
Examples:
Corporate Finance Institute®
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.
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.
Corporate Finance Institute®
7. Building Societies
Building Societies
Retail
Banking
Found in the UK, Ireland,
Australia and Jamaica,
building societies are owned
by members and primarily
offer home mortgages.
Nationwide Building Society
Example:
Corporate Finance Institute®
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.
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.
Banking Services: What They Are and Who Uses
Them
Corporate Finance Institute®
Corporate Finance Institute®
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
• Cash management requirements
• Complexities arising through
supply chain management
• Amount of financing required
Corporate Finance Institute®
Banking Services
Investment
Banking
Retail
Banking
Commercial
Banking
Business
Banking
Corporate
Banking
Private
Banking
Corporate Finance Institute®
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®
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®
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®
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®
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®
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®
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®
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
Revenue of $100MM – $1B
Corporate Finance Institute®
Corporate banking services are largely credit-related with an advisory component and act in between
commercial banking and investment banking services.
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®
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
• Underwriting
• Research
• Sales and trading
Corporate Finance Institute®
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®
Investment Banking
vs.
Corporate Banking Investment Banking
• Act as an intermediary
• Maintain banking relationship
with clients
• 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)
How Financial Institutions Generate Return
Corporate Finance Institute®
Corporate Finance Institute®
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®
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®
The value of the financial assets and liabilities changes during the year:
A Bank’s Balance Sheet
Fair value of financial assets
Fair value of financial liabilities
A gain in a bank’s income
statement during the year
Fair value of financial assets
Fair value of financial liabilities
A loss in a bank’s income
statement during the year
Corporate Finance Institute®
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)
X
Net Income
(Interest Income – Interest Expense)
Corporate Finance Institute®
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®
Net Interest Income – Example
What is the net interest income?
Assets
Loans to Customers 2,000 5.5%
$MM Yield
Trading Assets 500 3.0%
Deposits with Banks 200 4.5%
Property 100
2,800
Total Assets
Liabilities & Equity
Deposits 1,300 3.0%
$MM Yield
Trading Liabilities 1,100 3.0%
Long-term Debt 200 4.5%
Equity 200
2,800
Total L&E
Corporate Finance Institute®
Net Interest Income – Example
Net Interest Income 53
Interest on Loans (5.5% x 2,000MM)
Interest on Trading Assets (3% x 500MM)
Interest on Deposits with Banks (4.5% x 200MM)
110
15
9
134
Interest Income $MM
Interest on Deposits (3% x 1,300MM)
Interest on Trading Liabilities (3% x 1,100MM)
Interest on Long-term Debt (4.5% x 200MM)
(39)
(33)
(9)
(81)
Interest Expense $MM
Assets
Loans to Customers 2,000 5.5%
$MM Yield
Trading Assets 500 3.0%
Deposits with Banks 200 4.5%
Property 100
2,800
Total Assets
Liabilities & Equity
Deposits 1,300 3.0%
$MM Yield
Trading Liabilities 1,100 3.0%
Long-term Debt 200 4.5%
Equity 200
2,800
Total L&E
Corporate Finance Institute®
Components of Total Revenue
Commission and Fees from Income
Net Commission Broker Fees, Mark-up on Security
Underwriting and Other Security Activities
Profit on Sale of Investments
Other Customer Service Fees
Non-interest Revenue
X
X
X
X
X
Total Interest and Similar Income X
Interest (Loans and Deposits)
Interest Expense
Net Interest Income
X
(X)
X
Net Interest Income
Non-interest Revenue
Corporate Finance Institute®
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?
Profit After Tax
Equity
Return on Equity
Profit After Tax
Total Assets
Return on Assets
Total Assets
Equity
Leverage
Increase the leverage of the
bank ‒ what are the risks?
Optimize the return to
shareholders
Corporate Finance Institute®
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
50 ‒ 24
1,000
ROA
1,000
200
Leverage
= 2.6% = 5
ROE
13%
50 ‒ 27
1,000
ROA
= 2.3%
1,000
100
Leverage
= 10
ROE
23%
Corporate Finance Institute®
Target Ratio
The operating efficiency ratio shows a bank’s efficiency by comparing non-interest expenses to net
interest income and other income.
The Importance of Operating Efficiency
Non−interest Expenses
Net Interest Income + Other Income
Operating Efficiency Ratio
Salaries, occupancy costs,
technology expenses, etc.
Leading Edge
Financial
Institutions
Most Financial
Institutions
60% 70% – 80%
Corporate Finance Institute®
What is the bank’s profit and operating efficiency ratio?
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
Corporate Finance Institute®
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®
Asset-Liability Matching is the practice of investing, buying, liquidating, and allocating 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®
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®
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).
Banking Careers
Corporate Finance Institute®
Corporate Finance Institute®
Career Map
Corporate Finance Institute®
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®
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
Corporate Finance Institute®
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®
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®
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®
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®
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
Course Summary
Corporate Finance Institute®
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
Corporate Finance Institute®
Learn how a bank makes money Differentiate the various banking
career paths

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Similar to Okay, let's calculate this step-by-step:Interest earned on assets:Loans to customers: $2,000 * 5.5% = $110 Trading assets: $500 * 3% = $15Deposits with banks: $200 * 4.5% = $9Total interest earned = $110 + $15 + $9 = $134Interest paid on liabilities: Deposits: $1,300 * 2% = $26Net interest income = Interest earned - Interest paid = $134 - $26 = $108Therefore, the net interest income is $108 million

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Similar to Okay, let's calculate this step-by-step:Interest earned on assets:Loans to customers: $2,000 * 5.5% = $110 Trading assets: $500 * 3% = $15Deposits with banks: $200 * 4.5% = $9Total interest earned = $110 + $15 + $9 = $134Interest paid on liabilities: Deposits: $1,300 * 2% = $26Net interest income = Interest earned - Interest paid = $134 - $26 = $108Therefore, the net interest income is $108 million (20)

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Okay, let's calculate this step-by-step:Interest earned on assets:Loans to customers: $2,000 * 5.5% = $110 Trading assets: $500 * 3% = $15Deposits with banks: $200 * 4.5% = $9Total interest earned = $110 + $15 + $9 = $134Interest paid on liabilities: Deposits: $1,300 * 2% = $26Net interest income = Interest earned - Interest paid = $134 - $26 = $108Therefore, the net interest income is $108 million

  • 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 Corporate Finance Institute® Learn how a bank makes money Differentiate the various banking career paths
  • 3. Categories and Types of Financial Institutions Corporate Finance Institute®
  • 4. Corporate Finance Institute® 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
  • 5. Corporate Finance Institute® 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
  • 6. Corporate Finance Institute® 1. Universal Banks Universal Banks Investment Banking Retail Banking Commercial Banking CitiGroup HSBC Group Deutsche Bank ICBC Bank of China Examples:
  • 7. Corporate Finance Institute® 2. Large Banks Large Banks Retail Banking Commercial Banking Wells Fargo Bank of America Lloyds Bank Examples: Banco Santander
  • 8. Corporate Finance Institute® 3. Investment Banks Investment Banking Investment Banks Goldman Sachs Barclays Credit Suisse Examples:
  • 9. Corporate Finance Institute® 4. Community Banks Community Banks Retail Banking Small Business Banking In US: • Over 18,000 community banks ─ majority have < $250MM in assets 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. Corporate Finance Institute® 5. Online/Digital Banks Online Banks Retail Banking Small Business Banking Digibank Hello Bank Ally Bank Mashreq Neo Examples:
  • 11. Corporate Finance Institute® 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. 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. Corporate Finance Institute® 7. Building Societies Building Societies Retail Banking Found in the UK, Ireland, Australia and Jamaica, building societies are owned by members and primarily offer home mortgages. Nationwide Building Society Example:
  • 13. Corporate Finance Institute® 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. 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. Corporate Finance Institute® 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 • Cash management requirements • Complexities arising through supply chain management • Amount of financing required
  • 16. Corporate Finance Institute® Banking Services Investment Banking Retail Banking Commercial Banking Business Banking Corporate Banking Private Banking
  • 17. Corporate Finance Institute® 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
  • 18. Corporate Finance Institute® 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
  • 19. Corporate Finance Institute® 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)
  • 20. Corporate Finance Institute® 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
  • 21. Corporate Finance Institute® 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)
  • 22. Corporate Finance Institute® 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)
  • 23. Corporate Finance Institute® 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)
  • 24. Corporate Finance Institute® 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 Revenue of $100MM – $1B
  • 25. Corporate Finance Institute® Corporate banking services are largely credit-related with an advisory component and act in between commercial banking and investment banking services. 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
  • 26. Corporate Finance Institute® 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 • Underwriting • Research • Sales and trading
  • 27. Corporate Finance Institute® 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
  • 28. Corporate Finance Institute® Investment Banking vs. Corporate Banking Investment Banking • Act as an intermediary • Maintain banking relationship with clients • 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. Corporate Finance Institute® 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
  • 31. Corporate Finance Institute® 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
  • 32. Corporate Finance Institute® The value of the financial assets and liabilities changes during the year: A Bank’s Balance Sheet Fair value of financial assets Fair value of financial liabilities A gain in a bank’s income statement during the year Fair value of financial assets Fair value of financial liabilities A loss in a bank’s income statement during the year
  • 33. Corporate Finance Institute® 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) X Net Income (Interest Income – Interest Expense)
  • 34. Corporate Finance Institute® 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
  • 35. Corporate Finance Institute® Net Interest Income – Example What is the net interest income? Assets Loans to Customers 2,000 5.5% $MM Yield Trading Assets 500 3.0% Deposits with Banks 200 4.5% Property 100 2,800 Total Assets Liabilities & Equity Deposits 1,300 3.0% $MM Yield Trading Liabilities 1,100 3.0% Long-term Debt 200 4.5% Equity 200 2,800 Total L&E
  • 36. Corporate Finance Institute® Net Interest Income – Example Net Interest Income 53 Interest on Loans (5.5% x 2,000MM) Interest on Trading Assets (3% x 500MM) Interest on Deposits with Banks (4.5% x 200MM) 110 15 9 134 Interest Income $MM Interest on Deposits (3% x 1,300MM) Interest on Trading Liabilities (3% x 1,100MM) Interest on Long-term Debt (4.5% x 200MM) (39) (33) (9) (81) Interest Expense $MM Assets Loans to Customers 2,000 5.5% $MM Yield Trading Assets 500 3.0% Deposits with Banks 200 4.5% Property 100 2,800 Total Assets Liabilities & Equity Deposits 1,300 3.0% $MM Yield Trading Liabilities 1,100 3.0% Long-term Debt 200 4.5% Equity 200 2,800 Total L&E
  • 37. Corporate Finance Institute® Components of Total Revenue Commission and Fees from Income Net Commission Broker Fees, Mark-up on Security Underwriting and Other Security Activities Profit on Sale of Investments Other Customer Service Fees Non-interest Revenue X X X X X Total Interest and Similar Income X Interest (Loans and Deposits) Interest Expense Net Interest Income X (X) X Net Interest Income Non-interest Revenue
  • 38. Corporate Finance Institute® 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? Profit After Tax Equity Return on Equity Profit After Tax Total Assets Return on Assets Total Assets Equity Leverage Increase the leverage of the bank ‒ what are the risks? Optimize the return to shareholders
  • 39. Corporate Finance Institute® 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 50 ‒ 24 1,000 ROA 1,000 200 Leverage = 2.6% = 5 ROE 13% 50 ‒ 27 1,000 ROA = 2.3% 1,000 100 Leverage = 10 ROE 23%
  • 40. Corporate Finance Institute® Target Ratio The operating efficiency ratio shows a bank’s efficiency by comparing non-interest expenses to net interest income and other income. The Importance of Operating Efficiency Non−interest Expenses Net Interest Income + Other Income Operating Efficiency Ratio Salaries, occupancy costs, technology expenses, etc. Leading Edge Financial Institutions Most Financial Institutions 60% 70% – 80%
  • 41. Corporate Finance Institute® What is the bank’s profit and operating efficiency ratio? 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. Corporate Finance Institute® 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%
  • 43. Corporate Finance Institute® Asset-Liability Matching is the practice of investing, buying, liquidating, and allocating 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
  • 44. Corporate Finance Institute® 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
  • 45. Corporate Finance Institute® 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).
  • 48. Corporate Finance Institute® 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
  • 49. Corporate Finance Institute® 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
  • 50. Corporate Finance Institute® 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
  • 51. Corporate Finance Institute® 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
  • 52. Corporate Finance Institute® 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
  • 53. Corporate Finance Institute® 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
  • 54. Corporate Finance Institute® 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
  • 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 Corporate Finance Institute® Learn how a bank makes money Differentiate the various banking career paths