Thursday, July 29, 2010

What About Corporate Banking?

The financial crisis and financial reform forced almost all banks to step back and survey the scene to decide how they are going to remain stable and profitable in the periods to come. Constrained by what they can and cannot do and still unsure about when and where the economy will recover, many will focus on the basics.

Many will also attempt to re-emphasize their corporate-banking franchises, where they can more easily build business, capitalize on long-term corporate relationships, and generate more stable revenue streams. (After absorbing some losses, they'll do this with a more defined risk-management posture.)

Over the past year, some big banks have quietly announced plans for how they will grow this business. JPMorgan Chase has said it seeks to hire more than 400 in spots around the world. Credit Suisse, BoA and others have outlined corporate-banking plans. That includes hiring experienced bankers and encouraging recent MBA graduates to pursue this area of finance.

Corporate banking is not a new area. Its heritage is as old as the banks themselves. And it was a primary focus for large banks for decades after Glass Steagall rules in the 1930's prohibited banks from doing both corporate and investment banking.

Depending on the institution, "corporate banking" encompasses many activities. It implies corporate lending in most places. At others, it includes corporate lending, corporate cash management, syndicated loan finance, corporate payments and funds transfer, currency sales, and securities custody and processing. In many places, there is a line between large corporate clients and middle-market clients (usually based on the client's annual sales).
The core activity is always loans.

On the other hand, "investment banking" in its most basic definition entails equity and bond underwriting, corporate-finance advisory, and mergers and acquisitions. However, the corporate CFO or treasurer may prefer to see all of these activities (whether corporate or investment banking) as a bundle of finance-related activities and doesn't care about distinctions. Over time, these activities started to blend.

Think of the differences this way. A company CFO is responsible for all balance-sheet funding and capital structure. Corporate banking plugs into the top portion (of liabilities): short-term loans, working-capital loans, credit lines, letters of credit, revolving credits, long-term loans (fixed and floating rates), project finance, subordinated loans and syndicated loans.

Investment banking plugs into the bottom portion (of liabilities and equity): long-term bonds, mezzanine finance, subordinated debt, convertible bonds, hybrid debt, preferred equity, private equity, and public equity. The CFO and treasurer will have a hand in all of these activities.

By the late 1980's and especially into the 1990's, corporate and investment banking began to overlap more and more. Both rely on well-cultivated relationships with top corporations; both entail advising on, providing and/or arranging corporate funding. Both require bankers to be astute and technically proficient in corporate finance, financial analysis, and capital markets. And both entail degrees of risk in exposure to the borrower (or issuer)--risk that must be calculated, analyzed, and managed.

The line that separated the two started to blur in the 1990's, as regulators permitted commercial banks to engage in limited investment banking. The products themselves began to merge or blend. Eventually it was possible for banks to arrange for syndicated loans, where other banks participate, and where those banks could "sell off" their loans (like bonds) in a secondary market. Or it was possible for banks to syndicate loans to investment banks and hedge funds, as well (like a bond underwriting). And in many deals, the features of a loan began to look similar to the terms, pricing and features of a bond.

By the 2000's, Glass Steagall had been repealed. Commercial banks and investment banks were free to do whatever they wished--within risk-tolerance levels and capital guidelines, while meeting profit objectives. Immediately large corporate banks had to figure out the best ways to become dominant players in investment banking. They could acquire smaller, reputable investment boutiques, and they did (by buying such outfits as Hambrecht & Quist, Alex Brown, Montgomery Securities, Dillon Read, Morgan Grenfell, et. al.). Or they could build investment banking by deploying capital and hiring talent--smart, experienced, aggressive people, including MBA's or experienced bankers (the routes JPMorgan and Bankers Trust took at first).

Meanwhile, investment banks couldn't stand still. They, in turn, had to build corporate-banking expertise, although they couldn't merely acquire corporate banks. Many started from scratch by hiring talent to build a corporate-lending business to counteract large banks trampling on their turfs. (Goldman, Lehman, and Merrill leaped into syndicate loans and corporate lending because they reasoned they had to.)

While hustling their way into investment banking, the established corporate banks didn't ignore traditional corporate banking. But sometimes they overlooked growing it or implementing proper strategies. They didn't always take care to take advantage of their heritage strengths.

They (JPMorgan, Citi, and BoA, e.g.) remained top lenders to corporations and used that as an edge with clients to compete against Goldman, Lehman or Merrill. But to penetrate the core of the top investment banks (that coveted "bulge bracket"), they kept their business eyes primarily on expanding in investment banking (to enhance their capabilities to underwrite stocks and bonds, provide merger advice, and make markets in all instruments).

Nowadays, financial reform and the crisis have forced banks to undergo self-reflection: "What do we do well?" "What are our core strengths?" "Where are the opportunities to expand?" "Where are the opportunities to generate stable, predictable returns?" The more they ask these questions, the more likely one answer could be corporate banking.

Many banks, therefore, are bound to rediscover these strengths. Corporate banking doesn't replace investment banking. It complements it. The blurred lines will continue, because the purposes are similar and because some corporate CFO's and treasurers prefer to see bundled products. If one or few banks can provide short-term loans, facilitate issuance of commercial paper, make payments to the Far East, arrange three-year loans, manage idle cash reserves, expedite private placements and advise on equity offerings, then they will see efficiencies and minimal costs in doing so.

Many big banks can actually do all of the above, although they may do so in separate, distant units. Corporate banking permits bankers to coordinate the delivery of several products across silos with a big-picture view of the relationship. They oversee the client's overall financial requests, and they can evaluate the bank's overall profitability from the relationship.

Add to that the fairly good news that there won't be much in the new regulation that will discourage banks from rebuilding these units and promoting them sufficiently to attract top talent.

Corporate banking/lending, too, took a hit during the crisis. There were risky loans that had to be charged off or sold off at discounts. They had been booked, partly to support an investment banking client or a client that might award it investment-banking business later. The losses were due, too, to careless risk management or risk managers without sufficient authority. In the end, the big corporate banks still retained the infrastructure, their global branches, their history of corporate banking competence, and (in most cases) their long-term relationships.

Going forward, there will still be chances to hit investment-banking home runs--the headline-generating deals, the million-dollar fees, the occasional IPO's, and the blockbuster marriages of companies in M&A. Because investment banking rides a cycle, banks now contemplate that the steady revenue streams from short-term loans, collateralized lending, funds transfer, securities custody, international payments, or currency sales can offset anxiety from lack of deal flow.

In the past decade or so, they may not have tried hard, if at all, to hire MBA's from top schools into corporate banking. Today some banks are reassessing how they promote that unit. They are interested in MBA students or experienced graduates--at all levels. They will look for people with polished client skills and with a keen understanding of corporate finance, corporate industries, and capital markets. They will also look for those who can slide back and forth easily and comfortably into investment-banking or corporate-banking chairs.

Those who prefer and do well in investment banking will usually be those who crave the deal environment. They manage client relationships, but with the intent of pitching a finance idea, securing a deal mandate, coordinating all deal participants to meet tight deadlines, and managing the lucrative deal from start to closing.

Those who prefer and do well in corporate banking will usually be those who have vast knowledge of many bank products and are experts in explaining them to clients. They thrive in client relationships and will occasionally be involved in deal financing. But they are similarly eager to be engaged in non-financial activity (e.g., global payments or custodial accounts).

In both cases, they encounter some of the finance same people on the client side of the table.

Tracy Williams

Wednesday, July 21, 2010

Will Reform Affect or Create Opportunities?

Financial reform is now under way. Congressmen have discussed, argued, debated and compromised to pass new laws that will modify what financial institutions can and cannot do after the crisis. In many instances, they have two years to adapt.

They will adapt in many ways. Some will redeploy capital and resources toward the most profitable products and services. Some will reprice products and activities to make up for costs or declining revenues because of new regulation. Top banks will examine and analyze their retail products (checking accounts, mortgage products, credit cards), their trading activities(proprietary trading and quantitative strategies in in equities, derivatives, mortgages, currencies and more), their stakes in hedge funds, and their investments in private equity.

They will change their businesses to comply with new laws, and they will evaluate whether they should remain in certain businesses if the new laws make the economics unprofitable. That may mean exiting businesses, spinning some off, selling others, downsizing some units, or making valiant attempts to operate them while complying with new rules.

What does all this mean to MBA students and other finance professionals? Will they shy away from certain financial institutions because of uncertainty or the apparent lack of opportunity? Should they?

If they look cleverly, where there might be constraints or restrictions, there just may be opportunity. Take a peek:

1. Derivatives clearing and brokerage. Financial reform didn't obliterate the roles banks play in derivatives trading. It might limit it, and it might discourage the creation of new products or inhibit those that are on the drafting table now. But banks will still be able to act as dealers in conventional derivative products (futures, interest-rate swaps, credit default swaps, etc.), particularly for products that are or will eventually be traded on exchanges and processed by clearing agencies.

Banks will likely beef up these units, instead of pare them down. And they will seek to be even larger players by facilitating the trading and settling of derivatives on exchanges. If certain derivatives are required to be traded and settled through clearing agencies, then banks contend those trades might as well be funneled through them (for a fee).

They will step up to act as that primary vehicle through which derivatives users and traders must go to execute and process a trade. Some do this already (in a "prime brokerage" role for hedge funds), but many more will try to capitalize on this special role by expanding the client base.

Over time, they will hire more professionals to market these services (to corporations, hedge funds, and more) and manage and process the flow of trades on behalf of clients. This could create opportunities for MBA's interested in capital markets, derivatives and client relationships.

Banks with large prime brokerage units (businesses that facilitate trading for hedge funds, dealers and smaller brokers) may seek to expand their presence and may hire MBA's for roles in risk management, client management, and client flow-trading.

2. Corporate banking and lending. Banks, both big and mid-sized, over the past decade evolved to become not just commercial banks, but expansive investment banks. They focused on attracting smart, experienced people to build the investment-banking operation.

They didn't ignore the commercial or corporate banking side, yet didn't always grow it rationally to take advantage of their heritage strengths. They remained stalwart lenders to corporations and used that as an edge to compete with boutique investment banks. But they kept their eyes primarily on what they needed to do to contend in investment banking (enhance their capabilities to underwrite stocks and bonds, provide merger advice, and make markets in all instruments).

Financial reform has encouraged many banks to rediscover their strengths. Corporate banking is one. It complements investment banking. And they are reminding themselves of the steady, stable flow of revenues that can be generated from a fundamental business of supporting long-term clients (via bread-and-butter businesses such as corporate lending and cash management).

There is not much in the new regulation that will discourage them from rebuilding and expanding these units and promoting them sufficiently to attract top talent.

Corporate lending, too, took a hit during the financial crisis, as banks piled up risky loans, partly to support an investment banking client or a client that might award it investment-banking business later. They took hefty losses; careless risk management or risk managers with little authority thwart aggressive deal-doers is part of the blame. But banks have an infrastructure and history of corporate banking and can grow it cautiously if they choose to.

Hence, where before they may not have tried hard, if at all, to hire MBA's from top schools into corporate banking, they may now repackage how they present that unit, enough to lure MBA students or experienced graduates.

3. Retail products. Financial institutions, via lobbyists, have squirmed about how new regulation will make it hard for them to deliver products cheaply, efficiently and profitably. There are new rules or special review processes for credit cards, overdraft privileges and the unveiling of new retail products.

Banks say the rules add costs to the delivery of conventional products or discourage the creation of new ones (because of a seemingly arduous review-and-approval process). But they won't exit this business. They crave and rely on large deposits from retail banking and the steadfast, long-term customer base. There is too much value in deposits and loyal customers to decide to abandon retail banking, if they already have a large-scale operation.

They will likely repackage and bundle products, reprice them to benefit the most loyal customers, focus on the most profitable retail areas, and perhaps attract professional talent to make themselves as competitive as ever. That might include new MBA's right out of school.

4. Emerging markets. Financial institutions, even if they think financial reform is inhibiting, research opportunities, find them, and go seek them out. If they can do the same things in another region (in investment, corporate and retail banking) and do so profitably and with a keen understanding of the risks, then off they go.

Some banks--post reform--have already begun to expand again or differently in new markets or emerging markets. This means targeting the "BRIC's" (Brazil, Russia, India, and China), and it means identifying favorable business opportunities at the rung of countries below. To do so, they will hire professionals willing to work abroad or already understanding cultural and business dynamics in these areas. Another opportunity for MBA's in finance and those fluent in or interested in other languages and cultures.

It's certainly a new era or phase for many financial institutions. Financial reform helped to turn that corner. Nonetheless, instead of narrowing the scope of what business-school graduates wish to do in finance, it just might have expanded the range.

Tracy Williams

Wednesday, July 14, 2010

BE's View: The Best 40 in Diversity

In its July, 2010, issue, Black Enterprise magazine once again announces its 40 best companies for diversity. Granted, the list reflects its view, based on its criteria, and likely based on contacts it has with companies and the information it has retrieved from them. One magazine's perspective. (See

However, as in years before, BE strives to take an objective approach. It presents a list based on four primary criteria. It doesn't rank the 40, but highlights the companies that present diversity-related strengths on four fronts: employees, senior management, board of directors, and supplier diversity.

The list in 2010 hardly changed from last year. That's expected, because firms not on the list would have to take big steps in diversity initiatives to bump off companies on the list, many of whom are mainstays and have diversity programs that are working.

Financial institutions on the list, too, reflect minor changes, but some big names are conspicuously missing. That's not surprising, given the rocky road many firms endured the past two years. As we know, many financial institutions had to focus on other matters or financial institutions on the list have stepped up aggressively in the past year or so to maintain their reputations for diversity.

Eleven financial institutions made the list last year; 10 are included this year. Citigroup, long time regarded for setting a diversity standard, didn't make the list in 2010 and was pushed off by non-financial institution.

Companies that have historically been Consortium sponsors, as we'd expect, make the list regularly--including financial institutions American Express and Bank of America. Other financial institutions on the list include many insurance companies (Aflac, Aetna, TIAA-Cref, and State Farm) and some regional banks (Comerica and Northern Trust).

It certainly helps that American Express, TIAA-Cref, and Aetna have had blacks in CEO positions or in other top roles. And Ron Williams, African-American CEO of Aetna, is on the board of American Express, which is headed by African-American CEO Kenneth Chenault. TIAA-Cref's CEO is Roger Ferguson, also an African-American.

Although they have had to battle through the mortgage crisis and manage public opinion about their roles in it, Fannie Mae and Freddie Mac seem to have remain focused on diversity, despite all. They made the list again in 2010, partly because of minorities in senior roles (in management and on the board of directors).

For financial institutions in general, this year's list is notable for who didn't make it. The big investment and corporate banks--beyond BoA--didn't make the cut: Goldman Sachs, JPMorganChase, Wells Fargo, and Morgan Stanley.

The reasons might differ as much as the cultures and identities of these firms differ. Some might have made progress, just not enough to warrant a spot on the list (or not yet enough to get BE's attention). Others might have been so focused on other crises issues (raising capital, addressing TARP issues, or lobbying for or against financial reform) that they may not have done enough to keep up with the top 40. (BE notes many companies don't bother to return the surveys it sends out to get information it uses for the list. If a company doesn't return the survey, it isn't eligible to appear on the list.)

In the end, BE's is one of many such lists or surveys. Another magazine or website's list will likely have overlaps with the BE 40 or may use an entirely different set of criteria. All financial institutions, however, ought to know that if the lists are fair and informative, talented MBA's in finance will pay attention to them if they see them and use them as a factor in decided to accept an offer.

Tracy Williams

Tuesday, July 13, 2010

CFN: What's on Deck?

After existence for over 18 months, membership in the Consortium Finance Network heads toward the 500 mark. Activities, events, agenda and schedules evolve and get rejiggered from time to time. But CFN's objectives are still the same and are still relevant.

Now is the time for midsummer planning, a time to explore and outline events or projects for the fall. In recent weeks, the steering committee has discussed priorities and possible activities. It has also performed a self-assessment: what has worked, what hasn't, what to prioritize and what to plan, and how to recognize that everybody (students, alumni, sponsors, recruiters, and supporters) has limited time.

CFN welcomed the new class of Consortium students at the Orientation Program last month in Orlando. It has identified about 100 first-years who have expressed interest in finance or financial services. CFN invited that sub-group to join the group and distributed an electronic version of its second-annual first-year guide. The guide helps first-years prepare for school, core courses, finance courses, professors, recruiting, interviews, and the unceasing pressure to land the right internship. The guide is available to others who request a copy.

CFN is now seeking to identify more school champions at Consortium schools. School champions the past year told us what was going on on campus--students' concerns, worries, pressures, plans, achievements, long-term dreams, disappointments, successes, and hiring. They told us what corporations came (or didn't come) to campus, which ones aggressively recruited, and which ones made token appearances with little interest in making offers.

They told us about the low- and highlights of business school--the case studies, the hurdles of accounting and "baby finance," the spring-break trips abroad, the interesting investment-analysis courses, and the crushing workload. CFN is especially looking for champions on the campuses at such schools as Texas, Olin, UNC, Wisconsin, and Emory.

Membership today in CFN is assorted. Recent Consortium alumni and current students comprise most of the core. But over 100 include people who are sponsors, recruiters, mentors and friends of the Consortium. As hoped, membership includes those who are affiliated with all aspects of finance--from bankers, traders and investors to professionals in real estate, consulting, insurance, community development, academia, accounting, and corporate treasury.

CFN webinars on microfinance, job searches, and networking the past year were successful. CFN is considering planning webinars on the CFA designation, mentoring, and any relevant, popular topic others suggest.

Because there was no corporate sponsor, CFN didn't schedule a large-scale networking event in early 2010, as it did at the Federal Reserve in 2009. It continues to explore hosting such an event in late 2010 in New York, if a sponsor comes through.

The steering committee continues to review many ideas and possible initiatives. They include follow-up on executive and career coaching, a speed-networking event, an investment fund run by students, and a "boot camp" to help students prepare for finance recruiting. It welcomes help, input and recommendations from any member.

Last year's mentor program concluded with mixed reviews. The program included over 75 students and mentors. Some relationships worked well. Some didn't. With tough courses and difficult schedules, some students lacked time to pursue mentor relationships, yet they craved mentors when interviewing time rolled around. Mentors helped students with the intricacies of technical interviews. CFN prepared guides to enhancing mentor-student relationships and will update them and circulate them again.

The steering committee is reviewing how to sustain the best of last year's program, how to play the role as adviser in existing relationships, or how to frame the program by suggesting mentors rather than assigning them. The committee welcomes input and interest from potential

The committee is also exploring setting up an advisory team of senior experts, people with experience and reputations in a particular field of finance. That team would not spend as much time as the steering committee does. It will, however, make recommendations about focus and direction, make connections to other experts and participants, or simply share ideas from their points of view.

CFN discussion in Linkedin (with ties to the website and blog) has been lively, informative the last few months--thanks in part to contributions from experienced, informed members, who all seem to have thought-out points of view.

The dialogue and updates have touched many relevant topics in finance, diversity, opportunities, and career planning. It is the focal point for many CFN members, and it is hotbed of ideas and reflections from alumni, students, recent graduates, or outside experts. Often readers come away learning something or itching to add to the conversation. Contributions from anybody with an idea, a perspective, an update, or a teaching topic on finance, diversity or opportunities are encouraged.

Tracy Williams

Steering Committee: Rachel Delcau, Camilo Sandoval, Tracy Williams

Thursday, July 8, 2010

Opportunities: A Pause in the Momentum?

Remember the upbeat outlook back in the first quarter, 2010, after the economy showed signs of a recovery, corporates reported robust profits and financial institutions appeared to have emerged from the abyss of the crisis? Since then, volatility has been the norm in equity markets. And sovereign-debt turmoil in Europe has rocked confidence and spilled into other arenas.

So is there a pause in the recovery from the recession? And is that affecting the revival of recruiting and opportunities in finance? Have banks, insurance companies, asset managers, corporates, and funds called time-0ut on expanding the number of hires in 2010-11 at all levels?

Financial institutions went into hiding in 2008-09 in recruiting, as they patched themselves up, reduced staff, and waited for signs of an upturn. By late 2009, the signs began to point upward. Institutions returned to campus, hired more interns, expanded programs, created opportunities in growth areas and made efforts to bring on board experienced talent.

Will the recent signals of uncertainty send recruiters back to their cubicles and discourage firms from hiring to support designated growth areas? Will new financial reform impose regulatory restriction on activities such that that banks will rethink recruiting numbers?

Opportunities still exist, but perhaps in scattered, specific areas. Financial institutions identified long-term growth areas, are committed and have made sufficient investments. Banks and investment firms that targeted private wealth management, securities processing, cash management, and emerging markets for growth will continue to bring in more professionals.

Yet with financial regulation threatening to change the extent to which institutions can engage in trading or alter the economics of dealing in derivatives, firms certainly scale back hiring practices in capital markets and trading. Opportunities in these area--always limited or unpredictable--will become more so.

Entry-level MBA programs seemed to have returned to a humming pace--particularly in investment banking, corporate banking and private banking. Firms won't contract as they did in 2008-09, but they may slow the pace down until they have more confidence about the recovery. Banks don't want to staff up in anticipation of a certain volume of deal flow, new clients or product revenues that won't come to fruition until 2011.

MBA interns, including many from the Consortium, this summer were able to take advantage of renewed confidence. The moods, the opportunities, and the openings were significantly better than they were for second-year MBA's, who just graduated. Recent MBA graduates, without the benefit of impressive internships in the summer, 2009, have had limited opportunities, although with effort, outreach and drive, some are finally winning sought-after positions.

Early-career finance professionals, who want to transition into other roles in finance or seek to be rehired after staff reductions, are facing occasional barriers. The going can still be rough at times. If they do, they find opportunities in specific roles, requiring specific experiences and credentials. For example, a big bank seeks to hire an experienced associate to do healthcare equity research or oil-and-gas banking in Houston. Or another institution seeks an experienced vice president to manage custody-account relationships in Columbus, Ohio. Consortium sponsors Goldman Sachs, BoA, and Citi, for example, will regularly post position openings for associates with particular, special experiences.

For those interested in venture capital, hedge funds, or private equity, uncertainty always prevails. These firms have always been close-mouthed, insular in their hiring practices. They hire and still do in this environment. They, too, select for special purposes and reasons (a specialty trader, a risk manager, a compliance officer, a systems programmer, etc.). They key, as ever, is using a detective's skill to find them and figure out a way to get in.

Two years ago, MBA talent and finance professionals started looking toward the U.S. Government as a place to start or a place to transition to. The SEC, the Federal Reserve, and the U.S. Treasury stepped up recruiting efforts to take advantage of talent availability. They hired many in 2008-09, especially in experienced roles. They continue to hire, but not necessarily at growing levels. Amidst a recovery, they have slowed down their penetration at business schools. Or perhaps as big financial institutions firms return, their presence is less noticed.

Opportunities always exist in certain regions. That means in this environment, people may need to go where opportunities exist or go where they can be in the right place at the right time. Often that might mean being willing to be in New York, Chicago, Charlotte, or London. Or Stamford or Washington. In financial management at industrials, that might mean not being in, say, New York or San Francisco.

Have diversity initiatives emerged from the back seat? In some places, they have been relaunched or renewed after diversity fell to the bottom of the agenda during the crisis. Some, including some Consortium sponsors, are admired for being ironclad in not allowing diversity to slip.

For those in under-represented groups (women and people of color), the numbers coming out of the crisis were ugly. The crisis took its toll. Many from the under-represented were affected by staff reductions or left the pressure and turmoil of the industry to pursue other less-stressful activities. Some simply became disillusioned with chaos all around them.

The numbers declined at all levels--from first-year analysts to sector heads. The impact is being felt now. Early-career professionals wonder today where are or who are the senior role models from under-represented groups at the top. Financial institutions everywhere know they have to find ways to get back to pre-2007 numbers, whether they admit that openly or not. More important, they must convince themselves that diversity initiates are still worth the effort and expense. In crisis times, some struggled to justify the expense or time and approached diversity as a cyclical business.

The pause or the recent uncertainty that clouds recovery might have been inevitable. Economists, pundits, and finance experts hadn't figured out or fully agreed on whether we were in a full recovery. Recoveries, some contend, are always characterized by sporadic dips or pauses in growth.

The bright side? Financial institutions always want to be poised and prepared for an upturn. So they persist in planning for expansion, growth and bringing more professionals on board. Never do they want to be caught off guard when business opportunities arise.

The added bright side? They pull out the diversity agenda and initiatives from file cabinets and reassemble dormant diversity committees--things that never really should be under cover in the first place.

Tracy Williams