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
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