When the deal was announced, some surely gasped. The fact that Verizon Communications decided to purchase all of Vodafone's stake in Verizon Wireless was not a surprise. Vodafone had decided to sell its stake and units in mobile phones. What likely caused market observers and headline writers to turn their heads in wonder was the size of the deal, the big numbers. They were huge.
Deals and big numbers excite investment bankers and can spur them to pant and salivate. In the Verizon case, they certainly will, once Verizon gets around to handing out advisory and underwriting checks for fees. Deals and big numbers tend also to cause hiccups and coughs among some investors, research analysts and bank risk managers.
This deal is big, one of the largest ever. Perhaps it sends too many hopeful signals that an era of super-size deal-making has returned. Verizon Communications announced it will pay a whopping $130 billion for Vodafone's stake. To raise $130 billion to pay Vodafone, it will issue about $60 billion in new stock and tap various other accounts and reserves for billions in cash. It will borrow another mind-boggling $49 billion in bank and debt markets in one of the largest debt deals ever.
While some industry experts applauded this announcement, the stock market gulped, trying to figure out the true impact of Verizon digesting all this new debt onto its balance sheet. Verizon's stock value fell 3% on the day of the announcement.
The deal will probably be approved by regulators, will likely be executed, and will just as likely work--meaning, shareholders will gain value because of it and debt-holders, while crossing their fingers, will receive the regular cash interest payments due to them each quarter.
But some flags emerge. They send signals to investors and credit-risk managers that the deal is not a no-brainer. It must be assessed carefully.
1. Verizon already has over $40 billion in long-term debt. Now add $49 billion in more debt, and that sums up to over $90 billion in total debt. To manage this mountain of debt, Verizon must generate over $3 billion of year in cash flow to handle just the interest expense.
Is the company capable of handling this burden? The company operates at a pace today of generating about $10-12 billion/year that can be used to handle debt obligations.
That translates roughly into a Debt/EBITDA ratio equal to about 9.0. MBA finance students know well how this ratio can be used to compute a back-of-the-napkin analysis of whether debt levels are manageable. It suggests that for Verizon, while the debt is manageable, there may be little wiggle room if cash flows from Verizon businesses fluctuate, as they easily can.
Routine business operations must generate the flow of cash to manage this extraordinary debt load. But there may be periods when something else must take a back seat: Shareholders, for example, in one quarter may not get all of their entitled dividends, something they've grown accustomed to. And when substantial new investments are necessary, they will likely be funded by issuing new stock. The existing financial framework couldn't bear more debt--at least for now.
2. Verizon's balance sheet spurs a few questions, too. This is a capital-intensive business, so its nearly $90 billion in plant and equipment is no surprise. This is also a technology business, so its nearly $100 billion in intangibles and goodwill (from acquisitions, copyrights, patents and more) is not a surprise. But those assets are supported by "only" $34 billion in equity capital.
After the Vodafone deal, equity capital will increase substantially, but so will the amount of intangibles and goodwill---legitimate assets in the eyes of accountants, but assets that can't be touched and felt, in the eyes of investors and debt-holders (assets that also don't generate a steady flow of cash flow from quarter to quarter).
When analyzing a company, analysts prefer to subtract out intangibles/goodwill when computing the book value of a company (equity account). At Verizon, net tangible equity is computed to be a negative amount before the deal and after the deal. That often implies that debt funds all activities on the balance sheet, and there is little room for error, if the company runs into economic headwinds, and earnings (and cash flow) start to bounce around.
3. Unlike other large companies with significant cash reserves, Verizon may not have a comfortable stash of cash to meet unexpected cash shortfalls or required investments. It would rely on external markets, sometimes in times when external markets wouldn't be kind.
What do ratings agencies think? They are in the ballpark. Moody's and S&P currently rate the company Baa1 and BBB+, respectively--about what you would expect when there is already a significant debt burden and if bad times could jeopardize paying what's due on debt. With "stable" outlooks, the ratings agencies also observe that Verizon will be able to make investors happy.
Why would investors buy the debt? It's all about the interest-rate returns that investors can't get in other fixed-income investments. One tranche or segment of the new debt will yield 5.22% to investors over 10 years, a return that's not easy to obtain in a low-interest-rate era (even with recent interest-rate volatility and spikes, given uncertainty in Washington). That yield is enticing, and in the eyes of some, worth the risks described above.
Tighten up your belts. This is a corporate-finance deal that can work, but there could be some bumpy moments along the way.
Tracy Williams
See also:
CFN: Libor in Crisis, 2012
CFN: Why Is Dell Going Private, 2013
CFN: Merger Mania, Boom Times Ahead, 2013
Showing posts with label Corporate banking. Show all posts
Showing posts with label Corporate banking. Show all posts
Sunday, October 13, 2013
Friday, October 19, 2012
Why Was Citi's CEO Asked to Resign?
Citigroup caught everybody off guard this week, when its board announced it had asked for the sudden resignation of CEO Vikram Pandit. Or did it catch anybody off guard? Was this a gesture investors pushed for?
Was it the right move for the big global financial institution that seemed to have leaped a hurdle to move beyond the darkest days of the financial crisis--back when there were moments when many thought its survival was in jeopardy?
Over the past few years, Pandit and team took appropriate, bold steps to make the behemoth profitable again. They sold assets en masse. They shuffled bad, non-performing, defaulted, bankrupt, and/or foreclosed assets into a special holding company and, little by little, sold off these positions, properties, securities and full operations. By doing so, it rid itself of spoiled segments and began to polish ongoing core operations. They downsized in every way possible--in just about every unit, operation, division, and geography. They finally sold its stake in the brokerage joint venture with Morgan Stanley (although at a large loss).
Earnings, too, had improved. In the days before Pandit's exit, Citigroup announced third-quarter income of over $460 million (somewhat misleading because of a handful of accounting adjustments banks are permitted or forced to do) and has boosted its equity capital base to over $185 billion. Returns on its capital base throughout 2012 have hovered between 5-8 percent-not stellar, but much better than the debilitating losses of years ago.
With regulators showing their hands in all aspects of its business and that capital structure, Citi has cooperated, even when it desperately wanted to resume paying a dividend to shareholders. Growing leaner, it felt comfortable settling in as the third or fourth largest bank in the U.S., below the first-place perch it had held for many years.
Pandit and team had unraveled the mammoth financial-services empire Sandy Weill and his own team constructed throughout the 1990s and early 2000s. Yet the board, under chairman Michael O'Neill, behind the scenes had been huddling to plan a Pandit departure. It appears Pandit had little clue.
Why then would a CEO who followed the marching orders of both government regulators and a corporate board be told his time is up?
Impatience with the stock price is always a reason. Over Pandit's five-year stint, shares of Citi have fallen 80 percent and more, even though share price is up 10-12 percent in 2012. The market may have appreciated the bank's revival, but perceived that the clean-up, the reengineering, and the resumption of basic banking aren't complete. The market perceived that other thorns or problems might still remain hidden in operations and haven't been resolved, sold off or at least shoved into the Citi Holdings, the special entity that corrals all the "bad assets" and prepares them for sale.
Investors and the board applaud Citi for separating out the bad assets. But the bad assets still reside with Citi and must be maintained, grappled with and funded. The board may have been pushing for Pandit hard to get rid of them with more urgency and haste--if only to present a new, cleaner, "de-risked," and unrestrained Citi. The bad assets of Citi Holdings remain as a scar on its overall balance sheet and a stinging reminder of the crisis.
Shareholders also seem to covet their dividends. Banks traditionally have rewarded their owners with a regular, comfortable stream of dividends. Pandit this past year felt financial improvements warranted Citi resuming paying a dividend; however, Citi sparred with regulators, who vetoed the move. Dividend-loving shareholders appear to have blamed Pandit for not making the improvements quickly enough to result in dividends or share repurchases to help give a jolt to the stock price.
Investors and the board, too, are likely peeking at the performance of peers, the other big banks (Goldman Sachs, Wachovia, and JPMorgan Chase, e.g.) that seem to have rebounded far more swiftly. Citi has escaped the starting blocks, but runs several strides behind the others.
Years ago, Pandit arrived at Citi after his stint at Morgan Stanley and after selling his hedge fund to Citi. He rose to become its CEO when previous CEO Charles Prince was pushed out when the public learned about Citi's crashing values of mortgage securities and mortgage-related structures. Pandit had been a successful fund manager. Re-juggling portfolios of assets, restructuring balance sheets and assessing the values of trading positions summarize Pandit's experiences and skills.
Citi is now at a pivotal point. Shareholders dream of 10-percent returns on capital and new respect in the banking community. And the board appears to have assessed that Pandit lacked expertise and deep experience in the trenches off basic banking: operations, branches, systems and technology, corporate lending, deposit taking, cash management, and custody. It needed a new leader that knew as much about the profitability of retail branches and the costs of doing money transfers as about valuing derivatives and mortgage securities.
So it tapped Michael Corbat, a long-time Citi banker with broad experiences in sales and trading, wealth management and international operations. In fact, board chairman O'Neill phrased it as something like a different horse for a different course. The board is pronouncing the restructuring phase as over, and it is time for Citi to become what it wants to be--large, omnipresent, global, familiar to all, yet simpler, basic, stable with boring, steady profits, 10-percent returns (at least) and, yes, quarterly dividend payments to owners.
Tracy Williams
See also
CFN: Richard Parsons and Citi, 2012
CFN: Morgan Stanley Progress Report, 2012
CFN: Moody's Downgrades Big Banks, 2012
Was it the right move for the big global financial institution that seemed to have leaped a hurdle to move beyond the darkest days of the financial crisis--back when there were moments when many thought its survival was in jeopardy?
Over the past few years, Pandit and team took appropriate, bold steps to make the behemoth profitable again. They sold assets en masse. They shuffled bad, non-performing, defaulted, bankrupt, and/or foreclosed assets into a special holding company and, little by little, sold off these positions, properties, securities and full operations. By doing so, it rid itself of spoiled segments and began to polish ongoing core operations. They downsized in every way possible--in just about every unit, operation, division, and geography. They finally sold its stake in the brokerage joint venture with Morgan Stanley (although at a large loss).
Earnings, too, had improved. In the days before Pandit's exit, Citigroup announced third-quarter income of over $460 million (somewhat misleading because of a handful of accounting adjustments banks are permitted or forced to do) and has boosted its equity capital base to over $185 billion. Returns on its capital base throughout 2012 have hovered between 5-8 percent-not stellar, but much better than the debilitating losses of years ago.
With regulators showing their hands in all aspects of its business and that capital structure, Citi has cooperated, even when it desperately wanted to resume paying a dividend to shareholders. Growing leaner, it felt comfortable settling in as the third or fourth largest bank in the U.S., below the first-place perch it had held for many years.
Pandit and team had unraveled the mammoth financial-services empire Sandy Weill and his own team constructed throughout the 1990s and early 2000s. Yet the board, under chairman Michael O'Neill, behind the scenes had been huddling to plan a Pandit departure. It appears Pandit had little clue.
Why then would a CEO who followed the marching orders of both government regulators and a corporate board be told his time is up?
Impatience with the stock price is always a reason. Over Pandit's five-year stint, shares of Citi have fallen 80 percent and more, even though share price is up 10-12 percent in 2012. The market may have appreciated the bank's revival, but perceived that the clean-up, the reengineering, and the resumption of basic banking aren't complete. The market perceived that other thorns or problems might still remain hidden in operations and haven't been resolved, sold off or at least shoved into the Citi Holdings, the special entity that corrals all the "bad assets" and prepares them for sale.
Investors and the board applaud Citi for separating out the bad assets. But the bad assets still reside with Citi and must be maintained, grappled with and funded. The board may have been pushing for Pandit hard to get rid of them with more urgency and haste--if only to present a new, cleaner, "de-risked," and unrestrained Citi. The bad assets of Citi Holdings remain as a scar on its overall balance sheet and a stinging reminder of the crisis.
Shareholders also seem to covet their dividends. Banks traditionally have rewarded their owners with a regular, comfortable stream of dividends. Pandit this past year felt financial improvements warranted Citi resuming paying a dividend; however, Citi sparred with regulators, who vetoed the move. Dividend-loving shareholders appear to have blamed Pandit for not making the improvements quickly enough to result in dividends or share repurchases to help give a jolt to the stock price.
Investors and the board, too, are likely peeking at the performance of peers, the other big banks (Goldman Sachs, Wachovia, and JPMorgan Chase, e.g.) that seem to have rebounded far more swiftly. Citi has escaped the starting blocks, but runs several strides behind the others.
Years ago, Pandit arrived at Citi after his stint at Morgan Stanley and after selling his hedge fund to Citi. He rose to become its CEO when previous CEO Charles Prince was pushed out when the public learned about Citi's crashing values of mortgage securities and mortgage-related structures. Pandit had been a successful fund manager. Re-juggling portfolios of assets, restructuring balance sheets and assessing the values of trading positions summarize Pandit's experiences and skills.
Citi is now at a pivotal point. Shareholders dream of 10-percent returns on capital and new respect in the banking community. And the board appears to have assessed that Pandit lacked expertise and deep experience in the trenches off basic banking: operations, branches, systems and technology, corporate lending, deposit taking, cash management, and custody. It needed a new leader that knew as much about the profitability of retail branches and the costs of doing money transfers as about valuing derivatives and mortgage securities.
So it tapped Michael Corbat, a long-time Citi banker with broad experiences in sales and trading, wealth management and international operations. In fact, board chairman O'Neill phrased it as something like a different horse for a different course. The board is pronouncing the restructuring phase as over, and it is time for Citi to become what it wants to be--large, omnipresent, global, familiar to all, yet simpler, basic, stable with boring, steady profits, 10-percent returns (at least) and, yes, quarterly dividend payments to owners.
Tracy Williams
See also
CFN: Richard Parsons and Citi, 2012
CFN: Morgan Stanley Progress Report, 2012
CFN: Moody's Downgrades Big Banks, 2012
Friday, June 22, 2012
Big Banks: The Dreadful Downgrades
Moody's this week downgraded 15 banks, including top names such as Morgan Stanley, Citi, Bank of America, Goldman Sachs and JPMorgan Chase. This was not unexpected. Morgan Stanley's rating (Baa1) is now barely a notch above "high yield" status (or whatever the nomenclature today is for non-investment grade, "junk" or "non-prime" issuers).
Banks, analysts, and equity markets have tried--even until now--to determine and quantify the impact of the downgrade on each bank's profitability, ROEs, deployment of capital, liquidity, and access of funding, although banks all over are arguing they are stronger, better capitalized, more averse to risks and subject more to oversight and regulation than they were five years ago.
Ratings, for example, have impact on trading activity, as much as access to funding and the interest rate they pay on outstanding debt. When ratings decline, banks must pledge more in collateral for derivatives and trading-related activities (swaps of all kinds and forms, currency transactions, deposits at exchanges and clearinghouses, etc.).
That's collateral they pledge (normally in the form of low-yielding government securities) to support existing trading activity that could be capital deployed for more profitable purposes (corporate or small-business lending, international expansion, higher-yielding investments, etc.). Among the five large banks, estimates range from $1-3 billion in the amount of incremental collateral the ratings decline will force a bank to pledge for existing trades.
At each bank, that's $1-3 billion in capital that will be deployed for pledged securities earning less than 2% and capital not supporting incremental business in the form of more loans to support middle-market and small businesses, more investments in corporate projects, and more commitments for corporate- or municipal-bond underwritings. And this doesn't include the impact of permitted leverage, where $1 million in extra capital can result in, say, over $5 million in actual business activity (loans, investments, etc.) because of the bank's ability to use debt and capital to fund activity.
Hence, banks squeal and squirm, when they hear about the threat of a ratings decline or experience the actual confirmation of one.
The ratings agencies rationalize banks are more interconnected to all the vagaries and turmoil in markets all over the world (including Europe). Others say these are downgrades that should have occurred long ago, even if the banks have stronger balance sheets and substantially more in capital today than in 2007. When Greece, Spain and Italy cough, U.S. banks can get a cold, too--because of complicated lending, funding, and trading arrangements with institutions in every corner of the globe.
The banks have known since the beginning of the year downgrades were pending. Nonetheless, it adds to a long list of headaches, as somehow they try to grow profits, remain stable, endure tricky economic times, and get ready for the flood of new Dodd-Frank and Basel III regulation. While regulators and many market watchers want banks to simplify their business models (engaging in old-time deposit-taking and community-based lending), running and managing a bank--particularly a giant, money-center institution--becomes mind-numbing complex every year.
Tracy Williams
Click also:
CFN: Risk management at major banks
CFN: Banks and regulation
CFN: Basel III and Capital
CFN: The Volcker Rules, Part II
CFN: The Volcker Rules, Part I
Banks, analysts, and equity markets have tried--even until now--to determine and quantify the impact of the downgrade on each bank's profitability, ROEs, deployment of capital, liquidity, and access of funding, although banks all over are arguing they are stronger, better capitalized, more averse to risks and subject more to oversight and regulation than they were five years ago.
Ratings, for example, have impact on trading activity, as much as access to funding and the interest rate they pay on outstanding debt. When ratings decline, banks must pledge more in collateral for derivatives and trading-related activities (swaps of all kinds and forms, currency transactions, deposits at exchanges and clearinghouses, etc.).
That's collateral they pledge (normally in the form of low-yielding government securities) to support existing trading activity that could be capital deployed for more profitable purposes (corporate or small-business lending, international expansion, higher-yielding investments, etc.). Among the five large banks, estimates range from $1-3 billion in the amount of incremental collateral the ratings decline will force a bank to pledge for existing trades.
At each bank, that's $1-3 billion in capital that will be deployed for pledged securities earning less than 2% and capital not supporting incremental business in the form of more loans to support middle-market and small businesses, more investments in corporate projects, and more commitments for corporate- or municipal-bond underwritings. And this doesn't include the impact of permitted leverage, where $1 million in extra capital can result in, say, over $5 million in actual business activity (loans, investments, etc.) because of the bank's ability to use debt and capital to fund activity.
Hence, banks squeal and squirm, when they hear about the threat of a ratings decline or experience the actual confirmation of one.
The ratings agencies rationalize banks are more interconnected to all the vagaries and turmoil in markets all over the world (including Europe). Others say these are downgrades that should have occurred long ago, even if the banks have stronger balance sheets and substantially more in capital today than in 2007. When Greece, Spain and Italy cough, U.S. banks can get a cold, too--because of complicated lending, funding, and trading arrangements with institutions in every corner of the globe.
The banks have known since the beginning of the year downgrades were pending. Nonetheless, it adds to a long list of headaches, as somehow they try to grow profits, remain stable, endure tricky economic times, and get ready for the flood of new Dodd-Frank and Basel III regulation. While regulators and many market watchers want banks to simplify their business models (engaging in old-time deposit-taking and community-based lending), running and managing a bank--particularly a giant, money-center institution--becomes mind-numbing complex every year.
Tracy Williams
Click also:
CFN: Risk management at major banks
CFN: Banks and regulation
CFN: Basel III and Capital
CFN: The Volcker Rules, Part II
CFN: The Volcker Rules, Part I
Thursday, March 15, 2012
Parsons: On to the Next Phase
 |
| What's next for Parsons? |
After an illustrious business career that spanned decades, Richard Parsons is calling it quits this month.
He announced he wouldn't pursue re-election as chairman of the board at Citi. (Citi, as many know, has been an important, decades-long supporter of the Consortium and a host at Orientation Programs and Consortium events in New York.)
Has an era ended? Parsons has been a pioneer in many ways, and he wraps up a career filled with quite a few "African-American" firsts." He was CEO in the 1980s at Dime Savings Bank, at that time a well-known New York regional bank. He later became CEO at AOL Time Warner in the 2000s, landing right in the middle of turmoil from the cantankerous combination of AOL and Time Warner.
Few African-American lead or have led major financial institutions, so Parsons' exit from the Wall Street scene is noteworthy. In 2012, Kenneth Chennaultcontinues to preside over American Express. Stanley O’Neal rose to the top at Merrill, scratching and grinding from investment banker to CFO to CEO, but departed suddenly after an avalanche of mortgage-related losses during the financial crisis.
Few African-American lead or have led major financial institutions, so Parsons' exit from the Wall Street scene is noteworthy. In 2012, Kenneth Chennaultcontinues to preside over American Express. Stanley O’Neal rose to the top at Merrill, scratching and grinding from investment banker to CFO to CEO, but departed suddenly after an avalanche of mortgage-related losses during the financial crisis.
Was Parsons pushed out at Citi? Was this a behind-the-scenes ploy by current CEO Vikram Pandit to seize more control at Citi after a relatively calm and successful 2011? Did Pandit plot to assert himself now that re-engineering, reorganizing and downsizing at Citi are well under way. Not really.
Years ago, Citi adopted a governance strategy long accepted at European institutions--separating the roles of board chairman and the CEO. In the U.S., the CEO is often the board chairman. Elsewhere, it's likely the CEO answers to a board chairman who is not involved in daily operations. The board chairman watches over the CEO's shoulders.
So as Parsons exits, Pandit won't rise to the position of chairman; Michael O'Neill will succeed Parsons. The timing might be optimal. Citi is restructured, performance has improved, odd businesses have been sold, and now it can gear up for the impact of tough Dodd-Frank legislation.
So as Parsons exits, Pandit won't rise to the position of chairman; Michael O'Neill will succeed Parsons. The timing might be optimal. Citi is restructured, performance has improved, odd businesses have been sold, and now it can gear up for the impact of tough Dodd-Frank legislation.
For his part, Parsons, 63, is likely contemplating a life with other activities and projects (his interests in the community and in jazz). As Citi chairman since 2009, he was in a position that sometimes seems ceremonial. Yet with Citi, like most financial institutions since 2008, under the gun, scrapping desperately to survive the crisis and undergoing soul-searching reviews of its strategy, Parsons' role was likely anything but ceremonial.
In the end, he's had a sparkling, assorted career. He started out long ago as an aide for New York Governor Nelson Rockefeller, rode those coat-tails for a long time, and took advantage of contacts to propel himself up the corporate ladder. He eventually transitioned into corporate life and became Dime Savings' head until it was later sold. Years afterward, he found himself at the top of AOL Time Warner after what was an awkward, questionable merger of AOL and Time Warner.
Business observers have been neutral about his overall performance throughout his career (measured by gross profits, profitability or percentage increases in share prices). Yet whether at Dime, Time Warner or Citi, he always found himself in fire-fighting roles, where he had to lead companies out of corporate turmoil or shepherd them through complex restructurings.
Some say he had the knack for being in the right place at the right time. That knack started with his ties to Rockefeller, who got to know him after law school, liked him and tapped him to be an assistant. That relationship jump-started his career.
Some say he had the knack for being in the right place at the right time. That knack started with his ties to Rockefeller, who got to know him after law school, liked him and tapped him to be an assistant. That relationship jump-started his career.
Being lucky helped, but rising to the occasion helped. And he demonstrated he could manage a variety of ugly corporate situations in different industries, solve board-level problems, negotiate effectively and bring together groups with different agenda. He was often praised as being conciliatory, comfortable to work with, smooth, and one who understood tough, grinding business issues.
A classic case of someone who didn't ruffle feathers, who was generally well liked, and was fortunate to have started his career with the best of contacts. One who should be remembered, too, for those pioneering roles.
A classic case of someone who didn't ruffle feathers, who was generally well liked, and was fortunate to have started his career with the best of contacts. One who should be remembered, too, for those pioneering roles.
Tracy Williams
Wednesday, December 21, 2011
Getting Real: Opportunities for 2012
Let's get real. As we turn the corner and head toward an uncertain 2012, where are the real opportunities for MBA finance professionals?
What's the real scoop? In an environment where some tip-toe when they project better scenarios next year, but where every other day large banks announce lay-offs by the thousands, what's the real story?
Who's hiring? Who's promoting solid performers? Who's luring those interested in finance and promising long-term career paths? Where are the sectors or institutions that will harbor finance pros and allow them to grow, contribute and thrive over the the next few years?
Let's take a glance and gauge vibes and signals across the sectors.
1. Investment banking, corporate finance. From now until about mid-2012, you know banks won't commit. Uncertainty forces them to be hesitant. They'll want to see sustained trends in an economic recovery. Until then, banks will resort to old-time habits of firing rashly and excessively, but hiring too aggressively when signs point to more deal flow. Some banking sectors (Asia, financial institutions, e.g.) are thriving more than others. But even those change from quarter to quarter.
But old habits mean when the tide picks up (or when deals rush through the door), the doors of banks open, and they welcome new contributors at all levels.
2. Investment banking: equities, fixed-income. Who knows? Groupon, Facebook, Zynga, and Linkedin IPOs or projected IPOs were supposed to kick-start the equities sector. Low interest rates were supposed to encourage companies to refinance and get comfortable with debt levels. But regulation (especially from the new Dodd Frank rules) is forcing banks to restructure their trading desks and the complementary role investment banking plays.
Some analysts project fixed-income sectors will diminish in importance because of the lingering damage from the mortgage castastrophe and banks not being able to offset declines in fixed-income revenues with fixed-income banking fees. Some project equities units will soar and thrive, when markets improve, because of higher fees from deals.
2. Investment banking, mergers & acquisitions. Read between the lines or current deals. All depends on the industry sector. Many industries wait for entrenched signs of growth before they acquire companies or merge with a peer. Other industries, because of business conditions, must consolidate, restructure, or sell off divisions to survive. M&A groups stand ready to advise on any kind of corporate reorganization that exists.
New regulation won't tarnish this business too much, since it's fee-based and doesn't often require banks to use too much of their balance sheets. Opportunities for M&A pros in selected areas will always exist, as long as they're comfortable with a lifestyle of few holidays and weekends and arduous travel.
3. Bank sales & trading. Expect few opportunities. Profit opportunities are disappearing. Regulation, compliance, and market volatility have combined to become an avalanche. And banks, after careful analysis, are choosing to get out of the way. Expect gradual reductions in staff across the board. Some are deciding that trading requires too much effort, pain and compliance just to squeak out a few basis points of revenues or tiny profit margins.
Banks are restructuring their trading desks, because they must. Some will depart from all trading activity, except from bare-bones customer-flow transactions. Many (J.P. Morgan, e.g.) have already reduced staff in commodities substantially. The new Volcker Rules will change the game, guidelines and profit dynamics. Some will rationalize maintaining a presence in certain trading areas if they can offset declines with gains in business elsewhere, if that's possible.
They know their best traders will flee for hedge funds and take entire desks with them, and there's not much they can do about it.
4. Risk management. Right after the financial crisis, this was the "growth area" in most financial institutions. Banks, firms, and funds hurried to ensure they had experienced, wise risk managers in place. They reviewed governance policies and rewrote them to give risk managers sufficient authority to confront the next crisis.
They even re-branded risk units to attract and keep talent. Risk management would be a destination unit, not a temporary stop-off between corporate finance assignments. Since then, the rush to reorganize and re-emphasize risk management has slowed down, but few institutions will want to be seen as reducing risk staff or risk support during challenging times.
At many firms, you seldom hear about drastic cuts in risk staff. Risk management, you can argue, is the glue that keeps Goldman Sachs in order. The lack of a strong risk organization, some argue, is why MF Global failed.
5. Corporate banking. Corporate banking, or old-fashioned relationship banking and corporate lending, regained prominence in recent years. Big banks, fatigue from the ups and downs of investment banking, rediscovered the benefits of corporate banking: a stable revenue base from lower-risk products and a loyal, committed client base that rewards banks for service, not for dramatic board-room pitches.
Many banks continue their renewed emphasis on corporate banking and project hiring experienced bankers. They are also designing new paths for new MBAs, especially for those who never contemplated such a career while in business school.
6. Bank treasury services, funds transfer, custody and cash management. The other half of nuts, bolts, blocking and tackling of service banking. Big firms re-emphasizing corporate banking must also have superior service products, too. Banks in the past were often careless in their efforts to attract strong product managers or marketing experts from the outside or from within.
Lately, however, some (J.P. Morgan, e.g.) have successfully convinced former investment bankers to transfer into these areas to energize mature (and sometimes moribund) business units. Banks, nonetheless, haven't yet rationalized a comparable compensation program for those ex-investment bankers and may not be able to.
7. Corporate treasury, financial management, financial analysis. Ah, breaths of fresh air. Amid all the market turmoil and difficulties at financial institutions, blue-chip companies are quietly reporting strong earnings, investing in new markets, and projecting reasonable growth. The finance units in these companies continue to recruit aggressively at business schools; some have convinced top graduates to by-pass Wall Street.
They promise more stability, opportunities to work in foreign countries, and worthwhile management experience. A financial analyst job at Ford or General Motors (popular destinations for many Consortium graduates) might have become fashionable again. Or a position in corporate strategy at Eli Lily or Pepsico is a desirable first job.
8. Private wealth management. Almost every bank in the country has decided to devote capital and attention to this sector. Almost every bank is attracted to a business model of aggressive accumulation and gathering of client assets, which lead to stable revenues, steady growth, and fewer headaches from market risks, regulatory threats, and an uncertain corporate clientele.
At least for now, before too many banks chase too few clients or too little in assets (or clients get too frustrated with market performance), everybody agrees this is the hot hiring growth spot in the year or two to come.
9. Community banking and development, retail banking. Some institutions see long-term growth in brick-and-mortar banking. Some don't. J.P. Morgan Chase and Bank of America have seen it. Citi sees it overseas. HSBC or BNY Mellon didn't see it.
Those that do will continue to acquire branches, hire more managers and staff, and provide more face-to-face banking services, even if it's not always easy to justify the efficiencies of such expansion. As long as they attract more and more customers (especially those who prefer a personal touch) and as long as those customers bring their deposits and their ongoing personal needs (mortgages, car loans, credit cards, e.g.), they can justify it.
Not many MBAs from top schools (including many from Consortium schools) have conventionally expressed interest in retail or community banking, but many with experience have eventually turned toward these sectors when opportunities arise.
10. Hedge funds. Hedge funds stumbled through a tough 2011. They have admitted to their investors they were caught off guard with troubles in Europe and U.S. budget-deficit fuss. But funds tend to forget the past. Or at least they try to.
Others close up shop and reopen in a different incarnation. They move on and start anew. They know, too, they'll benefit from banks being forced to downsize proprietary trading. There will be opportunities, but the industry, as always, will still be difficult to break into. Hedge-fund managers hire cronies, classmates, former colleagues from other trading experiences, graduates from the schools they attended, and sons and daughters of classmates.
11. Venture capital and private equity (financial sponsors). This is the industry of home-runs and American-dream stories of earning millions inside the proverbial five-year window. Opportunities for firms and funds to make money exist in good times (new markets and mature markets) and in bad times (distressed assets, bargain-basement prices, and restructurings). There are some (KKR, e.g.) who have even discovered ways to make investments in battered Europe. But the doors to get inside this industry are difficult to penetrate. Now, next year, and for years to come.
Some (Blackstone comes to mind) have tried to be open-minded about opening their doors to a wider array of talent and backgrounds, partly because a few have become public institutions or have been contemplating going public.
12. Asia, Europe, South America, China. Of course, Europe is in turmoil, and experts project the likelihood of continued problems. Banks there are besieged with issues and capital challenges. Few European institutions (UBS, RBS, Deutsche Bank, HSBC, e.g.) are heralding opportunities while the continent tries to right itself.
Meanwhile, financial institutions everywhere continue to have expansion eyes on parts of Asia, South America (especially Brazil), and China.
13. Diversity initiatives. When institutions struggled to remain alive after the Lehman collapse, many initiatives and much enthusiasm for diversity slipped. You could hardly get a CEO or sector head to discuss the topic, much less attend a meeting or conference call on the topic.
Some enthusiasm has revived since then, partly because some institutions see the long-term benefits and genuinely believe it's a way to hire top talent.
We've reached the corner and are headed toward the new year. Uncertainty prevails, but the mood isn't one of hopelessness or disenchantment. It's about caution and picking the right spots, the right places, and the most optimistic and resourceful institutions.
Tracy Williams
What's the real scoop? In an environment where some tip-toe when they project better scenarios next year, but where every other day large banks announce lay-offs by the thousands, what's the real story?
Who's hiring? Who's promoting solid performers? Who's luring those interested in finance and promising long-term career paths? Where are the sectors or institutions that will harbor finance pros and allow them to grow, contribute and thrive over the the next few years?
Let's take a glance and gauge vibes and signals across the sectors.
1. Investment banking, corporate finance. From now until about mid-2012, you know banks won't commit. Uncertainty forces them to be hesitant. They'll want to see sustained trends in an economic recovery. Until then, banks will resort to old-time habits of firing rashly and excessively, but hiring too aggressively when signs point to more deal flow. Some banking sectors (Asia, financial institutions, e.g.) are thriving more than others. But even those change from quarter to quarter.
But old habits mean when the tide picks up (or when deals rush through the door), the doors of banks open, and they welcome new contributors at all levels.
2. Investment banking: equities, fixed-income. Who knows? Groupon, Facebook, Zynga, and Linkedin IPOs or projected IPOs were supposed to kick-start the equities sector. Low interest rates were supposed to encourage companies to refinance and get comfortable with debt levels. But regulation (especially from the new Dodd Frank rules) is forcing banks to restructure their trading desks and the complementary role investment banking plays.
Some analysts project fixed-income sectors will diminish in importance because of the lingering damage from the mortgage castastrophe and banks not being able to offset declines in fixed-income revenues with fixed-income banking fees. Some project equities units will soar and thrive, when markets improve, because of higher fees from deals.
2. Investment banking, mergers & acquisitions. Read between the lines or current deals. All depends on the industry sector. Many industries wait for entrenched signs of growth before they acquire companies or merge with a peer. Other industries, because of business conditions, must consolidate, restructure, or sell off divisions to survive. M&A groups stand ready to advise on any kind of corporate reorganization that exists.
New regulation won't tarnish this business too much, since it's fee-based and doesn't often require banks to use too much of their balance sheets. Opportunities for M&A pros in selected areas will always exist, as long as they're comfortable with a lifestyle of few holidays and weekends and arduous travel.
3. Bank sales & trading. Expect few opportunities. Profit opportunities are disappearing. Regulation, compliance, and market volatility have combined to become an avalanche. And banks, after careful analysis, are choosing to get out of the way. Expect gradual reductions in staff across the board. Some are deciding that trading requires too much effort, pain and compliance just to squeak out a few basis points of revenues or tiny profit margins.
Banks are restructuring their trading desks, because they must. Some will depart from all trading activity, except from bare-bones customer-flow transactions. Many (J.P. Morgan, e.g.) have already reduced staff in commodities substantially. The new Volcker Rules will change the game, guidelines and profit dynamics. Some will rationalize maintaining a presence in certain trading areas if they can offset declines with gains in business elsewhere, if that's possible.
They know their best traders will flee for hedge funds and take entire desks with them, and there's not much they can do about it.
4. Risk management. Right after the financial crisis, this was the "growth area" in most financial institutions. Banks, firms, and funds hurried to ensure they had experienced, wise risk managers in place. They reviewed governance policies and rewrote them to give risk managers sufficient authority to confront the next crisis.
They even re-branded risk units to attract and keep talent. Risk management would be a destination unit, not a temporary stop-off between corporate finance assignments. Since then, the rush to reorganize and re-emphasize risk management has slowed down, but few institutions will want to be seen as reducing risk staff or risk support during challenging times.
At many firms, you seldom hear about drastic cuts in risk staff. Risk management, you can argue, is the glue that keeps Goldman Sachs in order. The lack of a strong risk organization, some argue, is why MF Global failed.
5. Corporate banking. Corporate banking, or old-fashioned relationship banking and corporate lending, regained prominence in recent years. Big banks, fatigue from the ups and downs of investment banking, rediscovered the benefits of corporate banking: a stable revenue base from lower-risk products and a loyal, committed client base that rewards banks for service, not for dramatic board-room pitches.
Many banks continue their renewed emphasis on corporate banking and project hiring experienced bankers. They are also designing new paths for new MBAs, especially for those who never contemplated such a career while in business school.
6. Bank treasury services, funds transfer, custody and cash management. The other half of nuts, bolts, blocking and tackling of service banking. Big firms re-emphasizing corporate banking must also have superior service products, too. Banks in the past were often careless in their efforts to attract strong product managers or marketing experts from the outside or from within.
Lately, however, some (J.P. Morgan, e.g.) have successfully convinced former investment bankers to transfer into these areas to energize mature (and sometimes moribund) business units. Banks, nonetheless, haven't yet rationalized a comparable compensation program for those ex-investment bankers and may not be able to.
7. Corporate treasury, financial management, financial analysis. Ah, breaths of fresh air. Amid all the market turmoil and difficulties at financial institutions, blue-chip companies are quietly reporting strong earnings, investing in new markets, and projecting reasonable growth. The finance units in these companies continue to recruit aggressively at business schools; some have convinced top graduates to by-pass Wall Street.
They promise more stability, opportunities to work in foreign countries, and worthwhile management experience. A financial analyst job at Ford or General Motors (popular destinations for many Consortium graduates) might have become fashionable again. Or a position in corporate strategy at Eli Lily or Pepsico is a desirable first job.
8. Private wealth management. Almost every bank in the country has decided to devote capital and attention to this sector. Almost every bank is attracted to a business model of aggressive accumulation and gathering of client assets, which lead to stable revenues, steady growth, and fewer headaches from market risks, regulatory threats, and an uncertain corporate clientele.
At least for now, before too many banks chase too few clients or too little in assets (or clients get too frustrated with market performance), everybody agrees this is the hot hiring growth spot in the year or two to come.
9. Community banking and development, retail banking. Some institutions see long-term growth in brick-and-mortar banking. Some don't. J.P. Morgan Chase and Bank of America have seen it. Citi sees it overseas. HSBC or BNY Mellon didn't see it.
Those that do will continue to acquire branches, hire more managers and staff, and provide more face-to-face banking services, even if it's not always easy to justify the efficiencies of such expansion. As long as they attract more and more customers (especially those who prefer a personal touch) and as long as those customers bring their deposits and their ongoing personal needs (mortgages, car loans, credit cards, e.g.), they can justify it.
Not many MBAs from top schools (including many from Consortium schools) have conventionally expressed interest in retail or community banking, but many with experience have eventually turned toward these sectors when opportunities arise.
10. Hedge funds. Hedge funds stumbled through a tough 2011. They have admitted to their investors they were caught off guard with troubles in Europe and U.S. budget-deficit fuss. But funds tend to forget the past. Or at least they try to.
Others close up shop and reopen in a different incarnation. They move on and start anew. They know, too, they'll benefit from banks being forced to downsize proprietary trading. There will be opportunities, but the industry, as always, will still be difficult to break into. Hedge-fund managers hire cronies, classmates, former colleagues from other trading experiences, graduates from the schools they attended, and sons and daughters of classmates.
11. Venture capital and private equity (financial sponsors). This is the industry of home-runs and American-dream stories of earning millions inside the proverbial five-year window. Opportunities for firms and funds to make money exist in good times (new markets and mature markets) and in bad times (distressed assets, bargain-basement prices, and restructurings). There are some (KKR, e.g.) who have even discovered ways to make investments in battered Europe. But the doors to get inside this industry are difficult to penetrate. Now, next year, and for years to come.
Some (Blackstone comes to mind) have tried to be open-minded about opening their doors to a wider array of talent and backgrounds, partly because a few have become public institutions or have been contemplating going public.
12. Asia, Europe, South America, China. Of course, Europe is in turmoil, and experts project the likelihood of continued problems. Banks there are besieged with issues and capital challenges. Few European institutions (UBS, RBS, Deutsche Bank, HSBC, e.g.) are heralding opportunities while the continent tries to right itself.
Meanwhile, financial institutions everywhere continue to have expansion eyes on parts of Asia, South America (especially Brazil), and China.
13. Diversity initiatives. When institutions struggled to remain alive after the Lehman collapse, many initiatives and much enthusiasm for diversity slipped. You could hardly get a CEO or sector head to discuss the topic, much less attend a meeting or conference call on the topic.
Some enthusiasm has revived since then, partly because some institutions see the long-term benefits and genuinely believe it's a way to hire top talent.
We've reached the corner and are headed toward the new year. Uncertainty prevails, but the mood isn't one of hopelessness or disenchantment. It's about caution and picking the right spots, the right places, and the most optimistic and resourceful institutions.
Tracy Williams
Friday, May 6, 2011
Dimon's "State of the Industry"
Finance types everywhere are familiar with Warren Buffet's annual sermon to shareholders in the form of a letter in the annual report. It's seldom, if ever, a bogged-down analysis of company ratios and trends. More a colloquial finance lecture. Everybody knows the Buffet letter, an honest pontification on business, the economy and the financial system. Derivatives are, he once notably said, "weapons of mass destruction" (although Buffet's Berkshire Hathaway operating vehicle has used them adroitly from time to time).
This year, Buffet has other priorities and distractions. He has an internal crisis to manage. Top deputy David Sokol is under investigation for suspicious trading activity. Sokol reportedly bought an equity stake in a company before Berkshire announced it would purchase it. Buffet has publicly scolded Sokol, and Sokol, as expected, is no longer next in line to run Berkshile.
That thorny current issue undermines the message Buffet delivered from his shareholder-letter pulpit in 2011. Buffet's letter this year is, as always, his usual remarkable finance lecture--a mid-level MBA finance discussion, written in comfortable, flowing style. But you read it wondering about the ethics case that confronts the company right now.
That brings us to JPMorgan Chase CEO Jamie Dimon, who in recent years has stepped up to the plate to provide sharp insight from his Park Avenue pulpit. His letter to shareholders, also colloquial and comfortable, often includes a frank diagnosis of the financial and banking system. It takes a four-prong approach during a period when much has gone wrong in the global financial system: (a) What happened? (b) What went wrong? (c) How can it be fixed? and (d) Who's responsible for fixing it? (And oh, by the way, what do we do with those who were responsible for what went wrong?)
The 2011 letter, just distributed, follows the same course. As in previous years, the letter was eagerly awaited, widely anticipated. Analysts, shareholders, and market watchers wondered, "What would Jamie say this year?"-- in a year, not of turmoil, but one of mild recovery and impressive earnings among large financial institutions. Dimon, as usual, detects what's wrong and proposes a fix-it solution--whether you the reader, the politician or the stock analyst agree or not.
What did Dimon say in 2011?
Up front, he says he caved in and didn't like restoring the bank's high quarterly dividend. He says bluntly and does so on the broad finance stage, "(If) it were up to me personally, I would reinvest all capital into our company and not pay any dividend." But in deference to shareholders, he says, "(This) is not what most shareholders want." Shareholders will understand his sentiment and long-term view, but many wanted some upside after a few years of volatile stock performance.
In general, his message is upbeat, not like the financial death warnings he offered two or three years ago on the same pages.
On risk, he says: "Five years ago, very few people seemed to worry about outsized risk, black swans and fat tails." Five years ago, recall, it was 2006, when markets soared and deals of all kinds (leveraged deals, mergers and acquisitions and thinly documented financings) were getting done. After the crisis, he says, "Today, people see a black swan with a fat tail behind every rock." And he wonders if financial institutions might have been too strickened to take prudent levels of business risks today.
Dimon injects bits of humor. On work ethic, he states, "The American people have a great work ethic, from farmers and factory workers to engineers and businessmen." He adds, "Even bankers and CEOs."
Basell III and Dodd-Frank regulation are big issues at big banks these days. The behemoth banks aren't approaching financial reform with open arms and warm smiles. But they acknowledge the business of banking must be tweaked, and the effort to sustain returns on equity at certain levels will be an immense challenge. Banks will need to divert some attention from normal business activity to implement changes and systems required under new regulation. They also operate with a veil of uncertainty. Many of the details of new regulation are still being written.
Dimon's message this year addresses regulation in depth. He isn't fighting it or arguing for repeal. He is resigned to banks adapting (and whispers that costs might be passed on to customers.) "A likely outcome of the new regulations is that products and their pricing will change," he writes. "Some products will go away, some will be redesigned and some will be repriced."
He devotes passages to the "unintended consequences" of regulation--that Government may have the right intent to propose and enact new legislation, yet the impact could lead to complex consequences--some good for the general public, some very bad for the institutions that must comply. "If a restaurant that sells burgers can't sell french fries (because of a new rule), it risks losing all of its customers."
Dimon relents: "Like it or not, we will adjust...."
And like it or not, the relenting Dimon acceded to shareholders' requests that shareholders be entitled to much higher quarterly dividends.
Tracy Williams
This year, Buffet has other priorities and distractions. He has an internal crisis to manage. Top deputy David Sokol is under investigation for suspicious trading activity. Sokol reportedly bought an equity stake in a company before Berkshire announced it would purchase it. Buffet has publicly scolded Sokol, and Sokol, as expected, is no longer next in line to run Berkshile.
That thorny current issue undermines the message Buffet delivered from his shareholder-letter pulpit in 2011. Buffet's letter this year is, as always, his usual remarkable finance lecture--a mid-level MBA finance discussion, written in comfortable, flowing style. But you read it wondering about the ethics case that confronts the company right now.
 |
| JPMorgan CEO Dimon |
That brings us to JPMorgan Chase CEO Jamie Dimon, who in recent years has stepped up to the plate to provide sharp insight from his Park Avenue pulpit. His letter to shareholders, also colloquial and comfortable, often includes a frank diagnosis of the financial and banking system. It takes a four-prong approach during a period when much has gone wrong in the global financial system: (a) What happened? (b) What went wrong? (c) How can it be fixed? and (d) Who's responsible for fixing it? (And oh, by the way, what do we do with those who were responsible for what went wrong?)
The 2011 letter, just distributed, follows the same course. As in previous years, the letter was eagerly awaited, widely anticipated. Analysts, shareholders, and market watchers wondered, "What would Jamie say this year?"-- in a year, not of turmoil, but one of mild recovery and impressive earnings among large financial institutions. Dimon, as usual, detects what's wrong and proposes a fix-it solution--whether you the reader, the politician or the stock analyst agree or not.
What did Dimon say in 2011?
Up front, he says he caved in and didn't like restoring the bank's high quarterly dividend. He says bluntly and does so on the broad finance stage, "(If) it were up to me personally, I would reinvest all capital into our company and not pay any dividend." But in deference to shareholders, he says, "(This) is not what most shareholders want." Shareholders will understand his sentiment and long-term view, but many wanted some upside after a few years of volatile stock performance.
In general, his message is upbeat, not like the financial death warnings he offered two or three years ago on the same pages.
On risk, he says: "Five years ago, very few people seemed to worry about outsized risk, black swans and fat tails." Five years ago, recall, it was 2006, when markets soared and deals of all kinds (leveraged deals, mergers and acquisitions and thinly documented financings) were getting done. After the crisis, he says, "Today, people see a black swan with a fat tail behind every rock." And he wonders if financial institutions might have been too strickened to take prudent levels of business risks today.
Dimon injects bits of humor. On work ethic, he states, "The American people have a great work ethic, from farmers and factory workers to engineers and businessmen." He adds, "Even bankers and CEOs."
Basell III and Dodd-Frank regulation are big issues at big banks these days. The behemoth banks aren't approaching financial reform with open arms and warm smiles. But they acknowledge the business of banking must be tweaked, and the effort to sustain returns on equity at certain levels will be an immense challenge. Banks will need to divert some attention from normal business activity to implement changes and systems required under new regulation. They also operate with a veil of uncertainty. Many of the details of new regulation are still being written.
Dimon's message this year addresses regulation in depth. He isn't fighting it or arguing for repeal. He is resigned to banks adapting (and whispers that costs might be passed on to customers.) "A likely outcome of the new regulations is that products and their pricing will change," he writes. "Some products will go away, some will be redesigned and some will be repriced."
He devotes passages to the "unintended consequences" of regulation--that Government may have the right intent to propose and enact new legislation, yet the impact could lead to complex consequences--some good for the general public, some very bad for the institutions that must comply. "If a restaurant that sells burgers can't sell french fries (because of a new rule), it risks losing all of its customers."
Dimon relents: "Like it or not, we will adjust...."
And like it or not, the relenting Dimon acceded to shareholders' requests that shareholders be entitled to much higher quarterly dividends.
Tracy Williams
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
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
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
Tuesday, September 22, 2009
Which way--investment or private banking?
Students and finance professionals often grapple with tough decisions about what's next in their careers. One common decision: In which direction do I go, private banking or corporate/investment banking? Many Consortium alumni and students in finance confront this question every year.
Private banking (PB) encompasses an array of services for high net-worth individuals. That might mean personal banking, but might also entail sophisticated services: currency hedging, asset disposition, tax advice, portfolio management, and mergers and acquisitions on a smaller scall.
Investment banking/corporate banking (IB) provides services, advice and products to large corporations around the world. That, too, might mean basic corporate banking, but might entail complex debt or equity financings, takeover defense, project finance, convertible-bond offerings, or equity share repurchases.
But sometimes the two intersect. The owner of a thriving, growing private company decides to go public. Private bankers and investment bankers will be involved--to advise the company on its IPO and to advise the owner and other shareholders how to manage its ownership of new public shares or newfound wealth.
Students and other finance professionals in transition will knock their heads evaluating which direction to lean. Some have asked whether it's possible to transition from one to the other--whether investment bankers can become private bankers, and vice versa. Recently some CFN members reviewed factors that can help people decide what's best for them. Some are summarized below.
Private Banking (or "private wealth management")
Important factors to consider:
1. You'll establish close relationships with clients who are senior industry leaders or established entrepreneurs (who might seek you to join them in the long term one day). You'll be valued for the important contacts you've made and the long-term relationship you maintain.
2. Wealth management is a targeted growth area in many big firms, especially those which seek to avoid the erratic revenue streams from trading and investment banking.
3. Wealth management, among other objectives, focuses on accumulating assets and generating stable fees from those assets. By design, banks manage the business to be less cyclical and less susceptible to economic downturns.
4. You will learn and become exposured to a large number of banking products and services (from estate planning to private-equity investing, from portfolio management to funds transfer and securities custody.
5. There is often flexibility in moving from private banking to other banking units or other companies, because of that product/service exposure.
6. If you are good and stand out among others, will there be opportunities and encouragement to advance rapidly? Or would you be stifled by a "wait your turn" approach to advancement?
Investment banking/corporate banking
1. There is continued emphasis on innovation, new products, and novel financial techniques (many of which evolve and mature over time, many of which are eventually "shared" with private banking clients).
2. When deal flow peaks, the environment is intellectually challenging, adrenaline-building, and stimulating. When deal flow dwindles, the same day-to-day challenges can appear as "busy work" or "going through motions."
3. The learning curve accelerates, even for experienced, senior bankers. Banks differentiate themselves by offering something new, something that can boost shareholder value substantially, or something that can radically change the corporate face or product set of a client.
4. Those who are designated as "stars" are allowed to advance rapidly and get paid well.
5. The business is cyclical, no matter how much firms have tried to stabilize it by offering counter-cyclical services (restructuring advice, e.g.). In downturns, dismissals are rapid and sometimes rash.
6. Heretofore, the compensation pie has been large. (Time will tell whether that will continue, or continue at levels in recent years.) That pie must be divided among all those who contributed to and participated in deals. And often, that division process is undermined by anxiety and internal politics.
7. Teams are responsible for doing deals or managing corporate relationships. Subjectivity sometimes decides who plays the most important role, although in recent years banks have tried to implement objective, quantifiable methods to assess the importance of your contribution.
Yet in the end, subjectivity will influence how you are evaluated and appraised (and paid).
Investment and private bankers at large firms often work together. An older entrepreneur wants to retire and sell his/her firm. A wealthy investor wants to purchase a large stake in a blue chip company. The senior management of a large corporate client wants to understand the impact of a merger on its top leaders' wealth. These situations bring investment and private bankers together to advise the client.
It's not unusual for investment bankers to transition into private banking. It's rare, but private bankers sometimes transfer into investment banking, especially if they bring deep, rich relationships with important people within an industry.
For younger finance professionals, which way to go? Both will require special financial skills and a thorough knowledge of finance. Both will involve extensive client contact. Weigh the factors carefully, while being mindful of your own objectives. And keep an open eye.
Tracy Williams
Private banking (PB) encompasses an array of services for high net-worth individuals. That might mean personal banking, but might also entail sophisticated services: currency hedging, asset disposition, tax advice, portfolio management, and mergers and acquisitions on a smaller scall.
Investment banking/corporate banking (IB) provides services, advice and products to large corporations around the world. That, too, might mean basic corporate banking, but might entail complex debt or equity financings, takeover defense, project finance, convertible-bond offerings, or equity share repurchases.
But sometimes the two intersect. The owner of a thriving, growing private company decides to go public. Private bankers and investment bankers will be involved--to advise the company on its IPO and to advise the owner and other shareholders how to manage its ownership of new public shares or newfound wealth.
Students and other finance professionals in transition will knock their heads evaluating which direction to lean. Some have asked whether it's possible to transition from one to the other--whether investment bankers can become private bankers, and vice versa. Recently some CFN members reviewed factors that can help people decide what's best for them. Some are summarized below.
Private Banking (or "private wealth management")
Important factors to consider:
1. You'll establish close relationships with clients who are senior industry leaders or established entrepreneurs (who might seek you to join them in the long term one day). You'll be valued for the important contacts you've made and the long-term relationship you maintain.
2. Wealth management is a targeted growth area in many big firms, especially those which seek to avoid the erratic revenue streams from trading and investment banking.
3. Wealth management, among other objectives, focuses on accumulating assets and generating stable fees from those assets. By design, banks manage the business to be less cyclical and less susceptible to economic downturns.
4. You will learn and become exposured to a large number of banking products and services (from estate planning to private-equity investing, from portfolio management to funds transfer and securities custody.
5. There is often flexibility in moving from private banking to other banking units or other companies, because of that product/service exposure.
6. If you are good and stand out among others, will there be opportunities and encouragement to advance rapidly? Or would you be stifled by a "wait your turn" approach to advancement?
Investment banking/corporate banking
1. There is continued emphasis on innovation, new products, and novel financial techniques (many of which evolve and mature over time, many of which are eventually "shared" with private banking clients).
2. When deal flow peaks, the environment is intellectually challenging, adrenaline-building, and stimulating. When deal flow dwindles, the same day-to-day challenges can appear as "busy work" or "going through motions."
3. The learning curve accelerates, even for experienced, senior bankers. Banks differentiate themselves by offering something new, something that can boost shareholder value substantially, or something that can radically change the corporate face or product set of a client.
4. Those who are designated as "stars" are allowed to advance rapidly and get paid well.
5. The business is cyclical, no matter how much firms have tried to stabilize it by offering counter-cyclical services (restructuring advice, e.g.). In downturns, dismissals are rapid and sometimes rash.
6. Heretofore, the compensation pie has been large. (Time will tell whether that will continue, or continue at levels in recent years.) That pie must be divided among all those who contributed to and participated in deals. And often, that division process is undermined by anxiety and internal politics.
7. Teams are responsible for doing deals or managing corporate relationships. Subjectivity sometimes decides who plays the most important role, although in recent years banks have tried to implement objective, quantifiable methods to assess the importance of your contribution.
Yet in the end, subjectivity will influence how you are evaluated and appraised (and paid).
Investment and private bankers at large firms often work together. An older entrepreneur wants to retire and sell his/her firm. A wealthy investor wants to purchase a large stake in a blue chip company. The senior management of a large corporate client wants to understand the impact of a merger on its top leaders' wealth. These situations bring investment and private bankers together to advise the client.
It's not unusual for investment bankers to transition into private banking. It's rare, but private bankers sometimes transfer into investment banking, especially if they bring deep, rich relationships with important people within an industry.
For younger finance professionals, which way to go? Both will require special financial skills and a thorough knowledge of finance. Both will involve extensive client contact. Weigh the factors carefully, while being mindful of your own objectives. And keep an open eye.
Tracy Williams
Subscribe to:
Posts (Atom)