BANK3014 Week 1: Course Overview and the introduction
Presented by
Guangqian (Isaac) Pan
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BANK3014 Unit Progress
Introduction Sales and Trading Financial Engineering Regulation
Global Capital Mergers and Private Banking Markets Acquisitions
Lecture Overview
– An overview of the structure of Course and Assessments.
– Understand the role and positioning of Investment and Private Banks within the financial system.
– Identify the historical development of Investment Banks and the impact of the 2008 GFC on Investment banking.
– Understand the structure and development of Investment Banking activities in Australia.
– Examine the typical structure of Investment and Private Banking.
– The Investment Banking Division,
– The Trading Division,
– The Asset Management Division, focusing on Private Banking.
– Readings:
– Chapters 1 and 2.
– Case Studies: Investment Banking in 2008 (A) & (B)
Course Overview
Typical investment bank structures
Investment Bank
Trading Division
Asset Management Division
IB Division
Source: Stowell, D – Investment Banks, Hedge Funds and Private Equity Exhibit 1.2
The investment banking division
– Equity Capital Markets – Week 2:
– Equity issuance including various types of equity and equity derivatives,
– Initial Public Offerings (IPO’s) and follow on offerings and placements,
– Focus on client capital structures including cost of capital, impacts on earnings per share, share price impacts and legal and regulatory considerations.
– Debt Capital Markets – Week 3:
– Debt issuance for corporate and government clients,
– Clients grouped between investment grade (generally rated BBB and above) and non investment grade,
– Public offerings or private placements.
– Mergers and Acquisitions – Weeks 7 and 8:
– Generally industry focussed,
– “Sell-side” or “Buy-side” – purchase, sale or merger of a company or a division,
– Restructurings aimed at improving shareholder value, improving capital structures or avoid potential takeover,
– Hostile acquisitions.
– These activities require close coordination with the sales and trading teams in the Trading Division.
Trading division
– Equities – Week 4:
– Equities and enquiry derivatives traded on global stock and futures exchanges,
– The development of dark pools.
– Fixed Income, Currencies and Commodities – Weeks 5 and 6:
– Fixed Income (Debt) covers government bonds, corporate bonds, asset backed bonds (including mortgage
backed bonds or CMO’s),
– Currencies covers trading and hedging activities in most major traded currencies,
– Commodities are not covered in the course but include soft or agricultural commodities, base commodities (such as coal, iron ore and copper) and precious metals such as gold and silver,
– Trading in related derivatives, some of which traded on futures exchanges and some OTC.
– Trading activities:
– Client Trading: (i) Broking; and (ii) Market Making.
– Proprietary and Principal Trading and Investing.
– Financial Engineering – Week 9.
Asset management division
– Manages investments in the form of mutual funds, private investment funds or separately managed accounts.
– Investments in:
– Equites,
– Fixed Interest,
– Money Market,
– Alternative Investments, such as hedge funds, real estate and commodities.
– Investment Management is undertaken for clients who are:
– Institutional; or
– Generic Asset Management is not covered in the course but refer to 6 for further
information.
– Private Banking – Weeks 10
– Advisory and management services to High Net Worth Individuals,
– Assists them in investing their surplus resources.
Australian investment banking – the example of Macquarie Bank
Source: Macquarie Bank website
Macquarie Bank’s operations
– Macquarie Capital
– Corporate finance advisory and capital markets services to corporate, private equity and government clients.
– Public and private M&A, debt and equity fund raisings, private equity raisings and corporate restructuring.
– Principal investing activities globally to support clients.
– Corporate and Asset Finance
– Asset Finance provides specialist finance and asset management
– Principal Finance provides primary financing solutions and engages in secondary market investing.
– Commodities and Global Markets
– Covers global markets including equities, fixed income, foreign exchange and commodities.
– Macquarie Asset Management
– A full-service asset manager, products include infrastructure, real assets, equities, fixed income, liquid
alternatives & multi-asset investment management solutions.
– Banking and Financial Services
– Retail banking and financial services including personal banking, wealth management and business banking products and services to retail clients, advisers, brokers and business clients.
Source: Macquarie Bank website
Investment Banking within an Australian Commercial
Bank – the example of NAB
– NAB delivers investment banking operations via its Corporate and Institutional Banking Division.
– The Division comprises:
– Corporate Finance:
• Debt Markets Originations,
• Debt Syndication and Placement,
• Mergers and Acquisitions,
• Trade Finance,
• Specialised finance, leasing etc.
– Financial Markets:
• Foreign Exchange,
• Interest Rates,
• Commodities.
– Custody and Asset Servicing:
• Custody,
• Investment administration and data support services.
Source: NAB website
Introduction
1. Investment Banks and Private Banks in Global Financial Markets
Financial institutions & the flow of savings and investments
– There have been significant changes since the mid 1980s in the flows of funds from savers to borrowers:
(A) Bank intermediation, (B) Securities market,
(C) Direct-connect linkages.
– Disintermediation is a process of shifting focus from (A) to (B) and (C).
– Disintermediation is the area of IB activity.
Source: Exhibit 12-1 Financial Intermediation Roadmap, Smith, R., Walter, I. and DeLong, G. (2012) Global Banking, 3rd ed. Oxford University Press, , p.282.
Linkages amongst areas of financial services
Securities
Asset Management
Investment Banking
Retail and Private Banking
nstitution and Asset Management
Commercial Banking
Source: Smith and Walter (2003), Fig 14-4 p364
2. The History of Investment Banking
The growth of investment banking in the US
– The Glass- Act 1933 (GS)
– GS established the formal separation between deposit taking (commercial) banks and investment banking
activities.
– This followed the Great Depression which in part was seen to have been caused by the excessive risk taking activities on banks in the 1920’s. The GS provisions aimed to protect depositors.
– In particular banks (regulated by the US Federal Reserve) were only allowed to wholly own investment banking subsidiaries as long as income from them did not exceed 5% of consolidated income.
– This saw the development of “pure-play” or sometimes called the “bulge bracket” investment banks.
– The Size of US Investment Banking pre 1999
– Investment banks in the US are regulated by the Securities and Exchange Commission (SEC).
– Disintermediation activity, dominated by IB’s, accounted for around 75%* of financial intermediation in the
• Since the early 1980s major financial systems witnessed significant ‘disintermediation’ as deregulation of their financial markets progressed.
– Smith, Walter and DeLong* report that the proportion of commercial bank share of financial intermediation flows decreased from about 75% in the 1950s to less than 25% in the first decade of the 21st century in the US.
• The pace of disintermediation in Europe, whilst still significant, and in emerging economies has been less than in the US.
Source: Smith, R., Walter, I. and DeLong, G. (2012) Global Banking, 3rd ed. Oxford University Press, , p.282.
The demise of US “Pure Play” investment banks
– stage 1 regulatory change
– The Gramm-Leach-Bliley Act of 1999 (GLB) also known as the Financial Modernisation Act.
– The provisions of GS which forced a separation of IB’s and Commercial banks were repealed.
– The aim of GLB was:
• To provide a more stable and countercyclical operating environment for banks,
• To enable US banks to better compete with international universal banks such as Deutsche Bank, UBS
and Credit Suisse.
– The consequences of GLB.
– GLB led to the formation of universal banks such as:
• JP Morgan Chase, combining the with Chase Manhattan bank,
• Citigroup combing Citibank and Travelers Insurance Group, which also owned Barney.
– Thus US banking moved to a universal bank model, similar to that of the European banks.
The demise of US “Pure Play” investment banks
– stage 2 financial crisis
– Sub Prime crisis 2008 and the resultant GFC.
– The U.S. sub-prime crisis significantly changed the landscape of the U.S. banking industry.
– Especially for the IB industry which was heavily involved in sub-prime lending and securitisation arrangements.
– Business model of large “Pure-Play” investment banking is no longer sustainable.
– Major effects of the crisis on IB’s included:
• Bear Stearns failed in March 2008,
• collapsed in September 2008,
• merged with Bank of America in September 2008,
• and both applied for and were subsequently granted banking holding company status and are now regulated by the US Federal Reserve.
Investment Banking Firms
Global IB’s
Large Regional IB’s
Bank of America (US)
BNP Paribas (France)
Barclays (UK)
CIBC (Canada)
Citigroup (US)
Credit Suisse (Switzerland)
Macquarie (Australia)
Deutsche (Germany)
Mizuho (Japan)
MUFG (Japan)
JP Morgan Chase (US)
Nomura (Japan)
RBC (Canada)
UBS (Switzerland)
Standard Chartered (UK)
Wells Fargo (US)
Source: Stowell, D – Investment Banks, Hedge Funds and Private Equity
Boutique investment banks
– Note for example that has closed.
– The future for boutique investment banks:
– “I just believe there are more equities and fixed income businesses who cannot reach critical mass and will fold. Margins are terrible and volumes are still shifting to automated venues,” a former boutique investment banker, who will remain anonymous, commented.
Business Insider by 2013
– They are likely to become niche players, for example in M&A in specialised industry sectors.
– Of the top 20 largest full service investment banks* only Nomura (11), Lazard (17) and (18) were not controlled by or part of a Commercial Bank Group.
Source: Stowell, D – Investment Banks, Hedge Funds and Private Equity, *Wikipedia 2016
3. Investment Banking in Australia
The demise of Australian merchant banks
– stage 1 regulatory change
– US Regulatory reform under the GLB Act occurred in 1999.
– In Australia reform occurred much earlier with the Campbell Committee of enquiry which commenced
– The inquiry was established when was Treasurer and he and oversaw the implementation of significant reforms.
– Prior to these reforms commercial banks found it increasingly difficult to compete with NBFI’s including merchant banks.
– Non-bank Financial intermediaries (NBFI) grew at the expense of commercial banks.
– The reforms flowing from the Campbell Inquiry enabled banks to compete and saw Foreign Banks come under increasing pressure.
The declining position of banks prior to Campbell
Institution/Year
Financial Assets
1929 (% of total)
1939 (% of total)
1948 (% of total)
1960 (% of total)
1970 (% of total)
Central Bank
Trading Banks
Savings Banks
Other Banks (State)
Total Banks (ex Central Bank)
Life Companies and Pension Funds
Non-Life Companies
Pastoral finance companies
Building societies
Credit unions
Finance companies
General financiers
Merchant banks
Money market dealers
Unit trusts
Friendly societies
Other financial institutions
Source: Table 14.2 p. 578
Overview of the financial system prior to the Campbell Inquiry
– Banks were required to offer a full range of retail and commercial services.
– A division existed between Trading banks and Savings banks.
– The Commonwealth Bank (was Government owned) and competed with commercial banks.
– Only two non-Australian banks existed, BNP and the Bank of China.
– Banks were heavily regulated.
– Trading banks subject to an LGS ratio 18% and an SRD ratio 7% of deposits .
– Savings banks to hold cash and government securities equal to 40% of deposits.
– Controls on deposit interest rates offered by banks.
– Maximum interest rates set on housing loans.
– Qualitative standards on borrowers and loan volumes applied.
– This tight regulatory regime led to a significant growth in NBFI’s (shadow banks) or Merchant Banks as they were known.
– Many of the NBFI’s were owned by banks and foreign banks because Foreign banks were prohibited from operating as banks in Australia.
Significant reforms followed the Campbell Committee
– Interest Rate controls on bank deposits were removed.
– Savings banks were permitted to accept deposits from non-retail customers.
– Trading banks were permitted to pay interest on smaller deposits and for shorter terms, but unable to pay interest on cheque accounts.
– All controls lifted in 1984.
– Qualitative and volume controls on lending were replaced with market based price signals via
central bank open market operations.
– In 1985, 16 new banking licences were granted to foreign banks and many previous building societies also elected to become banks.
– Campbell recommended the implementation of a capital adequacy prudential framework, and Basel 1 was implemented in 1988.
The demise of Australian merchant banks – stage 2 financial crisis
– The new foreign banks aimed to compete with the domestic banks and competition for lending increased even further.
– The result was an excessive growth in credit. This was exacerbated by the significant injection of liquidity in 1987 following the October 1987 global stock market crash.
– This excessive competition led to:
– Significant industry rationalisation in the early 1990’s
– A lending bubble developed the late 1980’s.
– When the bubble eventually burst in the early 1990’s, bank losses that followed were huge:
– Westpac was forced to re-capitalise with asset write-downs of almost 40%, ANZ also incurred severe losses
– By 1995 all of the banks owned by the State Governments were sold, with those from Victoria and South
Australia forced sales due to accumulated losses.
Source: Marianne Gizycki and “The Australian Financial System in the 1990’s”
The demise of Australian merchant banks – stage 2 financial crisis
Total of individual Bank Losses in 1990, 1991 & 1992
Type of Bank
Losses A$ billion
Losses % Shareholders Funds
State government owned
Foreign Subsidiary
Private domestically owned
Total for Banking System
– During the early 1990’s the banks rationalised operations and banks closed down most of their merchant (investment) banking and finance company operations and amalgamated their business operations under a bank holding company.
– Merchant Bank Hill Samuel Australia acted much earlier and received a banking licence in 1985 and became Macquarie Bank Limited.
– Hence the “Pure-Play” investment banking model ended in Australia much earlier than in the US.
– But the overarching forces that drove this were the same; namely regulatory changes and financial crises.
Source: Marianne Gizycki and “The Australian Financial System in the 1990’s”
4. Concluding Comments and Investment Banking League Tables
Global investment banking
– 2017 global investment banking revenue and percent change year-on-year.
Source: Wall Street Journal MoneyBeat
Global investment banking
– 2018 global investment banking revenue and percent change year-on-year.
http://graphics.wsj.com/investment-banking-scorecard/
Source: Wall Street Journal MoneyBeat
Global investment banking
– 2019 global investment banking revenue and percent change year-on-year.
http://graphics.wsj.com/investment-banking-scorecard/
Source: Wall Street Journal MoneyBeat
Global investment banking
– 2017 global investment banking revenue ranked by investment bank and sector in USD millions.
Source: Wall Street Journal MoneyBeat
Global investment banking
– 2018 global investment banking revenue ranked by investment bank and sector in USD millions.
Source: Wall Street Journal MoneyBeat
Global investment banking
– 2019 global investment banking revenue ranked by investment bank and sector in USD millions.
Source: Wall Street Journal MoneyBeat
Global investment banking
– 2018 global investment banking revenue ranked by product in USD millions.
Source: Wall Street Journal MoneyBeat
Global investment banking
– 2019 global investment banking revenue ranked by product in USD millions.
Source: Wall Street Journal MoneyBeat
Australian investment banking (2016)
– Australia investment bank (IB) revenue dropped for the second consecutive year, to $1.6bn in 2016, down 13% on $1.8bn generated in 2015. ECM led the decline with $394m, a 40% drop from 2015 ($659m), while Loan revenue was down 13% and DCM fell 4% to the lowest total since 2011 ($364m). Only M&A revenue increased, up 16% year-on-year to $541m.
– Key highlights from full year 2016 were:
Source: Dealogic – Australia IB Review Full year 2016
Australian investment banking (2016)
– Australia investment bank 2016 rankings:
Source: Dealogic – Australia IB Review Full year 2016
2018 Equity Capital Markets in Australia
2018 Debt Capital Markets in Australia
2018 Mergers and Acquisition Activity in Australia
5. Conclusion
Conclusion
– Next week:
Equity Capital Markets
– Primary market offerings,
– Secondary market offerings.
BANK3014 Week 2: Equity Capital Markets
Presented by
Guangqian (Isaac) Pan
BANK3014 Unit Progress
Introduction Sales and Trading Financial Engineering Regulation
Global Capital Mergers and Private Banking Markets Acquisitions
Lecture Overview
– Understand the corporate structure, financial statement analysis and equity instruments used within Equity Capital Markets (Supplementary).
– Understand the equity valuation process, since this is typically undertaken by investment bank analysts / researchers.
– Understand an IPO and the role of the investment bank therein.
– Understand secondary market offerings and how an investment bank assists financing corporations
through equity once they are public.
– Readings:
– Case study: Quintiles IPO Case & Chapter 3 Exhibit 3.11 Google’s IPO
– Lecture 2 Supplementary: Background information
– 3 (pp 47-70) covers capital market financing (both equity and debt).
– NYSE IPO Guide https://www.nyse.com/publicdocs/nyse/listing/nyse_ipo_guide.pdf.
– ASX / DLA Piper IPO
Guide https://www.asx.com.au/documents/resources/3195890_Listing_Guide_to_Australia_2017_V6_Scre en.pdf
– ASX / and IPO
Guide https://www.asx.com.au/documents/products/MinterEllisonASXListingGuide_March.pdf
1. Equity Valuation
Introduction to valuation
– Every day, thousands of participants in the investment profession face a common and often troublesome question: What is the value of a particular asset?
– For equity analysts at an investment bank, the question and its potential answers are particular
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