Investment Banks are neither an investor nor a bank. Investment Bank is like a
normal private company which ensure different financial services to the people,
firms, and governments for increasing their financial capital by underwriting
which is ensuring that emanation of
bonds or stocks is accomplished ideally on both purchasing and offering
side or as a intermediary of issuance of securities. In other words, there
should be enough inverstors who are considering to buy these securities if
prices are not too low or too high. Also it can help to the firms which
interested in mergers and acquisitions(M&A) by providing some services like
market construction, trading and equity securities, and FICC services (fixed
income instruments, currencies, and commodities). While providing these
services and giving some advices they make profit by charging fees and
Purpose of this report is to inform about Investment Banking Industry by
mentioning how it was working in the past, what kind of problem it faced
basically history of the investment banks. Organizational structure of the
investment banks, how it is working in itself and substitutes of the investment
banks. After introducing the investment banking, there is an important concept
which is market of the industry. In this part, major competitors and their
revenue’s and market shares will be shown and future of the sector.Report will
continue with the bargaining power of the suppliers,customers and threat of the
entering to the sector and substitutes. Finally, key success factors of the
Investment Banks will be discussed.
of the Investment Banks
Before Great Depression
Between these years Investment banking lived it’s best
years before the Great Depression. Heads of the markets were JP Morgan and
National City Bank, usually they were taking a step for affecting and sustain. JP
Morgan himself saved the country from a horrable panic in 1907. Banks which
used the Federal Reserve loans to enforced the markets caused a high market
speculation, resulted a collapse in markets and it led to the Great Depression.
After The Depression
The nations banking system was in chaos, %40 of the banks were bankrupt or
subdued to merge. Building a wall between the commercial and investment banking
for healing the banking system, the government enacted a law called the
Glass-Steagall Act (The Bank Act of 1933). Moreover, to prevent the conflict of
interest between the request of acquire of investment banking business and
mission to ensure just and neutral mediation services, a seperation done by
government. These regulations remembered as “Chinese Wall”.
In 1975, the direction of removing the negoitated rate, mercantile
commissions shrunken and trading profitability went down. Search-focused
stuck plus under one roof the idea of an integrated investment bank, ensuring
sales, trading, research and investment banking started to take root.
Derivatives, high return an structured products.which were the financial products seen at
the end of the 70′ and begining of the 80’s, made high profits for investment
banks. The simplification of corporate merging assumed as Glass-Steagall will
fall at some point from investment bankers and it will cause a securities
business exceed by commercial banks in the late 1970’s. In 1999 The Bank Act of
1933 did collapse and the consequences were not as bad as expected.
Investment bankers escaped the recessional picture and they had the respect
for power and ability which gained in the fortunate times. The rise of the
invetment bankers mentioned in the populer media. In 1990s they tought that
there will be a boom in initial stock offering (IPO). Abvious IPO deals were
made amount of 548 in 1999 – in one year- went to the public in online. In
November 1999, Glass-Steagall Act has been removed when entry into force of a
new law called Gramm-Leach-Bliley Act (GLBA) provide a solution to the
confusion between banking with securities and insurance businesses and allowed
to a broad banking system. GLBA was functioning well since the wall was
collapsing over time.
Front Office defined as revenue part. In other word,
mostly it creates bank’s profit.and
occurs in three part which are investment banking, sales and trading, and
Investment Banking: provides consulting on merger and.aquisitions and support
for inreasing the customers funds which are the services that attending
investors to a security issuance, discussion with the merger target,
accommodate with bidders. For a possible M&A client a pitch book of financial.information to market
the bank will be provided. The bank will adjust the contract for the customer
if the pitch is succeed. The investment banking division has two groups.which are industry and
product covarege groups. Industry groups consider just particular industry like
healthcare, public, financial institutions groups, power and energy, and
sustain their connection with firms in the industry.providing a business for the bank. Product
groups focus on financial products like mergers and acquisitions, leveraged
finance, asset finance and leasing, equity etc, and provide professionalized solution
needs from association with the companies in the sector.
Sales and Trading: one of the
important things that an Investment Bank do is buying and selling the products.
Financial products will be bought and sold by traders purpose of earning money
in market making. Banks provide suggestions to the investors about trading
Research: is where reports are written by banks about future revenue
probability. These reports will be bought by financial experts from banks and
will be used in experts’ analysis.
This is the part which contains corporate strategy and treausry, risk
management, inner control. The duty of an investment bank’s liquidity risk
monitoring, capital structure management and funding is controled by corporate
treausry. The capital flows of the corporation is tracked and analyzed, global
risk exposure and profitability of the firm’s are managed by professional
advicer in the inner control. On the contrary firm strategy teams.which give suggestions
to customers, inner corporate strategy dealing with the corporation
administration and revenue.tactics
has a critical point within investment banks even it does not generate revenue.
It can be described as the technology. Technology team of the bank creates
the softwares and responsible of them because electronic trading has increased
over the years. In other words, support is provided by back office for front
office to sustain the front office’s job which is making profit for the bank.
For The Investment Banking Industry
In this sector substitues a little bit different than
other sectors. When firms or individuals want to make an investment or need
mone for their project, they must go to an investment bank. For example, firms
may go public, take credit or use bonds but all these solutions are provided by
investment banks. Eventually, they have to go to an investment bank but they
can choose which bank is more proper for them.
of The Industry
There are lots of banks in this
sector but most known globally and profitable are JP Morgan, Goldman Sachs,
Bank of America Merrill Lynch and Morgan Stanley. Most banks gathered and
functioning in United States understandable from Exhibit1 which shows the revenue in countries of the industry, U.S.
has the higher portion at global level with $36.3bn. Leader of this sector is
JP Morgan because it has the higher fees and revenues with $5,727.97m and %8.1
of the market share respectively. (see Exhibit
3-4). Secon one is Goldman Sachs with market share of %6.9 and thirdly
Merrill Lynch has %6.5 of the market share.
According to the Exhibit5 this
sector is downsizing with a rate -2.3% between 2012 and 2017. There might
several reason for this such as an economical ressesion may lead to saving
instead of investing or interest rate might be higher than firms can pospone
There are some drivers that affect the demand growth. For example, low
valuations, wealth management expansion, recovery in oil prices, growth in
trading revenues are affect demand growth for Bank of America.
Growth in trading revenues: customers will not want to make any
transaction in a fluctuation market or an economy, they will not issue their
equity or debt or launch initial public offerings.
Recovery in oil prices: Energy sector was influanced by Bank of America
amount of $21.8bn creating its total loan by 2.4%. In other words, when oil
prices went down it will affect the banks earnings because banks compose
equivalents to losses on loans that given to energy industry.
Wealth management expansion: Bank of America designed to increase their
wealth. However, unsatisfied interest rates and a volatile economy damaging
bank’s creating revenue capacity over trading operation and investment banking.
Now, they are foculize to heat up their wealth management.
Future of Investment Banking Industry
It is abivous that this sector will exists in the future becuase corporations
will need money when they want to increase their capital. Eventually, there will
be investment banks if there are not any crisis or something else like war
which can affect the investment banks existence. There are more than one
hundred banks but after a crisis half of them may go bankrupt. In addition,
they should follow the technological development because there is a correlation
between banking and technology. Tehncological development made the transaction
easier. Moreover,In U.S. forecasts show that the revenue of the investment
banks and they will sustain their increase (see Exhibit2). In other word, their future are bright.
Bargaining Power of the Customers of the Sector
Individual clients do not have an effective haggling power on large banks like
Goldman Sachs which provides investment services. Since they will not be affected
by losing their customers to another bank because they have small amount of
their profit. However, they carry the risk of losing the firms becuase when
they invest they do it huge amount of money and it can affect the bank. So,
firms has the bargaining power.
Bargaining Power of the Suppliers
Investment banks’ suppliers are not similiar with the traditional suppliers.
Bank’s suppliers are investors which affect the input. When there are less
customers-supplier, the existing ones have more power for bargaining becuase
bank’s supply influences from their money. For instance, Goldman Sachs’
investment services depend on the invested money from customers like valuable
firms which are the suppliers. More example, when Amazon wants to issue a bond
worth $5bn, they offer this to an investment bank and this money will be the
supply. All in all, fewer suppliers mean more bargaining power for the rest.
Threat of New Entrants to the Industry
For the existing Investment Banks, new comers will not create a big threat.
There will be some barriers entering to the sector if they want to compete
face-to-face with the large money-based banks such as JP Morgan or Goldman
Sachs. Major barrier for the new comers who want to give financial services
will be necessity of huge capital. In addition, they have to create a known
brand name required time to reach it. Also, they have to handle with the lots
of challenging regulation that government imposed. However, in the future, they
might face to an international threat coming from the developing economies such
Threat of Substitutes
Firms apart from the industry started to serve financially which only provided
from traditional banks create a threat of substitutes in the investment banking
industry. For instance, Paypal or Ininall types of payment or transactions,
down payment debit cards and Prosper.com and LendingClub.com types of online
peer-to-peer lending (Maverick
2016). However, banks have few chance for suplementary investment banking
services because of the regulation of capital markets, exchanges and securities
are restricted. For Goldman Sachs, The Securities and Exchange Comission
creates a barrier for the new comers about licensing, compensation, filing
which it can offer (Ross
Key Success Factors
Banks must create a brand image for their products because it always has an
importance. Generally most people want to buy well known companies product. It
is same with the banking industry. For instance, Merrill Lynch and JP Morgan,
they have large capitals,market share which are the top player in the industry.
The success of these banks comes from satisfying the clients’ need about
investing, insurance and banking needs. Analyzing the customers in the market
and influence them for purchasing banks’ product. For example, virtual banks do
not have a reputation so their shares in the market are low. All in all, brand
name has an impact on market.
Like other industries, technology also have an important effect on this industry.
It support to developing affective products for clients needs. It makes the
money transfer easir and cheaper. For instance, ATMs and debit or credit cards decreased
the cost for the banks and provide a service in every hour. Customers want to
access their accounts immedietly and for that reason Internet banking was born.
They support it with mobile devices and created a maximum service. Thanks to
the social media now banks can help their customers everwhere. Banks which can
not respond quickly will be behind their competitors.
Collecting information about your performance on the market and analyzing it
for financial services. This data collecting system will consider bank’s market
efforts while looking after customers need and will support the revenue from an
investment. In addition, it will ensure an appropriate market strategy for
selling the financial products. After that, banks can provide better suggestion
for their trustful customers to increase their profit when they have a large