Part B. Banking products and services. Lecture 5. Types of banking

Transcription

1 Part B. Banking products and services Lecture 5. Types of banking

2 Outline 2 1.Traditional versus modern banking 2. Retail or personal banking 3. Private banking 4. Corporate banking 5. Investment banking 6. Islamic banking

3 3 1.Traditional versus modern banking

4 4 1.Traditional versus modern banking

5 1.Traditional versus modern banking 5!!! Universal banking trend: banking business is broadly defined to include all aspects of financial service activity (including securities operations, insurance, pensions, leasing and so on).!!! Bancassurance trend: the distribution of insurance products through a bank s distribution channels (a package of financial services that can fulfill both banking and insurance needs at the same time). Advantages: Cross-selling opportunities for banks (scope economies); Non-interest income boosted at a time of decreasing interest margins; Risk diversification; Banks converting into full service financial firms (deregulation).

6 6 2. Retail or personal banking

7 2. Retail or personal banking 7 relates to financial services provided to consumers it is usually small-scale in nature (all large banks offer a broad range of personal banking services including payments services, savings, loans, mortgages, insurance, pensions and other services)

8 2. Retail or personal banking 8 Commercial banks: are the major financial intermediaries in any economy. They are the main providers of credit to the household and corporate sector and operate the payments mechanism. Commercial banks are typically joint stock companies and may be either publicly listed on the stock exchange or privately owned. Savings banks: savings banks have traditionally had mutual ownership, being owned by their members or shareholders who are the depositors or borrowers => they may pursue strategic objectives other than maximising shareholder wealth or profits (they are very similar with commercial banks, typically their business focuses on retail customers and small businesses);

9 2. Retail or personal banking 9 Co-operative banks: very similar with saving banks (originally had mutual ownership and typically offered retail and small business banking services); Building societies: very similar to savings and cooperative banks as they have mutual ownership and focus primarily on retail deposit-taking and mortgage lending; most people, who have a savings account, or a mortgage, are members and have certain rights to vote and receive information, as well as to attend and speak at meetings; Credit unions: non-profit institutions owned by their members. Member deposits are used to offer loans to the members; they are usually regulated differently from banks; Finance houses: provide finance to individuals/companies by making consumer, commercial and other types of loans. They differ from banks because they typically do not take deposits and raise funds by issuing money market (such as commercial paper) and capital market instruments (stocks and bonds).

10 10 3. Private banking

11 3. Private banking 11 concerns the high-quality provision of a range of financial services to wealthy clients (individuals/their families): retail banking products such as payment and account facilities plus a wide range of up-market investment-related services. tailoring services to individual client requirements; anticipation of client needs; long-term relationship orientation; personal contact; discretion.

12 3. Private banking 12 In terms of AUM (Assets Under Management), the world's 20 largest private banks (or private banking divisions/subsidiaries of large bank holding companies), as of end-2015.

13 13 4. Corporate banking

14 4. Corporate banking 14 The corporate banking segment of banks typically serves a diverse range of clients, ranging from small to mid-sized local businesses with a few millions in revenues to large conglomerates with billions in sales and offices across the country. Corporate banking is typically offered by commercial banks, and entails all the services that can be extended on a financial level to corporate entities to ease day-to-day operations.

15 4. Corporate banking 15 Banking services used by small firms Payment services; Debt finance; Equity finance; Special financing. Banking services for mid-market and large (multinational) corporate clients Cash management and transaction services. Credit and other debt financing facilities loans, overdrafts, syndicated loans; Commercial paper, bonds and other facilities; Commitments and guarantees; Foreign exchange and interest rate-related transactions; Securities underwriting and fund management services.

16 16 5. Investment banking

17 5. Investment banking 17 Investment banks were essentially created in the U.S. by the passage of the Glass-Steagall Act. Prior to this, investment banking activities were part of large, money-center commercial banks. The lines between investment banks and commercial banks again begins to blur as legal separation between investment banks and commercial banks is no longer required. They mainly deal with companies and other large institutions and they typically do not deal with retail customers.

18 5. Investment banking 18 Financial advisory (M&A advice); Underwriting of securities issues (guaranteeing a price that the new equity or bond issue will sell for); Trading and investing in securities on behalf of the bank or for clients. This activity can include trading and investments in a wide range of financial instruments including bonds, equities and derivatives products; Asset management managing wholesale investments (such as pension funds for corporate clients) as well as providing investment advisory services to wealthy individuals (private banking) and institutions; Other securities services brokerage, financing services and securities lending.

19 Financial advisory (M&A advice) Investment bankers may assist both acquiring firms and potential targets (although not both in the same deal). Deal may be a hostile takeover, where the target does not wish to be acquired. Investment bankers will assist in all areas, including deal specifics, lining up financing, legal issues, etc.

20 Underwriting of securities issues The process of underwriting a stock or a bond issue requires that the investment banker purchase the entire offering at a predetermined price and then resell the offering (securities) in the market. The services provided during this process include: Giving Advice Filing Documents Underwriting, Best Efforts, or Private Placement

21 Underwriting of securities issues Giving advice Explaining current market conditions in to help determine why type of security (equity, debt, etc.) to offer Assisting in determining when to issue, how many, at what price (more important with IPOs than SEOs)

22 Underwriting of securities issues Filing Documents A portion of the registration statement known as the prospectus is made available to the public. Debt issues require several additional steps, including acquiring a credit rating, hire a bond counsel, etc. For equity issues, the investment banker may also arrange for the securities to appear on one of the exchanges.

23 Underwriting of securities issues Underwriting (firm commitment) The investment banker purchases the entire offering at a fixed price and then resells the offering to the market. An underwriter may form an underwriting syndicate to diffuse part of the underwriting risk. Placement of a tombstone in, for instance, the Wall Street Journal (example on next slide).

24 Underwriting of securities issues

25 Underwriting of securities issues The goal of underwriting is for all of the shares in an offering to be spoken for. However, this may not occur. Fully subscribed: all shares are spoken for Undersubscribed: underwriting syndicate unable to generate interest in all of the available shares Oversubscribed: interest in more shares than are available (may lead to rationing).

26 Underwriting of securities issues Figure 23.1 Using Investment Bankers to Distribute Securities to the Public

27 Underwriting of securities issues Equity Sales: when a firm sells an entire division (or maybe the entire company), enlisting the aid of an investment banker. Assists in determining the value of the division or firm and find potential buyers Develop confidential financial statements for the division for prospective buyer (confidential memorandum) Prepare a letter of intent to continue, assist with due diligence, and help reach a definitive agreement

28 Trading and investing in securities Securities firms with brokerage services offer several types of services: Brokerage Service Other services Full-Service Brokers versus Discount Brokers

29 Trading and investing in securities Securities Orders: when you call a brokerage house to buy or sell a security, you essentially have three options: Market Order: buy or sell security at current price Limit Order: you specify the most you are willing to pay (buy) or the least you are willing to accept (sell) for a security Short Sales: sell a security you don t own with the intent of buying it back at a later date (hopefully at a lower price)

30 Trading and investing in securities Other Services Insurance against loss of actual security documents Margin credit for purchasing equity with borrowed funds Other services driven by market demand (e.g., the cash management account)

31 Trading and investing in securities Full Service Brokers: offer clients research and investment advice, but usually charge a higher commission on trades. Discount Broker: provides facilities to buy/sell securities but offers no advice. Many on-line discount brokerage firms do have significant research available

32 Trading and investing in securities Securities Dealers Hold inventories of securities on their own account Provide liquidity to the market by standing by ready to buy or sell securities (market maker) Especially important for thinly traded securities

33 33 5. Investment banking

34 34 5. Investment banking

35 35 6. Islamic banking

36 6. Islamic banking 36 Islamic Shariah law prohibits the payment of riba or interest but does encourage entrepreneurial activity. As such, banks that wish to offer Islamic banking services have to develop products and services that do not charge or pay interest. Their solution is to offer various profit-sharing-related products whereby depositors share in the risk of the bank s lending. Depositors earn a return (instead of interest) Borrowers repay loans based on the profits generated from the project on which the loan is lent.

37 37 6. Islamic banking

38 38 6. Islamic banking

39 39 6. Islamic banking

40 40 6. Islamic banking

41 41 6. Islamic banking

42 6. Islamic banking 42 Total Islamic finance assets of commercial banks rose 17% between 2009 and 2013, hitting $778 billion. Of that, Gulf Cooperation Council (GCC) countries account for around $517 billion, ASEAN countries for $160 billion and South Asia for $23 billion; with the rest of the world (especially Turkey) making up the remaining $78 billion.

43 43 6. Islamic banking

44 44 6. Islamic banking

45 45 6. Islamic banking