Session 2 - The different businesses of CIB

Question 1

Which are the areas of CIB?

Answer 1

The Business Areas that potentially qualify CIB are:
* Investment Banking (or “Pure” Investment Banking or Capital Market)
* Corporate Finance
* Private Equity (or, the old British name “Merchant Banking”)
* Structured Finance
* Asset Management (or, wealth management)
* Risk Management (or, corporate risk management)
* Corporate Lending (or, simply, Lending)

Question 2

What consideration we can have about Corporate Lending?

Answer 2

The corporate lending is more than a business area,
but is a support to all the other ones

Question 3

What is Pure Investment Banking or Capital Markets?

Pure Investment Banking

Answer 3

Support to customers to raise money in the financial markets by issuing securities and trading securities

Question 4

What are the main areas of Investment Banking and how are they divided?

Pure Investment Banking

Answer 4

• Primary markets
• Secondary markets
  They are divided in equities, bonds, and derivatives

Question 5

What is primary market activity? What are the phases/jobs?

Pure Investment Banking

Answer 5

Advisory and support for the first issuance through IPOs or private placements.
There are 4 phases:
- Origination
- Advisory and arranging
- Underwriting
- Placement and selling

Question 6

What is secondary market activity? What are the phases/jobs?

Pure Investment Banking

Answer 6

Secondary market activity is based on 3 different jobs:
- brokerage
- dealing
- market making (with or without specialist clause)

Question 7

Has primary market activity effects on regulatory capital? On what is it based? And what about secondary market activity?

Pure Investment Banking

Answer 7

Primary market: no effects on regulatory activity and wholly based on fees
Secondary market: impact on regulatory capital usage only for what concerns dealing activities (and specialist case, if necessary). It is based on fees and capital gains)

Question 8

What is Corporate Finance?

Corporate Finance

Answer 8

Very huge area that covers all the services devoted to manage (and to optimize) the liability side of customers. Strongly liked with services to allow customers to implement strategies for growth, acquisitions, internazionalization, restructuring, turnaround, and privatization.

Question 9

What are the phases of Corporate Finance?

Corporate Finance

Answer 9

• orgination
• advisory
• arranging
• fundraising

Question 10

Traditional split for Corporate Finance

Corporate Finance

Answer 10

• Mergers & Acquisitions (M&A)
• Corporate restructuring
• Pure Advisory

Question 11

Most common deals in M&A

Corporate Finance

Answer 11

• Acquisitions
• Mergers
• Spin-offs
• Break-ups
• Joint ventures
• Carve-outs

Question 12

M&A business is driven by what?

Corporate Finance

Answer 12

Fee driven. Driven by big privatization processes, consolidation of banking systems, and international expansion of corporations

Question 13

What is Corporate Restructuring?

Corporate Finance

Answer 13

Corporate Restructuring covers the services devoted to enhance the restructuring of companies that are in a state of distress, which can be financial and/or operational

Question 14

How can we classify corporate restructuring deals?

Corporate Finance

Answer 14

• the nature of the intervention: asset side deals (asset restructuring) or liability side deals (liability restructuring)
• the stage of the crisis: in-court processes (bankruptcy, etc.) or out-of-court (before application of insolvency law procedures, like private negotiations)

Question 15

What is Pure advisory? Who does it? What are the services?

Corporate Finance

Answer 15

Pure Advisory is tout court a provider of consultancy, i.e., without providing other M&A or corporate restructuring services. This stand alone activity is developed by first-class banks whose distinguished advisory activity can be considered a tradable service. Services are: company and project valuation, tax planning, international legal advisory.

Question 16

What is Private Equity? And how can it be managed?

Private Equity

Answer 16

Very specific area based on the financing of a customer providing equity capital.
Can be managed directly by the bank (usage of regulatory capital) or by a dedicated vehicle like a closed-end fund (no usage of regulatory capital).

Question 17

How can Private Equity be classified?

Private Equity

Answer 17

• amount of share capital acquired: minority and majority investors (with hands-off and hands-on style)
• investment stage: seed financing and start up, early-growth financing, expansion financing, replacement financing, distress financing

Question 18

What is Structured Finance? How are SF deal named and why?

Structured Finance

Answer 18

Covers deals based on three specific features:
- the presence of an asset generating cash flow
- the use of a SPV to isolate the asset
- the cash flows that are devoted (through a contract) to repay the debt

Named asset-based deals or self-financing deals as the asset is able to repay the financing with its own cash flows

Question 19

Phases of SF deals and do they use regulatory capital?

Structured Finance

Answer 19

• Origination
• Advisory
• Fund raising
• Financing
  All with the exception of financing, don’t use reg capital and generate economic impact through fees

Question 20

Typical delas of SF

Structured Finance

Answer 20

• Securitization: asset is represented by real estate, mortgages, etc.
• Project Financing: asset is represented by large projects and infrastructures whose size cannot be managed by corporates
• Leveraged buy out (LBO): the asset is the target company to be bought

Question 21

What is Asset Management? How can it be divided?

Asset Management

Answer 21

Covers all the activities devoted to manage the wealth of customers (i.e., to allocate it, to protect it and to make it grow).
It can be divided in financial asset management and management of other assets (real estate, arts, …)

Question 22

What are the technicalities of Asset Management?

Asset Management

Answer 22

• Asset allocation capabilities
• Asset specific knowledge (for real estate, for private
  equity, etc…)
• Taxation and legal expertise (managing holdings and
  trusts, managing tax arbitrage, etc…)
• Strong insurance know-how
• Country-specific knowledge

Question 23

What is Risk Management? How can it be classified?

Risk Management

Answer 23

Covers all the activities involved with and devoted to the management of the different risks of customers.
By nature, risks can be classified in:
* Financial risks: like price, interest, exchange rate risks. Represent the volatility of the underlying phenomena and can generate both positive and negative economic results
* Industrial and pure risks: like death, damage. Can generate only negative economic results

Question 24

On what are Risk Management services based?

Risk Management

Answer 24

• Internal matching of risks: typical approach adopted for financial risk
• Insurance services (like insurance contracts): contracts are more effective for industrial risk
• Financial services (like financial derivative contracts): more effective for financial risks

Question 25

What is Corporate Lending?

Corporate Lending

Answer 25

It involves the use of money of the bank both to finance customers and to sustain the development of many CIB transactions (like corporate finance and structured finance)

Question 26

Impact of Corporate Lending on banking economics

Corporate Lending

Answer 26

Very complex:
- generates fees (for arranging the deals)
- interest margin
- use of regulatory capital

Question 27

How can Corporate Lending be carried out?

Corporate Lending

Answer 27

• through a stand-alone approach
• through a syndication strategy

Question 28

How can Corporate Lending products be classified?

Corporate Lending

Answer 28

Both by loan features and the use of loan proceeds
* Trade and export financing
* Commercial loans (for accounting receivables, inventory and working capital management)
* Mortgages
* Leasing
* Corporate loans (for dividends, acquisitions, IPOs, etc.)
* Hybrid and mezzanine financing

Very often, investment banks create specific groups that manage loans for specific industries (i.e., shipping financing, energy financing, transportation financing, etc…)