Usefulness of the key investment banking products and services to the end customers
The investment banking sector refers to that specific division of banking that deals with the creation of capital in regards to other companies, governments and other entities. Investment banks carry out the underwriting of the debts that has been incurred by the companies. Moreover, the debts incurred by the equity securities for all kinds or categories of corporations are also underwritten by the investment bankers. The other functions carried out by the investment banks are the sale of the securities, facilitation of the mergers and the acquisitions, reorganization and broker trades in regards to both the institutions and the private investors. The primary operations that are carried out by the investment banks are that the investment banks employ the investment bankers for helping the corporations, the government bodies or the other entities that have the particular desire to issue stocks or bonds. The investment banks provides the much required assistance to the financial institutions for the purpose of maximizing the revenues and navigating the regulatory requirements. It must be noted here that the particular method by which the investment banks operate are the initial public offerings that are constituted by the different corporate entities directly from the company. This facilitates the smooth running of the concerned company by the offering of the contract of the initial public offering to the investment bank (Stowell, Meagher and Frazzano 2017).
This particular study aims to focus on the usefulness of the key investment banking products and services to the end customers. Moreover, the contemporary challenges that are faced by this particular sector and the impact of the recent regulatory changes on this sector have been discussed in this particular study.
There are a number of key investment banking products and services that are provided to the end customers. These can be understood from the functions or the services that are provided by the investment banks in the concerned market. these products or services can be listed down as follows:
- Debt and equity offering management – the management of the debt and equity offering is one of the primary functions or the services that are provided by the investment bankers. The role of an investment banker is dynamic and revolves around the providence of advices that are required by the clients in regards to raising the required funds from the market. The major portion of the role includes designing of the instrument, issue pricing, registration of the offer document, issue marketing, refund and allotment (Stowell, Meagher and Frazzano 2017).
- Distribution and placement – The network of an investment banker can be categorized into two parts that are institutional and retail in nature. The institutional investors network consist of the mutual funds, FIIs, domestic, bank and financial institutions, pension funds. The investment bankers operate and function in regards to these monetary components (Stowell, Meagher and Frazzano 2017).
- Advisory services that are corporate in nature – Another primary service offered by the investment bankers are that they offer customized solutions in regards to the financial problem that are faced by their clients. The essential areas where the investment managers provide the financial advice are in regards to the financial structuring. This process refers to the determination of the suitable level of gearing and providing the required advice to the company in regards to the degree of financial leverage or de-leverage that the company should engage in. The role of the investment banker also covers the exploration of the possibilities in regards to the refinancing of the funds that are featured with high costs with alternative cheaper funds (Jeucken and Bouma, 2017).
- Project advisory – The investment bankers share an association with their particular clients from the initial stage of a single project. They provide the assistance to the companies in regards to development of the concept for establishing the idea of the project. The investment banker also carries out the feasibility study in regards to the project (Jeucken and Bouma, 2017).
- Syndication of the loan – Investment bankers make necessary arrangements to tie up the loans on behalf of their clients. The initial step for the achievement of the tie up process is that the particular pattern in which the cash flows into the business of the client have to be analyzed in order to determine the terms of borrowings that can essentially suit the requirements of business in regards to cash flow. The investment bankers also prepare the loan memorandum that is detailed in nature (Jeucken and Bouma, 2017).
- Venture capital – the venture capitalists are the newest category of the investment bankers. The specialty of the venture capitalists was the combination of the risk capital with the management of the selected enterprise so that the launching of the new products and the companies could be carried out with the required degree of innovation (Grullon, Underwood and Weston 2014).
The investment bankers provides these services (Grullon, Underwood and Weston 2014). However, the products that are provided by the investment bankers can be listed down as follows:
- Investment in equity – the equity refers to the degree of ownership in a company that can be necessarily acquired via the contribution of the capital that is required for the purpose of setting up of business. The issuing of the shares to the public or private entities can raise the required capital.
- Investment in mutual funds – the mutual funds are ideal for the investors who would like to invest in a varied pool of investments. It must be noted here that a mutual fund might make the investment only in equities and the debt instruments or a mixture of the two. The investment bankers who invest in the mutual funds carry out such an activity for the purpose of enjoying the benefit of portfolio diversification, professional level management, low cost and tax benefits.
- Trading of the commodities – the particular activity in regards to the trading of the commodities. The trading of the commodities facilitates the diversification of the portfolio, predictability and liquidity of the investments.
- Trading of the currencies – the trading of the currencies facilitates the exchange of the currencies and the subsequent profit has been derived from such differences. The trading of the currencies is a popular investment banking product as it facilitates the essential features like high liquidity, lower costs and round the clock trading
- Derivatives – the derivatives is an instrument that facilitates the derivation of the value in regards to the underlying asset. It must be mentioned here that the derivatives are generally in the form of a contract in which the buyer or the seller is obligated to buy or sell the asset at a specified price on a specified date in the future. The investment banking products are featured with the essential aspects like the hedging against risks, lower costs and leverage
- Fixed income instruments – the fixed income instruments refer to the financial instruments that provide a rate of fixed income to the investor. The payout in regards to the fixed income instruments might be received in the regular intervals or by the end of a stipulated time period. By the time the financial instrument is matured, the principal is repaid to the investor.
- Initial public offering – An initial public offering is another potential instrument banking instrument and proper explanation in regards to the concept has been include in the earlier part of the study. The initial public offering comes with the essential features such as stable stream of income, higher chances of incentives
- Small and Medium Enterprises – the investment in the small and medium enterprises is a required investment that results in the promotion of the small and medium enterprises which are in the dire requirement of the required capital for further investment in business.
Therefore, these are the products and services that have been the essentialities of the investment banking sector. The major investment banks in this particular sector are as follows:
- Citigroup
- Deutsche Bank
- Barclays Investment Bank
- P. Morgan
- Morgan Stanley
- The Goldman Sachs Group
The contemporary challenges that the investment-banking sector has been facing are as follows (Grullon, Underwood and Weston 2014):
- The behavior of business has been driven by regulation – Banks have been fully engaged in the meeting with the requirements of IFRS 9. Moreover, it has been made mandatory by Basel III and the degree of focus on the maintenance of the core liquidity and ratios that are related to leveraging have also been increased. Furthermore, the pressure has been on reduction of the short term funding, holding of the assets that are more liquid in nature and raising the long-term wholesale funding.
- Scarce capital – the implementation of Basel III did lead to an outcome that there has been a fundamental shift in regards to the profitability of the product. This availability of the capital being scarce has resulted in an essential alteration in regards to management of capital.
- Cost pressure – It must be noted here that the investment banks also face significant amount of pressure for the reduction in the cost base at the time when the shackles of regulation has come upon. The experts of the industry have predicted the fact that that a number of five to six investment banks that have the capability to be successful due to the fact that the initiatives in regards to cost may result in the failure of the delivering of the results on the basis of the governance hurdles.
- It is the particular requirement of the banks for the utilization of the customer knowledge for the purpose of not only holding back but growing the customer returns via an effective cross sell. It must be noted here that the particular activity for measuring and cross selling products has become increasingly crucial for a company to maintain a sufficient degree of competition.
- The financial services market in Africa has been estimated to be one of the most receptive FinTech markets on a global basis. This has effectively resulted in the disruption of the entire value chain pertaining to the investment banking sector. it must be further noted here that the block chain is observed as the changing face of the cross border lending activity.
- Lower quality of infrastructure – the infrastructure of the banks including both the technical and the physical infrastructure leads to the required restriction in regards to the growth and movement in the present digital age. An inflexible infrastructure is the primary reason behind the challenges faced by the investment banking sector.
- The cost of compliance with the ongoing regulations that have been established, have been high. Moreover, this particular cost continues to rise in the recent times resulting on the reviewing of the existing business model
- The financial markets have been facing the necessary disruption due to a number of facts like the particular component of foreign exchange reshaping the entire investment banking sector.
- Lenders of the market place – the securitization of the debts that are incurred by the consumers is faced with the particular challenge in regards to raising the required funds in order to match the lending activities. This particularly carried out by 90% of the fees acquired from the new loans and the rest from the institutional investors. Moreover, it must be noted here that the pressure by the regulators for the purpose of maintaining the estimated standards, have been high on the investment banking sector. The regulators generate high amount of pressure in regards to greater transparency further making the indication of the disclosures.
- Cyber Security – there have been numerous instances of digital theft in regards to the investment banking sector in the recent times. Therefore, this particular banking sector is exposed to the risks of cyber security
- A number of global regulators have also mandated the adherence to the standard in regards to the BCBS239. Moreover, this adherence has resulted in the increase in the investment cost.
The impact of the regulatory changes on this sector is as follows (Bouma, Jeucken and Klinkers 2017):
- Decrease in the profitability of the customers and increased rate of competition – the degree of competition in the investment banking sector has increased rapidly resulting in the banks continuing to operate in an environment where the aspect of profitability of the customer and the measurement of capital has been primarily focused upon. This will result in the survival of the most efficient companies only.
- The profitability will be driven by volume, rather than being driven by margin – the operations that are essentially driven by volume will very well take over the profitability that has been derived by the margin driven products.
- The emphasis on the cross selling of products – huge focus will be put upon the particular activity in regards to cross selling of products carried out by the financial institutions. This will be done by the financial institutions for the purpose of maximizing the capital returns
- Political uncertainty – the political uncertainty that the world is going through in the recent times has resulted in the regulatory bodies becoming stricter in controlling the operations in regards to the different financial instruments market. The global regulatory standards have not been harmonized till the recent times which have resulted in the risks, inefficiencies and the opportunities for the purpose of arbitraging jurisdictions.
- Governance, conduct and culture – Despite the fact that an increased degree of attention is provided by the regulators and the external stakeholders for the purpose of strengthening the structure of governance and risk control framework across the industry, instances in regards to misconduct and other related components has to be continuously reported. Moreover, the cost for maintaining the regulatory standards in the investment banks has been high.
- Digital transformation – the regulatory standards that have been established in the recent times have resulted in the much needed digital transformation that will have to be adopted by the investment banks. The utilization of the technology for the purpose of driving down the costs or improving the particular process of analysis for enabling better decision making and improvement in the accuracy. Moreover, the process of digital transformation has to be integrated with the particular business model of the banks which forms another risk in hand.
- IFRS 9 – the current financial instruments standard has become effective from the financial year of January 2018. This has impacted the investment banking sector hugely as the upgrades to the systems have to be devised for the purpose of meeting up to the changes which have now become mandatory to follow.
References
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