Corporate Banking Overview
Product Needs
A customer with revenues of, say, USD 10 million generally needs a modest range of fairly standard products compared to a business with a turnover of USD 1 billion.
product risks
Appetite is set in terms of ______ parameters such as maximum loan-to-value (LTV) ratios for real estate loans. Some ______ may be considered so risky that they will not be offered at all - risk appetite is zero.
Individuals and small businesses customer management
Arm's length, reactive, and automated, including online, where possible
operations
Bank systems must be capable of providing a range of products and processing large volumes of transactions for different customers.
industry
Banking requirements vary quite considerably by
trading income
Banks that buy and sell foreign exchange earn a small margin on each deal where the transaction is covered at the time. If dealers expect rates to move and wait to cover the transaction, they may make a larger margin (or incur a loss).
Industry, geographical coverage, and business activities
Besides Revenue what are the other factors that influence customer type?
Capital Raising
Corporate advisory functions in investment banks provide an ongoing dialogue with customers regarding their overall capital structure. Investment banks can arrange for the underwriting and distribution of stock and bond issues when corporates want to raise additional funds from investors.
corporate customers
Corporate banking businesses provide banking services to ________________
1) Sources of Income 2) Size & Volume of Transactions 3) Variability in Income
Corporate customers are different from individual or retail customers for what reasons?
Limited liability companies
Corporate customers are most likely to exhibit which type of business structure?
Corporate customer management
Customized, with a relationship manager (RM) assigned to each corporate
corporates risk assessment
Detailed risk assessment supported by a range of risk measurement tools, but with decisions made using individual or collective judgment
1)deposit services 2) credit and finance 3) risk management & hedging
Different services required by corporates than individuals
Branch networks
Each _____ is legally part of the same company. They are formed as operations set up in multiple locations, both nationally and internationally.
subsidiaries
Each _______ is a separate legal entity that is owned by one or more companies within the group. They are created to manage separate business activities or locations.
interest income, fees & charges, trading income
How does corporate banking generate income? (3 ways)
operations units
If the ______________ responsible for product delivery are not part of the corporate banking business unit, corporate banking has no control over delivery quality or timeliness.
Shareholders' liability is limited to the nominal value of the shares they own.
In a corporation, what is the extent is shareholders liability limited?
1) Capital Raising 2)Trading 3) Mergers and Acquisitions
Investment banking involves what 3 specialized services
concentration risks
Large credit facilities to one or a small number of customers or overexposure to particular products, industries, or countries can lead to disproportionate losses.
Risk management and hedging
Many corporates face significant foreign exchange (FX) and interest rate risks that can be mitigated through use of forwards or other derivatives contracts.
Individuals and small businesses products
Narrow range of products that are standardized and come with fixed pricing
are not responsible for transactional processing
Product delivery can cause issues for corporate banking units because relationship managers:
medium-sized corporations
Revenue for _______________ is relatively modest, up to USD 50 million. These firms tend to be largely single-sector businesses with operations in one or a small number of national markets. Their product needs tend to be fairly straightforward.
Variability in income
Sales income can fluctuate wildly for corporates, although expenses such as salaries represent more constant outgoings.
A relationship manager who handles multinational corporations (MNCs)
Sam Martinez heads up corporate banking for a large, full-service bank. Sam must decide which relationship manager will be responsible for a new client, Lightning Inc. Lightning is a global manufacturer of heavy earth-moving equipment with manufacturing operations in Asia and Canada. Lightning sells its products to mining companies around the world and has average annual revenue of USD 5.5 billion. To whom is Lightning most likely to be allocated?
sales revenue is low
Small businesses are large in number, but _____________
operational responsibility
Staff in operations areas are responsible for ensuring customer transactions are processed efficiently (correctly, on time, and at the agreed price). Errors or delays can result in customer dissatisfaction.
Individuals and small businesses risk assessment
Standardized processes with automated risk assessment and decision-making
The larger and/or riskier
The ______________a bank's loan book and contingent liabilities, the higher the capital required.
Relationship Management Resourcing
The amount of time that a relationship manager can allocate to meeting a customer's needs must be proportional to the expected earnings from that relationship.
The rate charged to customers changes The bank's cost of funds changes
The cost of funds is deducted to determine NII, but this can change - positively or negatively - if one or both of what occur:
Risk Assessment
The credit process must be capable of dealing with both fairly simple and complex credit requests depending on the size and complexity of the customer or customer group.
Deposit services
The size and value of corporate transactions means that corporate credit balances are much larger than those for individuals. Also, for larger corporates with multiple accounts, cash management services are provided to improve liquidity management and returns on surplus cash.
associates
These are companies that are less than majority owned.
Holding Companies
These are legal entities that own shares in other group companies. For example, they may combine entities in one business line or geography
portfolio risk
This will usually be set in terms of maximum value or the percentage of the overall corporate portfolio in relation to a particular industry and/or product.
Credit and finance
To support short- or long-term business needs, corporates require a wider range of credit/loan products, such as accounts receivable and asset finance.
True
True or False? Corporate banking businesses operate a relationship management model.
False this is more likely to be provided by the investment banking unit.
True or false the corporate banking unit will provide m&a and capital raising services?
false
True or false: that a bank's potential gross earnings from small businesses are high compared to larger corporates.
true
True or false?The corporate banking unit will provide working capital and asset financing
Sources of income for corporate customers
Unlike individuals, corporates seek to make a profit primarily from providing goods and/or services to their customers.
1) increased credit losses 2) operational problems 3) compliance failure 4) competition
What are four events that could have an adverse impact on strategy execution
Sole proprietorships, partnerships, corporations, and Limited Liability Companies (LLCs)
What are the four main types of legal statuses for businesses?
1) relationship management 2) risk management and other support 3) product delivery 4) external costs
What are the main costs of corporate banking? (4)
Medium-sized corporations, large corporations, multinational corporations (MNCs)
What are the three broad customer segments for corporate banking?
LLCs
What does sole proprietors usually grow into?
An estimate of the amount of loss when a customer defaults, less the estimated value of mitigation
What is a provision for loan losses?
Business Structure
What is correlated with revenue and has an impact on customer type?
Revenue
What is the main factor that influences customer type?
There tends to be fewer boundary issues than between corporate and retail banking units.
What regarding corporate and investment banking business units in a full-service bank is true?
Bank C
Which of the following banks has the most favorable cost/income ratio? Bank A: 60% Bank B: 50% Bank C: 40%
Size & Volume of Transactions
While sales volumes and values for corporates vary, they are larger than those for individuals who rely primarily on salaried income.
The corporation itself, rather than the shareholders
Who is is legally liable for the actions of the business and the debts it incurs in a corporation?
Limited Liability Company (LLC)
Who is the vast majority of corp banking customers?
corporates products
Wide range of products with varying degrees of customization and negotiable pricing
12%
You have the following information for a corporate banking business: Operating income (revenues - costs) = USD 120 million Capital = USD 500 million Cost of capital = USD 50 million Expected loss = USD 10 million What is the bank's risk-adjusted return on capital (in percentage terms)?
Capital costs
are the costs of holding that capital - interest payments on eligible debt and dividend payments to equity shareholders.
Multinational Corporations (MNCs)
are customers with multi-billion dollar revenues and a global reach. They require a wide range of banking services in multiple locations for a large number of legal entities.
Special purpose vehicles (spvs)
are entities set up for a specific purpose, for example, owning a single ship within a shipping group.
Joint ventures (JV)
are entities set up to deliver a particular project or service with one or more third parties.
large corporations
are generally defined as those with revenues up to USD 1 billion. Their business needs are more wide ranging than mid-sized corporates, particularly where they have expanded internationally.
Risk-adjusted returns
are more forward-looking and take into account the potential risks (expected loss) across a bank's portfolio and the cost of capital required to support those risks.
a relationship management approach
corporate banking businesses adopt ____________ because the earnings potential warrants the additional costs involved.
Risk management and other support costs
costs associated with centralized teams that manage the credit process, post-approval documentation requirements, and ongoing monitoring and reporting at a customer and portfolio level.
Operational problems
delays in strategic investments could mean that products promised to customers cannot be delivered on time.
Compliance failure
failure to comply with regulatory requirements could result in fines or even the loss of a banking license, which would affect operations and lead to reputational damage.
1) customer types 2)products 3) geographical reach 4) competitive stance
four ways to define the bank's target market?
Segmenting by customer type
helps banks to keep costs down by, for example, enabling relationship managers to look after more customers where the earnings potential is lower.
An LLC
hybrid business structure that combines the limited liability features of a corporation with the tax efficiencies (pass-through taxation) and operational flexibility of a partnership. This is in contrast to a corporation, where the company itself pays corporate taxes on any income the corporation derives.
Mergers and acquisitions (M&A)
include the provision of advice to corporates seeking to acquire other companies, defend hostile takeovers, or manage an agreed merger. Capital raising may also be provided to fund a takeover or merger, once agreed.
A sole proprietorship (or sole trader)
is a business owned by an individual and where there is no legal distinction between the personal assets and liabilities of the individual operating the business and those of the business.
Partnership
is a business where two or more individuals share ownership.
provision for loan losses or provision for credit losses
is an estimate of the amount of loss, less the estimated value of mitigation (such as a property), when a customer defaults.
Expected Loss (EL)
is an estimate of the average level of credit losses for a specified time period. For any loan or portfolio, the higher the level of risk, the higher the _______
Probability of default (PD)
is an estimate of the likelihood of default
Loss given default (LGD)
is an estimate of the proportion of EAD that will be lost in the event of default
Risk appetite
is an expression of the degree of risk that a bank is prepared to accept in order to meet its strategic goals.
Corporation
is an independent legal entity owned by its shareholders, but legally separated from its owners.
Interest income
is earned on assets such as loans and revolving credit facilities
Net interest income (NII)
is the difference between a bank's interest income and its interest expense.
Exposure at default (EAD)
is the estimated amount that will be owed at the point of default
Competition
new competitors, including nonbanks, may enter the market and offer new or more competitive products.
Fees
on non-funded products are usually a percentage of face value, so income is a function of value, the fee, and time. For instance, a USD 1 million guarantee issued for two years at 0.5% annually will yield USD 10,000 for a bank.
Trading Operations
provide a secondary market for debt and equity securities. These banks also usually provide research services advising customers on the purchase or sale of particular securities. In addition to offering trading services to their customers, investment banks may also trade for their own account.
Pass-through taxation or flow-through
refers to how the individual owners of a business pay taxes on income derived from that business as part of their personal income tax returns. Thus reducing the effects of double taxation.
a product-driven/automated approach
retail banking adopts ___________________ to minimize the costs of delivering high-volume, low-value banking products and services.
relationship management costs
staff, premises, travel, and other costs incurred when meeting with customers.
product delivery
the actual processing of customer transactions
Increased credit losses
the unexpected failure of one or more customers could result in significant losses.
external costs
these include the costs for using third-party providers such as ratings agencies, valuers, and lawyers.
product delivery costs
these include the full costs for operational units owned by the corporate banking business, as well as transfer charges for transactional processing provided by other units within a bank.
True
true or false: earnings potential strongly influences how banks organize themselves
False
true or false? Corporate banking services are provided by full-service banks only.
False
true or false? Small businesses are always managed in corporate banking units.
1) concentration risk 2) product risks 3) portfolio risks
what are the 3 risks management must set risk appetite for?
Small businesses
what exhibit some of the characteristics of corporate customers - but volumes can be small and banking needs modest, which means that personal and business finances are often intertwined.
will the business be a market leader, innovator, or simply sit as "one of the pack"?
what target market questions does one ask regarding competitive stance?
are all customer segments to be serviced, or just some?
what target market questions does one ask regarding customer types?
is the target market national, regional, or global?
what target market questions does one ask regarding geographical reach
should a wide range of products be offered or just a few products?
what target market questions does one ask regarding products