CIB, Corporate and Investment Banking (CIB) is often confused with market activities. However, these are only the most visible part of a wider and more diversified field of activity. This is where the bank’s business relations are woven with its customers, who turn to it to help them define and implement the financing, investment or risk coverage solutions they need.
The commercial bank and the investment bank create for their clients financing solutions and financial products adapted to their needs. We are in the field of “made to measure”. Compared to the products thus created, the markets can be seen in two ways:
- On the one hand, they constitute the “pool” of gross financial products, which financial engineering will assemble, adding the bank’s own resources to build a finished product.
- On the other hand they also serve as an outlet for the marketing of these same products.
At the same time, the bank’s customers have direct access to the room, via the “sales” for their daily investment or hedging operations. In the end, the activity of the trading room is based to a large extent on customer requests, although of course the bank maintains, through trading for own account, a presence in the markets and risk taking on its own. capital.
There are as many ways to present the CIB as there are banks, each highlighting the products and know-how that sets it apart from others. To keep it simple, we can distinguish between the financing of “off balance”, which we call investment bank and the financing of “bottom of the balance sheet”, which we call commercial bank.
Corporate banking or coverage is based on a solid commercial relationship with the bank’s clientele and an in-depth knowledge of the business sectors and the situation of each client in its sector.
The core business is to offer each client bank financing solutions tailored to their needs. These can be direct loans from the bank or syndicated loans (the bank partners with other banks to raise the necessary funds) for amounts that the bank can not assume alone. The structured finance is to issue different qualities debt: Senior debt repaid priority, and subordinated debt in order to adjust the remuneration of the lender’s risk.
Loans are often backed by future cash flows from the asset being financed, which offers more favorable terms. We are talking of project finance or asset finance . The teams are usually organized by economic sector: energy, telecommunications, transport, etc.
Trade finance or trade finance includes a legal guarantee given to the customer, on the basis of the contractual documents of the transaction, for its import-export transactions. That’s why we talk about documentary credit .
For all these transactions, corporate banking relies on market activities to hedge the transaction appropriately against interest rate and currency risks.
At the same time, thanks to the “intimate” knowledge he has of his client, the banker is able to offer him a range of solutions in terms of cash and liquidity management, investment and investment, etc.
Investment banking (corporate finance)
We are talking here about transactions dealing with clients’ offspring.
First, there is Mergers and Acquisitions (M & A, Merger and Acquisition). The goal for the bank is to identify potential targets, obtain the client’s mandate to carry out the operation, and then lead it. This includes target assessment, negotiation, due diligence, setting up funding if necessary.
Corporate finance then includes all market financing transactions . The banker advises his client on the most appropriate financing solution for his case and designs the characteristics of the product to be issued.
Equity financing or ECM (Equity Capital Market) regarding the IPOs transactions (IPO, Initial Public Offering) and capital increases.
Bond financing or DCM (Debt Capital Market) concerns debt, convertible or commercial paper issues.
Corporate finance is also involved in securitization of receivables.
The financial products thus designed will be placed by the trading room with investors. The information can also flow in the opposite direction: the room is aware of a request from investors for a certain type of paper and corporate finance teams will then try to convince a client to issue this type of paper. particular title. This is called the ” reverse inquiry “.
Structuring and the primary market
In banks, these activities are quite often attached to market activities, but as they work in synergy with corporate finance they have their place here.
The structure is to create financial products to benefit from the return associated with an underlying while ensuring full or partial capital protection. A structured product therefore typically includes a yield-generating bond component and an optional component that provides capital protection. There is an infinity of possible montages, calibrated to satisfy either a category of emitters or a category of investors.
The origination is to develop a program of marketable securities in relation to the issuer and the market authorities and to produce the necessary documentation. This activity is conducted by an arranger who oversees the operation.
The syndication is the next step of the program: it is to find counterparties ready to participate in the offering of securities in the primary market. The lead bank is a group of associated banks in the operation around it, so as to be sure to reach as many potential investors as possible.
Origination and syndication activities are better known in the context of financing with marketable securities, but are also present in the field of bank loans as discussed above.
Finally, the investment is for union members to convince investors to buy newly issued securities. The contract with the issuer may include a clause whereby the syndicate members or the arranger agree to purchase for their own account securities that could not have been placed. We are talking about underwriting .