馃攳
2. Investment Banks vs Commercial Banks - Top Differences you Must know - YouTube
Channel: WallStreetMojo
[10]
hello friends welcome to this
investment-banking tutorial from wallstreetmojo
[15]
in this short introductory program on investment banking overview
[20]
you will learn about what are the key
roles and responsibilities of different
[24]
functions within an investment bank say
for example what is research what is
[29]
sales and trading division how do banks actually help in terms of
[33]
raising capital for various companies
what are these jargons all about what is
[38]
underwriting what is market making and let's say why investment banking M&A
[43]
activities are the core and heart
and soul of investment banking division
[47]
and we will also try to answer questions
regarding what is restructuring and
[52]
reorganization and how banks actually
help in terms of doing that so as you
[58]
may have understood that you know I was
referring investment banks and banks as
[62]
as one term now these two things are
kind of very confused lot our reason
[68]
being that you know commercial banks
have different work altogether as well
[71]
as you know when we talk about
Investment Banking they are kind of very
[74]
different from each other so the first
thing that let us kind of understand is
[79]
what is a commercial bank and how a
commercial bank differs from investment
[85]
bank let us now look at what is a
commercial bank now commercial banks are
[93]
in fact referred to sometimes as retail
banks okay and an example of a
[100]
commercial bank or a retail bank could
be something like Barclays JPMorgan
[107]
Chase Bank then we can also include HSBC and there would be whole list of you
[117]
know commercial banks but the primary
question here is that what is a
[122]
commercial bank and what is their
responsibilities how do they earn money
[126]
so let me put it this way in a very very
crude way let's assume that this is a
[131]
commercial bank and you know there are two different set
[135]
of parties which are involved think of
you and me you know when we have excess
[142]
cash you know we kind of deposit that
money in in the bank so we are
[146]
essentially depositors right a bank is a
place where they collect money from
[151]
various depositors so depositors can be
in the form of individuals or they can
[157]
be corporates as well or business guys
so essentially what we are saying is
[162]
that the bank actually collects dollars
from these depositors so what does
[168]
depositors get in return one is that the
money which has been deposited is
[174]
safe and second what they earn is
something called a interest rate so
[179]
let's call this as interest on deposit
so let's say if you have deposited
[184]
$100 and the interest rate is 5% the bank at the end of one
[190]
year will pay you not only $100 which is your initial amount but in your
[195]
account you'll also see a $5 which is corresponding to the interest
[199]
payment so you'll have $105 at the
end of one year if you deposit $100 in
[205]
the bank now this is on one side where
Bank actually sources money
[209]
the second is basically where they
deploy the set of money so think about
[215]
you know loans, loans in the form of you
know home mortgage loans you know they
[223]
could be individuals who would like to
have car loans you know it could be
[227]
personal loans it could be any other
format of loans so this may be with
[233]
respect to the individuals but we may
also see up some parts of loans which
[241]
are given to corporates so what we are
essentially saying is that Bank actually
[246]
collects money from the depositors and
gives them gives to those guys who are
[251]
in need of money so and what do they
charge so what is the benefit of the
[256]
bank here the benefit of the Bank is
that they earn again interest which we
[260]
will call that as let's assume on loans
and now this is their
[266]
interest income and this is their
interest expense so the bank actually
[271]
earns money by ensuring that the
interest on loans that they earn is
[276]
greater than the interest on the
deposits that they give so this is an
[283]
interest income and on the other side
this is an expense so if a bank is able
[290]
to manage this the bank will be
profitable so traditionally the banks
[295]
have been doing this kind of business
where they are giving loans and you know
[299]
this is something like a low-risk kind
of business and it's called as
[304]
commercial or a retail bank so with this
understanding of a commercial bank let
[311]
us now move forward so let us now look
at what is Investment Banking first and
[318]
for most please note that Investment Banking is
[320]
different from traditional or commercial
banking which we have earlier referred
[325]
to so Investment Banking is do not take
you know deposits like the way
[329]
traditional bank does neither do they actually pay our act like a
[334]
guarantee for safekeeping the money of
the depositors so investment banks do
[339]
not do that so let's see what investment
banks actually do so to understand
[344]
Investment Banking better let me give
you an analogy with respect to a
[347]
property broker now who is a property
broker let's assume that on one side
[354]
there are buyers buyers of apartment and
then on the other side there are sellers
[359]
of the apartment so there are buyers as
well as sellers of the apartment now
[364]
obviously they would like to transact
and make this market happen now on one
[369]
side when the buyers who are individual
buyers are seeking these sellers you
[374]
know sometimes or in fact many at times
it becomes very difficult for the buyers
[378]
to do all the due diligence with respect
to the apartment or maybe you know look
[384]
at the financial considerations and
negotiate them so and in addition the
[390]
important thing is even searching is
also a problem for them so what happens
[395]
is that these buyers may actually get in
touch with
[399]
people called property brokers now these
property brokers will do a couple of
[404]
tasks you know they would identify how
many sellers are there in the region you
[408]
know they would communicate and kind of make a checklist on the legalities
[412]
associated with the apartment they will
do the complete due diligence you know
[416]
what are the financial considerations
and they search and depending on the
[420]
requirement of the buyer they would kind
of suggest the properties so a property
[425]
broker is someone in between who is
doing all these tasks now how do these
[430]
property brokers normally make money
this is through Commission's that they
[435]
earn and commissions are primarily on
successful transactions so let's say if
[443]
a buyer has bought a flat from a seller
at $10 million so a certain percentage
[451]
will actually be a part of the property
broker as Commission's or fees so I mean
[458]
this is how a property broker functions
now having understood in very little
[463]
sense how a property broker functions
now think about our investment banker
[468]
I'll call an investment banker as a
financial broker so instead of property
[475]
broker I'm calling this as financial
broker what his job is essentially is to
[480]
make the buyers on one side and the
sellers meet somehow now I'll just
[487]
quickly change the definition of buyers
and sellers in this context because I'm
[491]
talking about Investment Banking here
now think about company okay instead of
[497]
a buyer or seller I am talking about a
company now this company let's say this
[502]
company's name is ABC and they want to
raise funds, raise funds meaning that you
[510]
know they have a requirement of
raising funds because they are going to
[514]
invest in expand largely from a very small city to you know they want to
[519]
have a global presence all together so
for that they require funds so obviously
[525]
there are two approaches to doing that
one is that they can approach a bank and
[530]
second is that they can raise equity from the
[534]
market and we call that as an IPO so
doing an initial public offering you
[540]
know they can raise money from the
markets so let's assume that they don't
[545]
want to go to the bank of for raising
for the funds so the option that they
[551]
are evaluating is through equity
dilution so what they mean is they are
[556]
ready to give a share of their company
to certain investors who would be
[561]
willing to do that why are initial public offering now if
[565]
company ABC may want to kind of go ahead and do this initial public offering they
[570]
will find it really tough because couple
of things would happen there are
[574]
legalities associated with it then if
you talk about you know how to be aware
[579]
of the processes you know they may not
even know that third at what valuations
[585]
you know all these things they may not
be actually equipped to do that so what
[591]
they essentially do is that you know
they contact someone called a investment
[597]
banker and the role of the investment
banker is to do all these tasks,
[603]
check at the legal options you know look
at the processes talk about the valuations
[608]
and what this broker does is that he
identifies all the set of investors for
[614]
this IPO so S would mean investors here
in this case and the investment bankers
[621]
are sophisticated financial brokers in
fact that they are connected with the
[626]
investors and they help these set of
companies raise funds and that they all
[631]
understand the checklist of you know
raising through an IPO so this was a
[636]
small example where you know investors
are on one side and the company is on
[641]
the other side so how do the investment
bankers earn money investment bankers
[647]
earn money by commissions like the way
you know the theory the property brokers
[652]
used to on these guys actually earn
commissions on the amount of funds that
[657]
are raised for this company ABC so this
is how investor banks actually earn
[662]
money so do one of the ways you know
the other set of examples could be
[666]
related to mergers and acquisitions so
let's say there's a company called ABC
[672]
and they want to merge with another
company called DEF now the problem with
[678]
these two set of companies would be that
they may not be equipped enough to
[682]
handle all the regulatory aspects of the
merger as well as come to the
[687]
appropriate calculations in terms of
valuations are prepared for financial
[691]
models so what investment banking firm
does is they come in between and advise
[696]
on the possibilities of the merger why
it should happen what are the possible
[701]
synergies and in fact the key critical
aspects of investment banks is that the
[708]
health largely with respect to
negotiating a price so you know if the
[714]
price is high then you know how to talk
to the clients in order to make the two
[718]
buyers and sellers meet at one point so
the expert negotiators as well so and
[725]
and for that again they charge
Commission so a certain amount of
[731]
Commission 1% 2% just as an example can be understood from the point of view of
[736]
Investment Banking so in an actual think about a property broker and that
[741]
the property brokers role is just to
kind of you know help the buyers and the
[745]
sellers identify and in between property
brokers actually add a lot of value by
[750]
helping the the buyer research as well
as the sellers also to identify the
[757]
buyers so they are adding lot of
value in between so likewise investment
[761]
banking also does the same while the
companies are looking for raising funds
[766]
or you know they're looking at mergers
and acquisition activities so investment
[771]
banks do many other things as well so we
will discuss all of these in our
[775]
following lectures I now hope that you
are able to kind of appreciate the
[781]
difference between what is an investment
bank and what is a commercial bank
Most Recent Videos:
You can go back to the homepage right here: Homepage