investment banking - I (/w” 0 Through investment...

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Unformatted text preview: I (/w” 0 Through investment banking, an institution generates funds in two different ways. They may draw on public funds through the capital market by selling stock in their company, and they may also seek out venture capital or private eguity in exchange for a stake in their company. Banking - Investment banking is an important pillar of the financial sector and particularly the NBFC regime in Pakistan . It took its roots in 1987. however, its still at a nascent stage. Today, investment banks in Pakistan are providing a full array of capital market products and advisory services to their clients. >Understanding Investments >The Importance of Studying Investments The industry is comprised of a variety of companies which are actively and efficiently serving institutional, corporate, government as well as individual clients. Subsequent to the transfer of regulatory authority over investment banks from SBP to SECP in December 2002, and promulgation of the NBFC Rules, the SECP has undertaken a two pronged approach. >The nature of Investments EVOLUTION OF WORD “BANK” 1ST QPINIQN 4:7,”, // “’h's— W >Understanding the Investment Decision Process >lmportant Consideration in the Investment . . 0 Word “Bank” is derived from the word “Banque” or "Bancus" which Decrsron means a bench. 0 Jews used to transact the business of money exchan e on benches in the market place &when businesses failed, "Bancus was destroyed by the people. 2ND OPINION >The structure and Responsibilities of Treasury Markets I Word "Bank" is derived from the German word “Bank” which means joint stock fund. EARLY GROWTH 0 Babylonians developed the banking system as early as 2.000 B.C and their temples were used as “Banks” coz ofthe prevalent respect 81 confidence. King Hammurabi laid down rules 81 regulations for banking operations 0 In 687 B.C Gyges (Croesus), King of Lydia invented gold and silver ingots which were used as money. - Earliest known public bank is called as “Bank of Venice" which was established in 1157 AD Then various other banks during 1336Uto 1349 were established in ltaly MODERN BANKING Modern banking originated in the 14'“ Century in Barcelona. Banking in its modern form started from Britain when King Edward -II of Great Britain established the office of Royal Exchanger for changing foreign money at the profit for the benefit of the Crown Later on this business was taken over by goldsmiths 81 they introduced strong safes to fulfill their requirement. They issued notes or receipts to their depositors in respect of the cash orarticles left with them and they were called as “Goldsmith Notes". 53"" - Lateron check currency was introduced and this proved to be very suitable. ' In 1946, the Labor Government nationalized the bank ofEngland and transferred the existing stock to the nominee of the British treasury and thus Governors, Deputy Governors and Directors were appointed. I In 1955, British Bank made a departure by undertaking hire-purchase finance for companies such as buying industrial plants and machinery but interest on it was very high. In 1401, German public bank was formed comprising the operations of discounting ,deposit and transferring of money. In 1407, Bank ofGenoa was formed. In 1587. a state bank under the name of Banco di Rialto was formed in Genoa. in 1609, Bank ofAmsterdam was also formed. Finally in 1690, Bank ofHamburg came into existence with the business of accepting deposits of fine silveror foreign moneys and to run accounts on these deposits. 41"- MN . Leftism“ ankers formed mm a corpoWoWha/s Bank of England. BOE lent r: 1,200,000 at 8% interest to William -lll and he allowed the right to issue Notes Payable to bearer on demand up to the amount of this loan. By the year 1700. BOE was not only issuing notes but also conducting accounts for customers. BOE was the only Joint stock company which was given the monopoly ofissuing Bank Notes. An act passed in 1708, the privilege of issuing notes was withdrawn from Joint Stock Co and confound to private banks with more than six partners. What is Banking? TYPES OF BANKS ' CENTRAL BANKS - COMMERCIAL BANKS - SAVING BANKS - MERCHANT BANKS - MORTGAGE BANKS ' CONSUMER BANKS - INVESTMENT BANKS ' DEVELOPMENT BANKS - COOPERATIVE BANKS - EXIMP BANKS ' CREDIT UNIONS o BROKERAGE FIRMS FUNCTIONS OF MODERN BANK 'I'Provide inexpensive media of exchange '1'Bank keeps deposits of public €°Bank finances trade and industry '2'Banks acts as reservoir of funds '2‘ Issue notes and controls money supply WHAT DO BANK OFFERS/DO? ‘r Direct Deposits Of Paxghecks > Afignk find That Can Be Used In ATM's ‘r A S redit Lard Linked To Your Bank Account That Includes A Line Of Credit To Use In An Emergency ’2 (lvgrd raft Privileges To Insure That All The Checks You Write Will Be Paid. 0 A bank is a commercial or state institution that provides financial services , including issuing money in various forms, receiving gem of money, lendin money and processing transactions and the creating of cre it. ME 0 A Person or an Organization doing banking business i.e accepting deposits and granting loans to individuals and to corporate houses. ELLSIQMES 0 A Person who has some sort of account either currentfixed or saving with the banker. ~2~Helps in development of agriculture and industry ~Z'Acts as the custodian customers valuables ‘2~Bank discount bills 01~Purchase and Sell Stock Exchange securities '1‘Act as underwriters for raising capital or loan by Govt '2'Collects and make payments of BOE on behalfof its Customers. WHAT DO BANK OFFERS/DO? ' Acmtingfiegosits fr_qm public/others (Deposits) - ending money to public (Loans) O Transferring moneyjrom o_n_e_plac_e to another (Remittances) 0 Acting as trustee; f 0 K e in valual in 0 government busingfi Commercial Banks - Elements of Commercial Bank - Primary and Secondary Functions of Commercial Banks SERVICES THAT A BANK OFFERS ” - DEPOSITS - CURRENTACCOUNTS - SAVING ACCOUNTS - CORPORATEACCOUNT - COMMERCIALACCOUNT - ESCROWACCOUNT - VAULT - ATMS - ASSURANCE - LOANS l /'* (Inmlfl’iflh Bitmap >Commercial banks receive deposits from =-==-—- 75 the general public which are repayable on )‘vThey provide short term finances to trade, commerce & industry. ‘r Fees are generally highest, and service is often impersonal. E.g. MCB, HBL, UBL, NIB, ABL, FBL, BAFL etc Investment Banks SAVING BANKS \r’ Saving banks are usually owned by depositors or creditors whose dividends are paid as interest on their accounts. ‘rTheir Fee Is Lower Than Commercial Banks. Depositors Should Inform Them Before Withdrawing From Checking 0 Saving banks deposits are paid to depositors only on the submission of: - Pass book - Certificate of deposit >Few saving banks operating in Pakistan are: - National saving organization - National saving banks ‘ - Post office saving banks MORTGAGE BANKS 0 Mainly Deal in Loans for the acquisition or construction of real estate against the security of mortgages. ' They also deal in Loan association and farm loan association. _ INVESTMENT BANKS ' Assists business houses and the Govt.al bodies to raise money through the sale of stocks and bonds for long term purposes. 0 Perform usual function of raising deposits of idle money from public. I E.g. IDBP, PLHC, SPIAICL, etc MERCHANT BANKS 0 Finance domestic and international trade in UK ' These trades were financed by BOB and merchant banks charged commission for their services. I Gradually they entered into other banks activities also. CONSUMER BANKS I Provide finances for purchasing consumption goods for the use of borrowers. - Consumer finance companies, sales finance companies and credit unions are some popular forms of consumer banks. 0 E.g. MCB Bank, HBL, NIB Bank, FBL, SCB, ABL, UBL, etc. DEVELOPMENT BANKS 0 Provide long term development finances to the trade, commerce and industry. | Few development banks in Pakistan are: - Agriculture Development Bank of Pakistan - Industrial Development Bank of Pakistan etc. w 0 Provide finance for the promotion of trade, commerce and industry, - Credit Unions are not for profit F1. 0 They are typically formed by the employees of a company, labor union, or a religious group and operated as a cooperative. - They offer a full range of Financial services 0 Pay higher rates on deposits and charges lower rates on loans than commercial banks. FUNCTIONS OF A CENTRAL BANK I ISSUING NOTES 0 GOVERNMENT'S BANKER Gives Loan to Govt without limitation ofamount Collects and pays money on behalf of Govt Manages Public debts Act as Financial Adviser to the Govt 0 BANKER'S BANK ‘ Provide short term credit to Commercial Banks by rediscounting first class bills and other securities. 0 MANAGEMENT OF GOLD STANDARD - Res onsible for the Gold standard to control the stability of exc ange Rate, - Offer limited Banking services. ' They offer low cost or free savings and checking coordinated with investing. 0 They require large minimum balances. - They may have private insurance but not FDIC insurance. CENTRAL BANK 0 It is the reservoir of credit. 0 Principle Banking Institution ofa country ' Operated under Some Degree of state control 0 Has the responsibility of maintaining economic equilibrium ¢ Controls Money Supply 8'. Value of Credit in the Economy 0 Works for the overall interest of the Country E.g; State Bank of Pakistan Reserve Bank of India /-:h— m WUEROF LAST RESORT ' ' ' ' ‘ “ I V - Controls the flow ofcredit in accordance with the need ofbusiness CUSTODIAN OF NATIONAL RESERVE - Actsas the trustee ofthe entire economy ofthe country ' Keeps national reserve in the form ofgold, silverand securities CREDIT CONTROL CLEARING HOUSE EXCHANGE CONTROL - Maintain foreign exchange and rate ofexchange. MISCELLANEOUS FUNCTIONS - PublishesFS - Developmentofbanking system Financial Markets I Function of Financial Markets: Flow of Funds Financial Medians; 0 Why Study. Financial Markets? 0 Brief Introductionto: 0 Bond Market - Stock Market Lender-5aver Mm ‘ ' MM“. - Forelgn Exchange Market ' "—P‘Mfl‘fi - government ‘ Fl—m - Householg ' govcmmem . as - Foreigners "_gn— Direct Finance ) Allows transfers of funds from person or business without investment opportunities to one who has them Improves economic efficxency What is an Investment Company? =-‘-I>—\—,=__§ , MTfiVestments 0 Financial Assets 0 Real Assets 0 Marketable Securities 0 Portfolio 0 Expected Return 0 Risk 0 Risk Averse Investments 0 Portfolio Management Investments? - FinancialAssets I Return on future holdings. ~>Risk The chance that the actual return on an investment will be different from the expected oz. Marketable Securities return. Financial assets that are easily and cheaply traded in _ organized markets. ~:. Risk Averse Investments Piece of paper evidencing a claim on some issuer. ~> Real Assets Physical assets such as gold or real estate etc. An investor who will not assume a given level of risk unless there is an expectations of adequate compensation for having done so. '2' Portfolio The securities held by an investor taken as a unit. /" Primary Markets OWhere new issues are distributed to investors. Secondary Markets ;Where existing securities are traded'The secondary >Li uid assets, which mature quickly and can be flame " ' w market trading of debt instruments. so d for C351]; Treasury Hills Bank Guarantees Commercial Papers (DP Note) Foreign Currency Discount Rate >is the rate at which banks are permitted to borrow from the central bank. The interest rate on 13 and 26 weeks T. Bills are used by many banks to determine rates that they pay on some of their accounts, This interest rate is probably the one most economists have in mind when they talk about "the interest rate." Classifications of Financial Markets 1. Primary Market - New security issues sold to initial buyers (often behind closed doors) Investment banks t pically underwrite securities (i.e. guarantees a price or the security and then sells it to the public) Overg—the—counter 1. Secondary Market a Securities previously issued are bought and sold E.g.: Stocks, Bonds, Futures, Options, FE Exchanges 0 Trades conducted in central locations (e.g., KSE, LSE, lSE, NYSE; LSE) Over—the—Counter Markets 0 Dealers at different locations buy and sell What does the Treasury Do? IMoney does not flow directly from Depositors to Borrowers. D I Coordination or management of funds 0 Maintains liquidity and maximization of profits - Corporate Finance, Project Finance - If ineffective, in the highly competitive markets quality clients may not come at all. Key Variables in ' Funds Management To manage funds, the Treasury must control some key variables like: Amount Tenure Currency Return Risk Security Analysis ' Portfolio Management Key Terms to Remember 0 While learning Treasury and Funds Management it is important to familiar with key terms usually applied in Treasury, such as: Xv PlBs — Pakistan Investment Bonds ‘xv T-Bills - Treasury Bills ‘fr SLR - Statutory Liquidity Requirement ‘7 CRR - Cash Reserve Requirement ‘iv SGLA - Subsidiary General LedgerAccount Composition of Treasury Department ‘r The Treasury Department consist of following three markets. 0 Money Market (MM) ' Foreign Exchange Market (FX) - Equity Market Desk (EMD) )v RR — Reverse Repo 'r‘ COI — Certificate of Investment > TDR - Term Deposit Receipt >SPOT - FX transaction (executed on 2nd following day of deal date, eg 03-01—2012 deal dated. 5 oi rat execution date would not be 3rd or 4‘“ but 0 -01-2012 i-e 2"d following date. > Forward —fon~ard date transaction > Swap - simultaneous purchase and sale of a given amount of foreign exchange for two different Value dates Functions of Money >Unit ofAccount >Medium ofExchange >Means ofPayments >Store ofValue lO Financial Institutions 'r SBP 'r Banks (Commercial, Investment) ‘r Micro Finance Banks Saving Banks / Post Offices ‘r‘ Exchange Banks (Foreign Exchange) ‘r Insurance Companies ‘2 Mutual Funds “r Modarba Companies 3' Leasing Companies "r Housing Finance Companies ‘r AMCs ‘ Financial Market Operator and Controller 0 Primary Issuer of Govt. Securities 0 Manages Inflows and Outflow 0 Provide Guidelines to Financial Institutions 0 Monitors Financial Statements of Banks - Controls Inflation and Maintains Monetary Policy for the fiscal year {Role of Treasury Department 0 It evolves beyond traditional activities into a more Strategic Role. > New role includes Compliance with SBP 2. Internal Consulting Strategic financial planning Technology implementation Role of a Central Bank (SBP) Bankers' Bank Regulation and Supervision of the Financial System Issue of Notes (currency) Banker of Govt‘ Conduct of Monetary Policy Management of Public Debt Management of Foreign Exchange Bankers’ Last Resort 2‘ Role of Treasury Department Traditional Treasury Activities in Pakistan Em Em 51E E a E as as E» 01—” 5 a w 3 —§ ~17, wa :mE ; ‘5 E «Cm go g :50 "=u E 16) mm a: a? men, {an an: gee, a0 :0 a: mag ‘13: 08 zmg 09 m0 a) 3m 3 (u g u. m g 41E 2 g 2 5‘1”.— Role of Treasury Department or th Fut r 0 Traditional activities either outsourced or automated. Pre ari To continue education through professional certification. Upcoming Treasury staff needs to specialize in Treasury by attending courses on Treasury department and Fund management. If ll Hierarchy of'l'reasury Department “fl . Head of Treasury Chief Dealer Money ChiefDealer Foreign Mark“ Exchanoe Settlement In Charge (MM) Settlement In charge (FX) 5551:“““[ Settlement Settlement Settlement ‘0” Officer Officer (FX) Officer (FX) m lama-anus: Research Research Analyst Assistant Functions and Responsibilities of Treasury Department 0 To negotiate and obtain loans on competitive terms & Conditions. ‘To manage yields on investment (Government securities, etc). - Profitable deployment of surplus liquidity. O Reading the nerve of the market sentiments. 0 To follow prudential regulations and 58? guidelines. Importance of Stock Market Functions and Responsibilities of Treasury Department - To raise funds (deposits from F.Is & money market) O To manage line limits from money market players - Borrowings Repo or clean at competitive rates - To cater to the funding needs of the corporation 0 To Follow line limits religiously 0 To provide competitive deposit rates to branches and customers (keeping future interest rates in mind) The stock market, individual investors, and financial risk 12 ...
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This note was uploaded on 01/26/2012 for the course FINANCE 205 taught by Professor Akramzahid during the Fall '10 term at Karachi Institute of Economics & Technology.

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investment banking - I (/w” 0 Through investment...

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