Major difference between Merchant banking and Investment Banking(433) Views

Apr 30th by Management Duniya ( No Comments )

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Sources of revenue could be [a] Fund based source & [b] Fee based source The fund based income is that revenue gained from interest, lease rental, and as well as income from capital market investments. The fee-based income is that source gained from banking, advisory services, custodial services etc. The major difference between the Merchant bankers and Investment Bankers is: Merchant Banking is purely fee based. Investment banking is both fee based and fund based. A merchant banker can undertake only those activities, which are relating to securities market and which do not require registration / have been granted exemption from registration as an NBFC from RBI. In particular a merchant Banker can undertake the following activities Managing of public issue of securities Underwriting connected with the public issue Management Services acting like as Book Running Lead Manager/Lead Manager for the IPOs/FPOs/Right issues/Debt issues Managing advising on international offerings of dept / equity i.e. GDR, ADR, bonds and other Instruments Private placements of securities Primary or satellite dealership of GOVT securities Corporate advisory services relate to securities market eg: takeovers acquisitions and Disinvestments Stocking broking _ Advisory services for projects and Project appraisals. _ Syndication of rupee term loans

_ International financial advisory services. _ Project counseling and pre investment activities _ Undertaking Feasibility studies _ Issuing Project reports _ Design of capital structure _ Mobilization of funds from NRIs _ Foreign currency finance _ Mergers and takeovers _ Venture capital services _ Buy back and public deposits _ Refund Banker _ Monitoring Agency _ Debenture Trustee Services of Merchant Banks in detail Project Counseling: Project counseling includes preparation of project reports, deciding upon the financing pattern to finance the cost of the project and appraising the project report with the financial institutions or banks. It also includes filling up of application forms with relevant information for obtaining funds from financial institutions and obtaining government approval. Management of debt and equity offerings This forms the main function of the merchant banker. He assists the companies in raising funds from the market. The main areas of work in this regard include: instrument designing, pricing the issue, registration of the offer document, underwriting support, and marketing of the issue, allotment and refund, listing on stock exchanges. Issue Management: Management of issue involves marketing of corporate securities viz. equity shares, preference shares and debentures or bonds by offering them to public. Merchant banks act as an intermediary whose main job is to transfer capital from those who own it to those who need it. After taking action as per SEBI guidelines, the merchant banker

arranges a meeting with company representatives and advertising agents to finalize arrangements relating to date of opening and closing of issue, registration of prospectus, launching publicity campaign and fixing date of board meeting to approve and sign prospectus and pass the necessary resolutions. Pricing of issues is done by the companies in consultant with the merchant bankers. Managers, Consultants or Advisers to the Issue: The managers to the issue assist in the drafting of prospectus, application forms and completion of formalities under the Companies Act, appointment of Registrar for dealing with share applications and transfer and listing of shares of the company on the stock exchange. Companies can appoint one or more agencies as managers to the issue. Underwriting of Public Issue: Underwriting is a guarantee given by the underwriter that in the event of under subscription, the amount underwritten would be subscribed by him. Banks/Merchant banking subsidiaries cannot underwrite more than 15% of any issue. Portfolio Management: Portfolio refers to investment in different kinds of securities such as shares, debentures or bonds issued by different companies and government securities. Portfolio management refers to maintaining proper combinations of securities in a manner that they give maximum return with minimum risk. Restructuring strategies A merger is a combination of two companies into a single company where one survives and other loses its corporate existence. A takeover is the purchase by one company acquiring controlling interest in the share capital of another existing company. Merchant bankers are the middlemen in setting negotiation between the two companies. Merchant bankers assist the management of the client company to successfully restructure various activities, which include mergers and acquisitions, divestitures, management buyouts, joint venture among others. To help companies achieve the objectives of these restructuring strategies, the merchant banker participates in different activities at various stages which include understanding the objectives behind the strategy (objectives could be either to obtain financial, marketing, or production benefits), and help in searching for the right partner in the strategic decision and financial valuation of the proposal. Off Shore Finance: The merchant bankers help their clients in the following areas involving foreign currency. (a) Long term foreign currency loans (b) Joint Ventures abroad

(c) Financing exports and imports (d) Foreign collaboration arrangements Non-resident Investment: The services of merchant banker includes investment advisory services to NRI in terms of identification of investment opportunities, selection of securities, investment management, and operational services like purchase and sale of securities. Loan Syndication: Loan syndication refers to assistance rendered by merchant bankers to get mainly term loans for projects. Such loans may be obtained from a single development finance institution or a syndicate or consortium. Merchant bankers help corporate clients to raise syndicated loans from banks or financial institutions. Corporate Counseling and advisory services: Corporate counseling covers the entire field of merchant banking activities viz. project counseling, capital restructuring, public issue management, loan syndication, working capital, fixed deposit, lease financing acceptance credit, etc. Merchant bankers also offer customized solutions to their clients financial problems. Like determining the right debt-equity ratio and gearing ratio for the client; the appropriate capital structure theory is also framed. Merchant bankers also explore the refinancing alternatives of the client, and evaluate cheaper sources of funds. Another area of advice is rehabilitation and turnaround management. In case of sick units, merchant bankers may design a revival package in coordination with banks and financial institutions. Risk management is another area where advice from a merchant banker is sought. He advises the client on different hedging strategies and suggests the appropriate strategy. Placement and distribution The merchant banker helps in distributing various securities like equity shares, debt instruments, mutual fund products, fixed deposits, insurance products, commercial paper to name a few. The distribution network of the merchant banker can be classified as institutional and retail in nature. The institutional network consists of mutual funds, foreign institutional investors, private equity funds, pension funds, financial institutions etc. The size of such a network represents the wholesale reach of the merchant banker. The retail network depends on networking with investors.

STATE BANK OF IND

State Bank of India (BSE:SBI), www.statebankofindia.com a public sector bank, is the largest bank in India.
[1]

SBI accounts for almost one-fifth of the nations loans.

[1]

Besides personal and corporate banking, SBI is also involved in NRI (Non Resident Indian) services through its network in India and overseas. The bank has 21 subsidiaries and 10,186 branches. SBI was recognized as the [2] best bank in India in 2008 by The Banker magazine of The Financial Times. Banks across Asia are looking to shore up their balance sheets as they prepare for a tougher business environment amid a global economic downturn. SBI, which had no direct exposure to sub-prime mortgages, has said that it would still need to raise USD $2-4 billion capital to boost its Tier-1capital adequacy ratio, but whether [3] it would be done through a rights issue or other means has not been finalized. Tier 1 capital is a core measure of a bank's financial strength. It is composed of core capital, which consists primarily of equity capital and cash reserves.

Company Overview
SBI offers banking services as well as an array of financial services which include Mutual Funds, Credit cards, Life Insurance, Merchant Banking, Security Trading & Primary dealership in the Money market. The Bank is actively involved in non-profit activity called community services banking apart from its normal banking activity. Associate banks There are six associate banks that fall under SBI, and together these seven banks constitute the State Bank Group. They are: Contents

1 Company Overview

o o o

1.1 Joint Ventures 1.2 Business and Financial Metrics 1.3 Business Segments

1.3.1 Global Markets 1.3.2 Wholesale Banking Group 1.3.3 Mid-Corporate Group 1.3.4 National Banking Group 1.3.5 Rural Business Group 1.3.6 International Banking Group

2 Trends and Forces

2.1 Macro economic risk is the largest risk for SBI, given its size, penetration and exposures in India

2.2 International

operations'

increasing

contributions to total income expected to

continue and boost income further

2.3 11,111 branches and still counting - a source of low-cost deposits

2.4 Public sector banks facing stiff competition from private sector banks

3 Competition 4 References

State Bank of Indore State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Mysore State Bank of Patiala State Bank of Travancore

SBI is the only Indian bank that figures in Fortunes top 100 banks. Its 11,000 branches and 5,600 automatic teller machines give it a reach throughout the length and breadth of the country; its work force of 200,000 dwarfs all other banks in India (its nearest competitor is Punjab National Bank, which has around 56,000 employees ). [6] employees.
[4] [5]

It is also the second largest bank in the world, measured by the number of branches and

Joint Ventures
SBI has entered into strategic agreements with banks, insurers and other companies. Insurance Australia Group (IAG) has signed a $170 million joint venture agreement with the State Bank of India (SBI) to establish a general insurance company in India. SBI will become the first public sector bank in Indiato enter the custody services sector. State Bank of India (SBI) and Societe Generale Securities Services (SGSS), part of Societe Generale Group, have announced a joint venture which will offer custody and related services in India. The new company, SBI SG Custodial Services, will be based in Mumbai and offer a range of services to both foreign and domestic investors and clients, covering custody, depository, fund administration, registration and transfer agent services. The joint venture will leverage SBIs strength in the Indian financial sector.
[7]

India is a preferred destination for private equity funds in real estate. SBI has planned to capitalize on this opportunity by teaming up with Australias Macquarie Group for a $2 billion infrastructure fund, and with an affiliate of Unitech Ltd, the countrys second largest publicly traded real estate company, to float a private equity(PE) real estate fund.
[8]

Business and Financial Metrics

First Quarter Fiscal 2011 Results
[9]

During the first quarter of fiscal 2011, State Bank of India reported operating profit increased year-over-year by 66.97%. Net Profit for Q1 FY2011 increased to Rs. 2914.20 crores from Rs. 2330.37 crores in Q1 FY2010, representing growth of 25.05%. Net interest income increased by 45.35% in Q1 FY11 over Q1FY10 by 4.30%. Interest expenses on deposits decreased by 11.85% during Q1 FY11 through strategic shedding of high cost bulk deposits. Interest expenses have come down despite deposits increasing by 6.78%. Interest income on advances increased by 8.62% year-over-year driven by growth of 20.74% in advances.

Interest earnings from Investments increased by 3.08%. Cumulative net interest margin improved significantly by 88 bps to 3.18% from 2.30% as at the end of June 2009. Total non interest income increased by 3.40% despite profit on sale of investments decreasing by 75.54% (Rs.535 crores). Non interest income excluding profit on sale of investments was up by 22.96%. Fee income increased by 29.41% year-over-year, driven by robust growth in loan processing charges, non fund based business, government business, and cross-selling.

Business Segments
Global Markets
In keeping with its integrated approach to all treasury activities in various markets in different time zones i.e., Forex, Interest Rates, Bullion, Equity and Alternative Assets, the Bank re-designated its Treasury Operations into Global Markets.

Wholesale Banking Group

The Bank's Wholesale Banking Group consists of three Strategic Business Units: Corporate Accounts Group, Project Finance & Leasing, and Stressed Assets Management Group. The Bank has recently launched the "Wholesale Banking Initiative" to harness the SBI Group synergy for the benefit of the corporate customers by [10] providing them with a "One Stop Shop" facility for all their banking needs. Testing....................

Mid-Corporate Group
The Mid-Corporate Group (MCG) has been immensely successful in attracting the business of Mid-Corporate units through relationship management and quicker creditprocessing. It is estimated that 38% of the MidCorporate universe in the country is covered by the bank. The total credit portfolio (fund based) of the Group stands at Rs 1,090.02 billion. This is more than the aggregate business handled by many of the top banks in the country. =

National Banking Group

The Bank's National Banking Group (NBG) consists of three Business Groups: Personal Banking, Small & Medium Enterprise (SME), and Government Banking.
[10]

Rural Business Group

Rural Business Group comprises rural and semi urban branches, accounting for about 70% of the branch network of the Bank.

International Banking Group

The Bank has a network of 84 overseas offices spread over 32 countries covering all time zones. Net Profit from the Banks overseas operations (including subsidiaries and joint ventures with more than 50% shareholding) registered a growth of 84% during the fiscal year mainly driven by significant growth of 48% in Net Customer Credit.

Trends and Forces

Macro economic risk is the largest risk for SBI, given its size, penetration and exposures in India
Government regulations and the country's macroeconomic policies affect SBI's expansion and liquidity the most. Key ratios such as Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Repo rate and Reverse Repo rate are all controlled by the government and affect the bank's liquidity.

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SBI and ICICI Bank Ltd, two of the nations largest banks, have been worst hit by the Reserve Bank of Indias [12] (RBI) decision to increase the amount of cash they must hold with it (CRR). In 2008, RBI hiked CRR from its long-standing value of around 6%, in steps, to 7.5%. Changes in interest rates adversely affect net interest margin the difference between the yield the bank earns onassets and the interest rate it pays for deposits and other sources of funding which in turn affects earnings. As SBI works to broaden its products and services and to increase its branch network, it will have to gain approval from the Reserve Bank of India and other government agencies.

International operations' increasing contributions to total income expected to continue and boost income further
SBI is laying greater and greater thrust on its international operations, capitalizing on its presence in 32 countries. Being the largest commercial bank in India, it is one of the most capable banks to cater to corporate India's growing appetite for international mergers and acquisitions. Net profit from the banks overseas ope rations (including subsidiariesand joint ventures with more than 50% shareholding) registered a growth of 84% during FY 2007-08 mainly driven by significant growth of 48% in Net Customer Credit. The bank was ranked No. 1 in the Asia Pacific (excluding Japan and Australia) in the mandated arranger/book runner league table for syndicated [10] loans by IFR Asia in 2007-08.

11,111 branches and still counting - a source of low-cost deposits

Bank branch expansion in India is regulated by RBI and banks cannot expand their branch network without RBIs approval. As low-cost deposits are directly tied to the size of the branch network, the number of branches a bank has, is a key success factor for any bank in India. Branch expansion is particularly a key factor for SBI, given that SBI's profit growth is driven by core business. The operating profit increased by 54.5% yearover-year, given a robust increase in the net interest income and a modest rise in the non-interest income. Net [13] profit rose by 40.2% year-over-year after accounting for a 30% increase in the tax paid.

Public sector banks facing stiff competition from private sector banks
Public sector banks are facing competition from their private sector counterparts and foreign banks entering India in all realms of financial services. While public sector banks enjoy a pre-eminent position in terms of low-cost deposit base (also called CASA deposits in India stands for Current Accounts and Savings Account), privatesector banks have been increasing their CASA base steadily over the years. ICICI Bank, the largest private bank in India, has expanded its CASA market share by 218% over the period of 2003-2007. The banks CASA deposits have grown at a CAGR of 61% over the same period, compared with a growth of 17.1% for public-sector banks, 32.5% for private sector banks and 29% for foreign banks in India.
[14]

Private sector banks, armed with usually more efficient management and employees, are employing all tricks branch expansion, mergers and acquisitions, and international operations - to compete with public sector banks.

Competition

Punjab National bank - Punjab National Bank (PNB) is the second largest government-owned commercial bank in India with about 4,500 branches across 764 cities. This financial institution offers services in personal and corporate banking, including industrial, agricultural, and export finance, as well as international banking. It competes with SBI mostly in retail lending and wholesale businesses
[16] [15]

ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is India's largest private sector bank and second largest overall in terms of assets. Together with its subsidiaries, ICICI Bank offers a complete spectrum of financial services and products ranging from commercial banking to investment banking, mutual fund to insurance. It is also the largest issuer of credit cards in India.

HDFC - Housing Development Finance Corporation Limited Bank Limited or HDFC Bank is the second largest private bank in India, catering to the whole universe of financial services [17] from commercial to investment banking, mutual fund to insurance. On February 25, 2008 HDFC agreed to buy Centurion Bank of Punjab. The combined entity has the largest branch network among private banks [18] in India, a strong deposit base of around Rs 1220 billion and net advances of around Rs 890 billion.

Bank of Baroda - Bank of Baroda is another private player. It has a rich countrywide network of over 2800 branches. It also has significant international presence with a network of 74 offices in 25 countries.
[19]

Axis Bank - Axis Bank is India's third-largest private-sector bank after the significantly larger ICICI Bank, and HDFC Bank. Comparison of Competitors
[20] [21] [22]

Total Deposits Total Advances Net profit Total Assets Branches

State Bank of India

4,355.21

3,373.36

45.41

5,665.65

10,186

ICICI Bank

2,305.10

1,958.66

31.10

3,453.12

1,400

Punjab National Bank 1, 398.60 HDFC Bank

1,990.48

20.48

1,990.48

4,500

1,007.69

634.27

15.90

1,332.51

1,412

Bank of Baroda

1,520.34

1,067.01

14.35

1,795.99

2,800