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Demystifying FIG IB.pdf

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Demystifying FIG IB.pdf

  1. 1. wallstreetprep.com Demystifying FIG Investment Banking
  2. 2. 2 • Understand the FIG IB landscape, including: • Typical roles and responsibilities • Common products and services • Learn about the common FIG IB slides and how to construct them • Learn key analyses and metrics specific to FIG IB Course Objectives
  3. 3. 3 Section 1: What is FIG? Section 2: Day 1 in the Banks group Section 3: Benchmarking analysis Section 4: Capital roll forward Section 5: Risk management overview Section 6: Conclusion Our Journey
  4. 4. Learning Objectives What is FIG? ✓ What Does FIG Do? ✓ A Look at FIG Clients ✓ How Do FIG Groups Get Hired? ✓ FIG Group Roles & Responsibilities
  5. 5. Financial Institutions Group (FIG): Investment banking group providing capital raising and advisory services for financial institutions
  6. 6. What is FIG? 6 Bulge Bracket Investment Bank IB Industry Coverage IB Product Coverage FIG M&A ECM DCM Lev Fin Consumer / Retail Healthcare Oil & Gas Financial Sponsors Industrials Power & Utilities TMT Sales and Trading
  7. 7. What Does FIG Do? 7 M&A advisory Equity Capital Markets Debt Capital Markets
  8. 8. What Does FIG Do? 8 M&A Advisory • Advise on M&A opportunities for financial institution clients. • Acquisitions • Mergers • Divestitures M&A Advisory Equity Capital Markets Debt Capital Markets
  9. 9. What Does FIG Do? 9 Equity Capital Markets • Help clients raise equity capital (e.g., IPO, PIPEs, follow-on offerings) • Focus on capital needs to satisfy regulatory requirements • Cover hybrid debt instruments (e.g., convertible bonds) used to explore equity credit and avoid dilution M&A Advisory Equity Capital Markets Debt Capital Markets
  10. 10. What Does FIG Do? 10 Debt Capital Markets • Help clients raise debt capital (e.g., short-term borrowings) • Manage liabilities on clients’ balance sheets aside from having deposits (Banks) or premiums (Insurance) fund a regulated entity’s activities M&A Advisory Equity Capital Markets Debt Capital Markets
  11. 11. Who Are FIG’s Clients? 11 Banks Specialty Finance Insurance Asset Managers Fintech
  12. 12. Overview of FIG Clients 12 Banks Regulated Yes (Federal Reserve) Valuation methods Dividend discount model (DDM), public and transaction comps Commonly used multiples P/E, P/B, P/TBV Key financial metrics ROAE, ROATCE, NIM, Non- interest margin, efficiency ratio
  13. 13. Overview of FIG Clients 13 Insurance Regulated Yes (NAIC) Valuation methods Dividend discount model (DDM), public and transaction comps, actuarial valuation Commonly used multiples P/E, P/B Key financial metrics Combined ratio (each component), Portfolio yield, ROAE, ROAA
  14. 14. Overview of FIG Clients 14 Specialty Lenders Regulated Some Valuation methods Dividend discount model (DDM), Discounted Cash Flow (DCF), public and transaction comps Commonly used multiples P/E, P/B, P/TBV Key financial metrics ROAE, ROATCE, NIM, Non- interest margin, efficiency ratio
  15. 15. Overview of FIG Clients 15 Asset Managers Regulated Yes (SEC and FINRA) Valuation methods Discounted Cash Flow (DCF), public and transaction comps Commonly used multiples P/E, EV/EBITDA, Fees/AUMs Key financial metrics ROAE, ROAA
  16. 16. How Do FIG Groups Get Hired? 16 Citizens Bank is growing its loan portfolio and needs to raise equity via a share sale They invite several investment banks to pitch their services in a “bake off” They present relevant experiences, roadmaps to execution & peer valuation estimates FIG teams at each bank construct pitches to show why they are the best “fit” Citizens selects Goldman and JPMorgan to execute its sale shares in a follow-on offering
  17. 17. How Do FIG Groups Get Hired? 17 • If a bank wants to execute a transaction itself (e.g., raise capital, acquire a target)… Use their own internal FIG groups to execute the transaction Bulge Bracket Banks Use an independent advisor (though might use their own FIG groups) Other Banks
  18. 18. Why is FIG Different? 18 • Distinctive valuation methods (e.g., Dividend Discount Model) • Capital regulations (e.g., Basel) • Unique accounting, primarily financial assets on balance sheet • Banks and Specialty Lenders – loans, deposits instead of inventory, accounts receivable and accounts payable • Insurance Companies – investment portfolio supporting written insurance policies • Asset Managers – investment portfolios Note: Fintech companies will follow more traditional cash accumulating companies depending on the space covered. We will focus on its approach elsewhere.
  19. 19. Who Does What in FIG? 19 Note: Different banks might have different nomenclature for each position. • Manages associates and analysts (staffing) across all verticals • Reviews documents before submitting to senior bankers • Ultimate technical source of information for junior bankers VP • Collaborates with MD on origination efforts • May start taking over client relationships • Manages execution of transactions with VP, associates, and analysts • Signs off on client documents Director • Leads client origination efforts • Responsible for client relationships and compliance • Covers a particular vertical within FIG (e.g., Banks) Managing Director
  20. 20. Who Does What in FIG? 20 Note: Different banks might have different nomenclature for each position. • Knows the model/technical aspects inside out for all verticals • Most senior person in Excel and PowerPoint • Makes sure deliverables progress smoothly Associate • Puts together the models • Updates comps • Creates presentation slides Analyst
  21. 21. Who Does What in FIG – An Example 21 • Guides associate to build a roll- forward slide with current valuation levels in the peer universe • Performs final review before sharing with senior banker VP • Puts together a shell of the slide • Asks analyst to do the analysis and complete the slide • Reviews the analyst’s work Associate • MD has an upcoming meeting with a client and wants to understand its current standing from a regulatory capital perspective Managing Director • Analyst runs the analysis and completes the capital roll forward slide Analyst • Director performs a high- level overview and provides detail to include in the slides Director
  22. 22. Learning Objectives Day 1 in the Banks Group ✓ What Happens on the First Day? ✓ How Should You Do Your Work? ✓ What Work Can You Expect? ✓ Resources to Seek Out ✓ Key Metrics for Banks
  23. 23. What Typically Happens on the First Day? 23 • Meet with the staffer who places you in projects with different MDs or project groups • You will work on projects categorized by: 1. Execution/live deal; 2. Origination/ pitching; or 3. Internal work Day 1 What do I do next?
  24. 24. How Should You Go About Doing Your Work? Baseline: Listen to what your staffer wants and go learn how to complete each deliverable Set Yourself Apart: Learn how to do a quick assessment of the clients that you cover by putting together a: Benchmarking Analysis Capital Roll Forward Risk Management Overview
  25. 25. What Work Should You Expect To Do? 25 Know your clients well (investment banking is 100% about clients) • Banks is probably the most transparent space (read their websites) • Regulators (FDIC, Federal Reserve New York) Know how to construct documents that bankers ask for • Look at past documents put together by your group • Know what resources to leverage • Understand big picture (Technically and fundamentally)
  26. 26. Resources To Seek Out 26 Bankregulatordatasupersedesanydatasource Bank websites • All Banks (publicly traded or private) have to file regulatory filings with the Fed and they usually have very detailed publicly available presentations Sources • Federal Deposit Insurance Corporation (FDIC) • Federal Reserve Bank of New York (New York Fed) Databases • SNL (owned by S&P) is the go-to database for Bank information and data (watch out for wacky number formats!)
  27. 27. Key Metrics for Banks 27 Metric Definition Formula Total Loan Portfolio Total amount of money loaned out to customer base Total loans excluding bad debt provision Return on Average Assets (ROAA) Performance metric on profitability Net income/Average total assets Return on Average Equity (ROAE) Performance metric on profitability Net income/Average total equity Return on Average Tangible Core Equity (ROATCE) Levels the playing field by excluding goodwill; eliminates any overpaying or underpaying incurred during an acquisition Net income/Average tangible core equity Deposit ratio Higher percentage means less interest or dividends paid to investors (cheaper funding) Deposits/Total liabilities Net Interest Margin (NIM) Performance metric carving out interest bearing assets; a measure of core business profitability Net interest income/Interest bearing assets Efficiency Ratio Amount of money a bank needs to operate relative to its total income Non-interest expenses/Total income
  28. 28. Learning Objectives Benchmarking Analysis ✓ What is Benchmarking? ✓ How Do You Benchmark? ✓ Create a Benchmarking Slide
  29. 29. Dictionary Definition: The practice of comparing business processes and performance metrics to industry bests and best practices from other companies. Dimensions typically measured are quality, time and cost.
  30. 30. Banks Groups Definition: How are the Banks who look like me doing relative to me in terms of profitability, efficiency, growth, and quality of assets.
  31. 31. Key Considerations 31 How am I performing relative to my peers? In terms of profitability, efficiency, growth, quality of assets, and capitalization How do I look relative to my peers? There is no one exactly comparable entity Why am I not performing optimally? Charging too little interest, spending too much, or lending to the wrong crowd
  32. 32. How Do You Benchmark? 32 To select a peer group, identify banks with similar… Products (loans, services) Size (loan portfolio, total assets) Geography Funding Strategies (deposits, debt) Industry Exposure
  33. 33. How Do You Benchmark? 33 • Use the FDIC to look through all banks and select by criteria (unrealistic) • Use SNL to select peers and get an automatic peer group based on its set criteria (can modify to filter and create your own peer group) • Look at a bank’s peer group in an Investor Presentation – usually found in the Investor/Regulatory section of their webpage (most common method - we will use this method in this course)
  34. 34. Example: Citizens Bank 34 Peer group selection • Citizens Bank has a Fixed Income Presentation showing the peer group on slide 23: • BB&T*, Comerica, Fifth Third Bancorp, KeyCorp, M&T Bank, PNC Financial Corp., Regions Financial Corp., Suntrust*, US Bancorp. • Peer listings may be found in different sections; we used slide 23 and then confirmed in the notes section Sources *SunTrust and BB&T merged as part of Truist, so they may no longer be a comparable peer as a combined entity
  35. 35. Example: Citizens Bank 35 Your VP wants to understand how Citizens Bank is performing relative to its peers as there is an upcoming call with the client The Situation
  36. 36. Example: Citizens Bank 36 Layout the slide Usually, a benchmarking page is set up as a four- quadrant slide composed of 4 graphs highlighting any metrics to be shown 1 Determine which metrics to show Good practice to separate slides with size and balance sheet metrics from those with performance or income statement metrics 2 Gather the data and build charts in PowerPoint Insert graph data in PowerPoint and have an Excel file supporting your calculations; never mix 3
  37. 37. Benchmarking Slide 37 Total loan portfolio Total borrowings / Total liabilities NPLs as a % of total loans CET1 124.1 311.0 253.1 113.1 110.7 105.0 98.5 88.0 52.0 6.6% 11.7% 10.7% 10.1% 9.1% 8.9% 7.8% 4.6% 3.9% 9.8% 11.7% 10.3% 10.1% 9.9% 9.8% 9.5% 9.4% 9.3% 0.67% 1.30% 0.90% 0.84% 0.81% 0.80% 0.74% 0.62% 0.41% Note: Figures as of 3Q2020 in US$ million unless noted
  38. 38. Benchmarking Slide (cont’d) 38 Net interest margin Efficiency ratio ROATCE Non-interest margin (Fee income) 2.83% 3.13% 3.13% 2.96% 2.95% 2.95% 2.55% 2.39% 2.33% 53.4% 61.3% 60.6% 59.0% 56.6% 56.2% 56.1% 54.1% 51.5% 36.5% 45.4% 40.3% 39.6% 38.2% 35.2% 34.4% 31.3% 30.1% 9.0% 18.3% 16.6% 14.5% 13.9% 13.8% 13.2% 12.3% 12.2%
  39. 39. Benchmarking Slide Key Takeaways 39 What did you find out? Draw preliminary conclusions as to how the different metrics show relative performance. Due to provisioning and risk management, Citizens shows lower profitability. What are you trying to show? Is Citizens more or less profitable than its peers? Does it have a lower NIM? Is it very efficient? In this period, Citizens seems to be less profitable than peers, in the “middle of the pack” in terms of NIM, efficiency, and fee ratio. Highlight findings to your VP Annotate findings when turning in a first draft. For example, “I noticed that Citizens has a noticeable higher NIM than X; you should note this item when we review in detail…). Similar to how we drew conclusions above for Citizens, you must communicate any detail of how you arrive at your conclusions.
  40. 40. Learning Objectives Capital Roll Forward ✓ What is a Capital Roll Forward? ✓ How Do You Build a Capital Roll Forward? ✓ Create a Capital Roll Forward Slide
  41. 41. Definition: A Capital Roll Forward is a graphical analysis bridging beginning regulatory capital (CET1 for Basel III regulations) and ending/projected regulatory capital.
  42. 42. What is a Capital Roll Forward? 42 • Banks need to keep this regulatory capital above a certain threshold (defined globally at a 4.5% minimum but discussed with the Regulator on a case-by-case basis) • This capital has 3 main drivers on a stand-alone basis: • Earnings (increase if positive) • Loan growth (increase in Risk Weighted Assets) • Dividend payments (reduction in capital) Bankers use this analysis to initiate conversations on additional capital needs whether debt or equity, and/or capacity to acquire other banks
  43. 43. Example: Citizens Bank 43 Your VP requests a Capital Roll Forward for the next two years for Citizens Financial Bank The Situation
  44. 44. Example: Citizens Bank 44 Look for the beginning balance of CET1 1 Retrieve projected earnings and loan growth from databases like CapitalIQ. These Banks will sometimes provide guidance in their investor presentations 2 Make a dividend assumption, based on guidance or prior dividend payments 3
  45. 45. How Do You Create a Capital Roll Forward? 45 The Math Beginning CET1 % • Beginning CET1/Risk-weighted Assets (RWA) Ending CET1% • Numerator: Beginning CET1+Earnings-Dividends • Denominator: (Loan growth x Current RWA) 1 2 3 4 5
  46. 46. Capital Roll Forward 46 Key assumptions • Earnings are generated based on multiplying capital at 13% ROE • Dividend payout ratio is 40% of Net income • Loan growth is assumed to be 2% 1 2 3 4 5
  47. 47. Capital Roll Forward Key Takeaways 47 Based on the bank’s growth assumptions, will it need additional capital? Most likely, Citizens will not need additional equity or debt, however, if any debt instrument would come due and refinance, they will need help from the Banks Can we pay a higher dividend without running into trouble? Can we buy someone else? Citizens regulatory capital base is growing, however, it might be building up capital to be ready in case of an acquisition or other inorganic growth initiatives
  48. 48. Learning Objectives Risk Management Overview ✓ What is a Risk Management Overview? ✓ What Do You Look For in a Risk Management Slide? ✓ Create a Risk Management Slide
  49. 49. What is a Risk Management Overview? 49 Banks lend money and book those loans on their balance sheet in two ways: • Performing loans: Loans currently on time with payment • Non-Performing loans (NPLs): Commercial loans 90 days past due, consumer loans 180 days past due • To cover for potential losses, banks set aside a provision (an expense) that will be recorded as a contra-asset in the total loan portfolio, decreasing the net loan balance • To keep a balance sheet clean, banks write-off or eliminate loans that are considered uncollectible and fully provisioned
  50. 50. A Bank will begin to worry if NPL balances increase and they have not provisioned enough to support any losses from those loans
  51. 51. What Do You Look for in a Risk Management Slide? 51 Charge offs as a % of NPLs. Are you cleaning your balance sheet as you accumulate more NPLs? Increasing levels of NPLs/ total loans. Signals that the quality of the loans is deteriorating; must ask yourself why! Allowance for credit losses/NPLs Have you provisioned enough loan loss reserve to support further deterioration of your NPLs
  52. 52. Example: Citizens Bank 52 Your VP wants to understand where Citizens Bank stands in terms of non- performing loans and write-offs The Situation
  53. 53. Example: Citizens Bank 53 Layout the slide Usually, a risk management overview page is set up as a four-quadrant slide composed of 4 graphs highlighting any metrics to be shown 1 Determine which metrics to show NPLs/Total loans, Net charge off ratio, Allowance for credit losses as a % of total loans and Provisions for credit losses, Net charge offs 2 Gather the data and build charts in PowerPoint (Preference for organizational purposes) Always insert graph data in PowerPoint and have an Excel file supporting your calculations; never mix 3
  54. 54. Provisioning and Write Offs 54 NPLs as a % of total loans Net charge off as a % of total loans Allowance for credit losses as a % of total loans Provision for credit losses, net charge offs 1.10% 1.09% 1.73% 2.01% 2.21% 0.38% 0.41% 0.46% 0.46% 0.70% 101 110 600 464 428 113 122 137 147 210 3Q2019 4Q2019 1Q2020 2Q2020 3Q2020 1.07% 1.05% 1.70% 1.95% 2.05% Note: Figures as of 3Q2020 in US$ million unless noted
  55. 55. Risk Management Slide Key Takeaways 55 Is the balance sheet clean? From what we can see, Citizens has taken conservative approaches and provisioned for loans that most likely resulted from the pandemic. As a bank, am I ready to absorb the losses of my troubled loans? Citizens seems to be very well capitalized to handle any potential losses. Is my client’s loan portfolio exposed to events that can trigger additional NPLs? From Citizens’ presentation, we see that their loan portfolio is well diversified across industry and geography; events like the pandemic that had effects across industries exemplify those risks.
  56. 56. Learning Objectives Conclusion ✓ Succeeding on Day 1 ✓ Connecting the Dots
  57. 57. Succeeding on Day 1 57 Understand the big picture. Do not execute work without knowing its purpose Know your clients well. Know why the client needs you Know how to build the documents bankers ask for. Develop base knowledge as a segue into more complicated analyses Benchmarking Selecting and comparing peers Capital roll forward Do we have enough, too much, or too little capital? Risk management overview Is our balance sheet clean, can we clean it any further, and are we safe?
  58. 58. Connecting the Dots 58 Once you learn how to create these documents, the following items should come to mind: Why is bank performance important when generating investment banking origination ideas? Why is regulatory capital important for understanding which products may be of interest to a client? How does the quality of a bank’s loan portfolio affect its ability to grow or continue to perform?