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What's an investment bank? How an investment bank works

JPMorgan’s investor day has come and gone – and left its fair share of wisdom.

One of those pieces of wisdom is its insight into how an investment bank works in terms of a broader universal bank (AKA a bank that does everything, including retail banking) and what the mythical practice of "cross-selling" looks like in practice. 

As the chart shows, the ideal situation is one in which that an investment bank can “feed” the operations of other parts of the bank, and not just the Commercial and Investment Bank (CIB) – the asset and wealth management operations also get a share of the pie.

Starting in the top left of the chart above, a client looking for private capital funding comes to JPMorgan's investment bank for an Equity Private Placement (EPP). An EPP is a sale of stock away from the public markets (i.e., stock exchanges), and involves the commercial bank’s money lending facility, as well as the private bank (to source potentially eligible buyers).

Similarly, if a corporate client (a company) wants to expand, it might come to JPMorgan's investment bankers to discuss Mergers and Acquisitions - M&A. They will then work with the corporate bankers, who might provide a loan to fund an acquisition, or with the private bank, which also supplies a potential source of lending. The commercial bank can also identify potential targets and buyers through its own network, which assists with the investment bank’s support of the corporate client.

When an Initial Public Offering (IPO) happens and a company sells a portion of its stock (also known as its equity) in the public market for the first time, the investment bankers liaise with the client, the markets professionals help sell the equity, and the private bankers both provide potential sources of finance and manage the founder's wealth (when the IPO is driven by a wealthy company founder).

On top of this, not only does JPMorgan’s commercial bank benefit from feeding the M&A process domestically by connecting investment bankers with JPMorgan commercial banking clients, it does the same thing internationally for the same reason (although generally targeting takeover targets). It also benefits from a pre-formed relationship when a company is spun off from a parent.

A private bank also manages client shares in an EPP, as well as offering investment opportunities both to and for its clients during the IPO process. Additionally, once an IPO is complete, the private bank can continue its relationship with a company founder – and benefit from a “regular” private banking relationship with an Ultra-High Net Worth Individual (UHNWI).

JPMorgan’s payments team, meanwhile, is silently in the background facilitating all of the above-mentioned economic activity (and taking a slice of the transactions home as profit).

It’s the markets (sales and trading) division, however, which is arguably the best connected. Research, pricing data, analytics, as well as trade execution (actually making the trades) mean the bank also gets a chance to create derivative products based on the underlying products being traded.

For example, in an M&A deal, the markets team might construct derivatives that help reduce the client's exposure to changing foreign exchange (FX) rates. In debt capital markets deals, where new tradable debt is being issued, the markets team might help organize a group of investors (a 'syndicate') to underwrite the debt being issued in the event that it's not all sold. Additionally, it can also provide loans.

This web of relationships can be beneficial. JPMorgan estimated in its presentation that for every dollar generated by investment banking clients, the bank received an additional 1.4 dollars in “additional franchise revenue”, reinforcing the cycle.

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AUTHORZeno Toulon Reporter

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