Why is the Investment Banking division important for the bank?
Hi guys, I know what investment banking is about, but how would you explain the importance this division has for the bank? Why is it so important? I know it isn't only because of profits, but what else?
This was a Goldman Sachs' interview question for the summer analyst position in London.
It is important because it is very profitable and develops corporate relationships (which lead to further profits)
I know, but you can't answer like that to a recruiter during the interview
Edit: sorry, I didn't read the second part.
Anything else?
Ability to cross sell other products (at BBs) like transaction services, middle market banking, wealth management, etc... as well.
Because when the CEO of a company has an idea he does not need to call the bank switchboard and rather has the business card of the person that to him (no women allowed) is the face of the bank.
What kinda question is this? Like IBD is a huge division (accounts for like what 10-20% of GS revenue) and encompasses a lot of services. IBD is the core of Goldman's business - it's been running M&As and IPOs for as long as u can remember. Though other divisions may generate more revenue than IBD such as the Investing and Lending Business, IBD is at the center of Goldman's long standing reputation and history - it's the bread and butter of what makes Goldman a great investment bank as a whole. What kind of answer are they even looking for??? That's like asking "why is the iphone important for apple?"
May be they wanted to understand if you were informed about the importance of this division in the firm's history.
However, they made this question for each division in which you applied, so I think it's more about something else related to the specific functions of the different divisions, and the advantages they bring to the whole firm.
Thank you for your help. Much appreciated.
Craig's answer above is right. To use medicine as an an analogy, think of IBD as a general physician and the other parts of the firm as specialists (e.g., heart surgeon, dermatologist, oncologist, etc.). At least in the U.S., when you get sick, you see a general physician because he is your first point of contact. That person will diagnose you. If you require additional expertise, he will refer you to the appropriate specialist. A bank's corporate finance bankers are like general practioners. Product groups (e.g., M&A, capital markets) are like specialists. Therefore, IBD (specifically, corporate finance) is important because it manages the firm's client relationships and is responsible for selling the firm's products and services.
Aside from (1) reputation and (2) revenue synergies/cross-selling, you should also think about (3) diversification. E.g. having a hot M&A or IPO market can help you weather a storm in other parts of your business, e.g. Asset Management
Also this has been touched on, but (4) IB helps you protect your market share across all your businesses. e.g. You might have an institutional investor who you're working with to help generate 5-10%/y return in tech portfolio, and magically your IB group brings them a hot tech IPO like FB where they buy 5% of the stock. A neighboring bank whose IB group didn't bring them that deal wouldn't have hooked that up, so the investors stays wiht your bank...and if that IB group brought them Google, it'll take a helluva lot for that investor to leave you. IB protects market share across many of a bank's businesses
As mentioned above, it serves as a contact at the bank for c-suite executives, provides cross-sell for other groups (treasury, corporate banking etc. etc). Another thing I don't think was mentioned was it provides extremely high risk-adjusted returns for the banks. IB involves no capital so the ROA and ROE of investment banking is extremely high and assists other lower-returning business such as lending. That's a big part of the reason that you see banks chin up on lending for potential M&A mandates.
not challenging this, just trying to understand the business better. Doesnt IB still require capital? arent the enormous salaries paid to IB employees considered capital? and when you're underwriting an IPO, doesnt the bank absorb the primary shares before distributing them elsewhere, therefore requiring capital to take the shares onto the banks' balance sheet? again, not saying youre wrong (especially because i dont know much) but it raised a few questions that i figured were worth asking.
Fair points. The salaries aren't that significant for a something as large as a bank and take into consideration that every other department also requires similar salaries, in addition to tying up the banks capital. IB doesn't use the banks balance sheet when providing advice and as such doesn't eat into the tier I capital ratio and other regulatory-type issues.
In terms of your other point, an IPO is a marketed offering and so it done on a "best-efforts" basis, therefore not using the banks b/s. A bought deal is a bit different and certainly incurs risk but that's intended to be minimal and very short term relative to the day to day function of most other capital markets departments.
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