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.
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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.
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.