Banks offer various types of financial products and services. These include corporate and investment banking services. Corporate banking vs investment banking, what are their differences?
Investment Banking helps grow an organization, while Corporate Banking helps an organization manage its finances. Investment bankers assist their clients when it comes to raising capital. At the same time, corporate banking professionals assist their clients in achieving both their short- and long-term financial goals.
In essence, investment banking is one type of corporate banking solution. Investment banking can be a specialized division of a commercial bank or a totally separate company.
Read on to learn more about the difference between investment banking and corporate banking. In this article, you will learn how they play a big role in the growth and success of their clients.
Corporate Banking vs Investment Banking
Investment Banking assists organizations in growing their business, while Corporate Banking helps organizations manage their finances. Investment bankers guide their clients when it comes to raising capital.
At the same time, corporate banking professionals assist their clients in achieving both their short- and long-term financial goals.
Let’s discuss how these two types of banking services differ from each other.
What Is Corporate Banking
Corporate banking, also known as corporate finance, refers to the custom-fit financial services financial institutions offer to their corporate clients. These financial institutions aim to assist corporations in managing corporate funds.
Each commercial bank typically has a specialized division for corporate banking. Isolating it from all other financial services allows commercial banks to focus on addressing the needs of their corporate clients. Suffice to say that they have a team of bankers whose ultimate expertise is corporate banking.
The corporate banking division offers a range of banking solutions for its clients. These include cash management, asset management, credit management, and underwriting solutions. Their clients are not only big companies, but they also cater to small and medium-sized enterprises (SMEs).
With corporate banking, commercial banks can help companies meet their business and financial objectives.
Corporate Banking Services
There are several types of corporate banking services. These include the following:
- Credit Services
- Treasury Services
- Fixed Asset Requirement Financing Services
- Employer Services
- Commercial Services
Let’s discuss each one of them.
1. Credit Services
Credit services focus on loans and other credit-related products. These services play a big role in the profitability of commercial banks. Loans, for instance, have significantly high-interest rates. This is due to the prevalence of the high risk of lending large sums of money to corporate clients.
2. Treasury Services
Banks offer treasury services to assist corporations in terms of managing their working capital requirements. Multinational corporations typically get these services because they expedite currency conversion.
3. Fixed Asset Requirement Financing Services
Corporations that normally get these are those involved in capital-intensive industries. Examples of these are heavy machinery manufacturing, information technology, and transportation businesses.
With this type of banking solution, banks expedite customized loans and lease agreements. That way, they open opportunities for their corporate clients to buy machinery, equipment, and other heavy-duty requirements.
4. Employer Services
Banks also offer products related to salaries and fringe benefits of employees. They offer payroll facilities that will enable corporations to manage salary releases conveniently. Aside from that, banks also offer healthcare plans and retirement plans.
5. Commercial Services
The commercial services offered by banks include debt and equity restructuring, leverage analysis, portfolio analysis, real asset analysis, and more. Banks also offer asset management services, underwriting for initial public offerings (IPOs), and more.
These services, however, have formed part of the investment banking services ever since the passage of the Glass-Steagall Act. Suffice to say that investment banking is one of the banking solutions offered to clients under corporate banking. But then again, investment banking can be a specialized division of a commercial bank or a separate corporation in itself.
What Is Investment Banking
Similar to corporate banking, investment banking is also a specialized division of banks. However, there are financial institutions that solely offer investment banking solutions. They are, of course, called investment banks.
Investment banking services focus on helping their clients raise capital. At the same time, it focuses on providing all other types of financial consultancy services.
One of the things that set investment banking apart from corporate banking is its target market. Both individuals and organizations can avail investment banking services. Whereas corporate banking services solely focus on organizations.
There are different types of investment banking solutions. Some of these are proprietary trading, trading securities, and leveraged finance. Investment bankers also offer services related to mergers and acquisitions.
Suffice to say that investment banking is a more complex financial mechanism than other types of financial services.
Investment Banking Services
There are several types of investment banking solutions. Among these are the following:
- Mergers and Acquisitions Solutions
- Restructuring Solutions
- Leveraged Financing Solutions
- Securities Underwriting Solutions
1. Mergers and Acquisitions Solutions
Under the mergers and acquisitions (M&A) solutions, investment banks first and foremost provide sound pieces of M&A advice to corporate clients. They then facilitate transactions where corporations sell themselves to corporate buyers and acquire smaller businesses.
Also, investment banks assist corporations in acquiring or divesting specific assets or divisions from other businesses.
M&A consists of two broad categories, namely, sell-side M&A deals and buy-side M&A deals. In terms of sell-side M&A deals, investment banks deal with corporations that are interested in selling themselves. They can sell either the entire business or only specific divisions.
When it comes to buy-side M&A deals, investment bankers deal with corporations interested in buying either another business or only an asset or division of it.
2. Restructuring Solutions
Investment banking services include restructuring solutions. Banks suggest strategies on how corporations can modify their capital structure to survive. They deal with issues concerning liquidations, bankruptcies, and distressed sales. Also, they have the capability to coordinate with both the creditors and the debtors.
Restructuring and distressed transactions consist of two parties, namely, the debtors and the creditors. Banks deal with only one party in each transaction.
Debtors have three types:
- Stressed company,
- Distressed company, and
- Bankrupt company.
When we say the company is stressed, it can still pay interest on its debt. However, it may encounter some serious trouble in the long run.
A distressed company is an organization that has already missed paying interest, the principal amount, or the maturity. At the same time, a bankrupt corporation has already entered a liquidation or reorganization process.
These corporations deal with investment bankers to assist them in achieving the most favorable outcome for them.
On the other hand, creditors may be banks or bondholders. They can also be subordinated or mezzanine lenders. The role of investment bankers is to find the most favorable terms for creditors. This can be the highest repayment percentage or recovery. When it comes to a debt-for-equity swap, it can be the higher percentage of equity.
3. Leveraged Financing Solutions
Another investment banking solution is leveraged financing. Investment banks provide loans to corporations and private equity firms for leveraged buyouts.
Every investment bank has a team of experts that solely focus on Leveraged Finance. These experts work on such transactions as leveraged buyouts, recapitalizations, and asset acquisitions.
Corporations that are interested in leveraged financing solutions typically do so using debt. This is because using debt is considerably cheaper compared to using cash or equity.
Several banks have a good track record in providing leveraged financing solutions. Among these are Citi, Credit Suisse, and JPMorgan Chase.
4. Securities Underwriting Solutions
Investment banks also offer securities underwriting solutions. In simple terms, investment banks bring long-term funds’ supplier and long-term funds’ users together in the capital markets. In essence, investment banks play a big role in the security offering process as the financial middlemen.
All companies that consider raising funds in the capital markets will most likely seek assistance from investment banks. Investment banks are widely recognized as a significant source of financial market expertise.
There are several approaches as to how corporations can sell securities in the primary capital markets. These include the following:
- Public Cash Offerings,
- Private or Direct Placements, and
- Rights Offerings.
Public Cash Offerings
A Public Cash Offering happens when a company wants to issue new securities they intend to sell to the public. To make this happen, the company hires an investment banker to handle such a transaction.
The bank agrees to buy the entire issue of securities at a set price. Then, it resells the issue to the public at a higher price.
Private or Direct Placements
A Private Placement happens when a company is not interested in selling to the public. Instead, it prefers to place debt or preferred stock issues directly or privately with institutional investors. In which case, investment banks are paid a “finder’s fee” for finding a buyer and closing the deal.
Rights Offerings
A Rights Offering happens when a company prefers to sell its common stock to its stockholders. The company then issues rights, entitling each stockholder to buy new shares at a subscription price below the market price.
Again, what’s the difference between corporate banking vs investment banking? Investment banking helps grow an organization by assisting clients in raising capital. Meanwhile, corporate banking deals with managing finances for clients. Specifically, corporate banking professionals help their clients in achieving their long-and short-term goals.
Corporate Finance Vs Investment Banking
The difference between corporate finance and investment banking is not only their target markets. In fact, there is only a slight difference when it comes to this aspect. In most cases, corporate finance and investment banking cater to the same types of customers.
Their difference mainly lies in the types of services offered to clients.
Corporate banking professionals help clients achieve both their short-term and long-term financial goals. In other words, they also deal with the day-to-day financial operations of their clients.
On the other hand, investment banking professionals help clients raise capital or investments in the public markets. They run private planets of debt capital and stocks. Also, they handle merger and acquisition deals.
In essence, investment bankers help their clients from a capital perspective. At the same time, corporate banking professionals assist clients in managing their capital and in making strategic financial-related decisions.
The Glass-Steagall Act of 1933
The term Corporate Banking was initially used in the United States upon the Glass-Steagall Act of 1933. The law was created to establish the distinction between investment banking and corporate finance finally.
Two members of the U.S. Congress introduced the Glass-Steagall Act (GSA). They were U.S. Senate President Carter Glass and U.S. Committee on Banking and Currency Chairman Henry Steagall.
The law was a result of the stock market crash that occurred in 1929. The unfortunate incident led to the failure of commercial banks and eventually resulted in the Great Depression.
During that time, it was believed that the financial crash resulted from improper banking activity. Commercial banks allegedly placed such a very high risk on the money of their depositors.
So, banks were instructed to choose only one area of expertise. If a bank chose to specialize in corporate banking, it was prohibited to provide investment banking services, and vice versa.
The 1999 Repeal of the Glass-Steagall Act
A debate sparked concerning the Glass-Steagall Act. The banking sector believed that the law’s restrictions were negatively affecting the health of the financial services industry. Instead of making it safer, the law was allegedly making it even riskier.
The act was repealed in November 1999, and the Gramm-Leach-Bliley Act was established. This time, banks can diversify their activities.
Since then, banks have had the option to offer both investment banking and corporate banking solutions to clients. However, banks have to provide a specialized division for each of these types of services.
Conclusion – Investment Banking vs Corporate Banking
Investment Banking assists organizations in growing their business, while Corporate Banking helps organizations manage their finances. Investment bankers guide their clients when it comes to raising capital.
At the same time, corporate banking professionals assist their clients in achieving both their short- and long-term financial goals.
Banking solutions under Corporate Banking include the following:
- Credit,
- Treasury,
- Fixed asset requirement financing, and
- Employer services.
As for Investment Banking, services involve mergers and acquisitions, restructuring, leveraged finance, and securities underwriting.
In other words, investment banking is a more complex financial mechanism than corporate finance and other types of financial services.
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