Types of Banks

On the sellside, there are many types of financial institutions, but banks are by far the most prominent. However, actually defining precisely what is a bank can be somewhat hard nowadays when there are so many branches and services offered. A typical large bank holding company in the US may comprise of an investment bank, a commercial bank, a retail bank, and an asset/wealth management branch. The services of the “sales and trading” division at investment banks can also be found at standalone broker-dealers.The asset/wealth management branch, inherently buyside as an investor, can operate as a standalone entity, or even combined with broker-dealers, as in the case of TD Ameritrade. We shall cover in this lesson the types of “banks” out there, their structures, and the types of work done by employees of various roles at these institutions.

Front Office vs. Back Office

In finance, one might hear the terms front office and back office thrown around from time to time. These terms refer to a classification of jobs at banks depending on their functions and who an employee would interact with on a day to day basis. Although one can also describe a “middle office”, for simplicity’s sake, we are going to group this together with the back office and give an umbrella definition. As with any industry, it takes people with different skill sets to keep a company running smoothly.

Front Office

The front office is generally referred to as the part of a bank that generates its revenues, or is interacting with its clients.

1. At an investment bank, this would be the traders doing the trading, and investment bankers who are creating the pitch books and valuation analyses for clients.
2. At a commercial bank, this would be the sales teams bringing in corporate clients and analysts creating loan evaluations.
3. At a retail bank, this would be the relationship manager that sits down with us to educate us about services and help us manage our accounts.
4. At a wealth management firm, it would be the financial advisor sitting down with us to go over our investment portfolios and financial planning.

Back Office

The back office is generally referred to as the part of a bank that takes care of operations, technology, human resources, and any supporting role that keeps the company running smoothly.

Commercial Banks

At commercial banks, remember that their primary business is accepting deposits and lending to corporate clients. There are different banking services for these corporate clients, and the work available depends on what service the division/team is providing. Below are two of the main services a commercial bank provides.

Lending

Providing loans to businesses is a main service of the commercial bank. These loans help businesses meet immediate financial needs, consolidate debt, and expand their operations. From the bank’s perspective, it wants to lend money out, but only to the right borrowers and at an attractive interest rate to earn a return. Credit analysts’ roles are to help a bank determine whether it should lend to a company and what interest rate it should charge. Some important factors to consider when doing this analysis are:

1. How long has the company been around?
2. What does their balance sheet look like?
3. Are they earning enough to pay off the interest on the loans?
4. What are they using the loan for?
5. Have we (the bank) had a past relationship with this company to know that it’s reliable?
6. Are there assets that we can use as collateral to claim in case the company defaults and cannot pay back the loan?

Real Estate Services

This is essentially providing mortgages for real estate purchases. An analyst working for a commercial mortgage division will be analyzing the risks and returns of giving initiating a mortgage with a corporate client. One important factor to consider when doing this analysis - in addition to those listed in the previous section - is:

What is the loan to value (LTV) of the transaction? LTV is a measure of risk. It is the amount of the loan compared to the value of the asset loaned against. Mathematically, LTV = (amount of loan) / (value of asset). A lower LTV is better because that means the borrower is able to pay a higher percentage of the purchase price upfront. If we use a mortgage analogy, a $120,000 mortgage on a $200,000 house has an LTV of 0.6. The buyer can pay 40% upfront and needs to take out a loan of 60% of the property’s value.

Of course, in addition to the technical work and analysis done in these roles at a commercial bank, there needs to be relationship managers to meet with the client and close the deal.

Retail Banks

At retail banks, services are all geared towards the consumer. Similar to commercial banks, personal loans and home mortgages are a vital part of a retail bank’s business. Credit analysts at retail banks also help evaluate which loans to make to which customers, whether it’s a personal loan or mortgage.

Checking and savings account services are vital to retail banks because they are the gateway for the bank to selling other services to its clients. For a bank to get our business in their other products, us customers usually open an account with them first. Because of this, working at retail banks is very much client facing. If you are a people’s person, then it could be very easy to quickly get the hang of things.

Debit card and credit card services help improve the lives of consumers. As a credit analyst, one would be evaluating whether to approve a credit card application for a consumer. Customer service needs to be tech savvy and great sales people - think about the problems that we encounter and the questions that we have when we contact them for questions about our credit card accounts: they must both solve our problems and sell us new products without upsetting us!

Other Institutions

Broker-Dealers

The firm and its traders execute trades with their own capital. However, it is hard to distinctly classify all trading firms because trading patterns are not necessarily strictly defined. What we mean by this is that sometimes, traders act as market makers, helping to insure liquidity to their clients. At other times, traders do proprietary trading in making bets on certain assets in the market. Lastly, there is the grey, murky middle ground when traders do a bit of this, a bit of that. A metric could be the amount of directional risk that a trader is taking, but event that is a continuum without a clear divide. This is why it is hard to make a legal case against some traders back in the financial crisis who profited from the chaos. Yes they are in essence betting against their clients...but in practice, they were performing their jobs as liquidity providers. For every buyer to buy something, there has to be a seller to sell, and they will essentially be betting against each other.

Wealth Management

The work is essentially on the buyside, but the the financial advisors are still selling a service to their clients. If mom and pop decided to let a financial advisor at a wealth management firm handle their assets and help with life planning, they essentially transfer their role as an investor to the financial advisor. These firms service a variety of clients from middle class working families to wealthy individuals with family money, inheritances in trusts, or celebrities who need financial planning advice. The work at these firms is very heavily relationship management based. The senior level employees sit down with the client and goes over their situation while the more junior employees might be helping out with researching funds to invest in and sending out monthly letters to educate and inform clients.

Financial Advisors

This category of financial professionals is very diverse in the sense that they can work as part of a big bank, part of a brokerage, part of a small independent firm, or even strike it out on their own! At the end of the day, it is all about building and maintaining relationships with clients and helping them achieve their financial goals. It needs a variety of skill sets from technical like understanding the investing process to interpersonal, like knowing how to deal with clients in distress or are undisciplined in their habits. It is great for someone with an entrepreneurial spirit, knows that they provide a valuable services, and is not afraid to put themselves out their as competent, reliable, and trustworthy.

Review

Contrasted to the previous lesson where we broke down possible career paths by services provided, this lesson broke down job opportunities by organization type. The types of careers available are as diverse in skill requirements as they are in life styles and career progression. We briefly covered the opportunities available in a variety of institutions in this lesson, but we will devote all of next lesson to the discussion of what work is like at the heart of finance - the investment bank.