- What is Corporate Banking?
- Corporate Banking Product Offerings
- How Corporate Bank Lending Works
- Largest Corporate Banks
- Corporate Banking Roles
- Corporate Banking Salary & Career Path
- Breaking into Corporate Banking
- Corporate Banking Exit Opportunities
- Corporate Banking vs Private Banking
- Corporate Banking vs Debt Capital Markets (DCM)
- Corporate Banking vs Investment Banking
- Corporate Banking Trends
- Bilateral vs Syndicated Loans
What is Corporate Banking?
Corporate banking (also called institutional banking) is a division in a bank responsible for lending products like Revolving Credit Facilities, Term Loans, and Bridge Finance, letters of credit, trade finance, and cash management to corporations, financial institutions, and governments.
The basic business model of a Corporate Bank is similar to commercial banking: Use customer deposits as a funding source to make business loans. For example, if a bank has $100 million in deposits from customers A, B, and C, the Corporate Bank can use $90 million of those deposits to issue loans to customers D, E, F. As long as the interest rate the bank receives from the loans exceeds the rate it must pay on deposits, it earns a profit.
However, there is a key difference. Commercial banking is a standalone business line whose sole focus is generating income from its lending operations. Corporate banking, on the other hand, is usually housed within the investment bank part of a financial institution and serves as the quarterback for broader capital markets business. Corporate banking is closely tied to the M&A advisory and capital markets divisions within an investment bank.
Corporate Banking as “Loss Leader”?
What this means is that within the investment bank, corporate banking often functions as a “loss leader” to foster stronger overall investment banking relationships. Banks often give large, sophisticated clients sweetheart loan offers because they can be cross-sold on additional banking services or want to build a long-term relationship.
Clients regularly require corporate banking products such as term loans, revolving credit facilities, and cash management solutions to support business operations.
When a big corporation decides to tap into capital markets and needs to allocate distribution (and fees, or “wallet”) to the capital markets teams of various banks they’ve done business with, they often consider the prior support corporate bankers gave them when deciding how much to allocate to each bank.
So while the commercial bank will only lend to a small business if it clears lending returns of, say, 20%, a corporate bank might accept a paltry 8% lending return if the investment bank views those returns as acceptable given the potential for future equity capital markets, debt capital markets, or interest rates derivatives business.
As a result, when screening for whether or not to extend credit, corporate banking deal committees look at historical investment banking revenues and the potential for longer term relationships.
Corporate Banking Product Offerings
Corporate bankers generally offer standard commercial banking products, but on a much larger scale. These are primarily lending solutions, most notably:
|Revolving Credit Facilities
|Non-Revolving Term Loans
|Letters of Credit (Standby and Performance)
How Corporate Bank Lending Works
While it is true that Corporate Banking serves as a loss leader, it doesn’t just give loans away – it still adheres to a lending process.
Similar to commercial banking, the lending decision is based on approval from a risk division, which looks at the bank’s potential losses against such an exposure and the capital they have to put up against it.
Additionally, each loan must clear an investment or lending return hurdle which ensures that the bank is getting an acceptable return on its capital. Key lending ratios used to ascertain returns include return on assets, return on equity, and return on risk weighted assets.
Key Lending Ratios
Loans are liabilities for corporations and individuals, but they are assets for corporate banks.
When evaluating a single loan, a corporate bank will look at the interest income from the loan plus other fees and charges and subtract the interest expense (their cost of funds from customer deposits or borrowing money from elsewhere) as well as associated labor costs/salaries and allocated overhead.
There also needs to be money set aside for any expected losses on the loan, or a contingency / provision.
This will get the corporate bank to a loan level net income. This net income is used by corporate banking professionals to calculate how profitable a potential loan is and whether or not they should extend the loan to a prospective borrower.
If these profitability calculations or ratios meet the hurdle for the lending product, the banks can approve the loan assuming other criteria are met from a risk perspective such as exposure to the same client, exposure to the industry at large and expected losses from the loan.
Here is a summary table for calculating the net income for a loan:
|add: Fee Income|
|less: Cost of Funds|
|Net Interest Margin|
|less: Loan Loss Provisions|
|less: Non-interest Expense|
|Net Income before Tax|
|less: Income Tax|
Return on Assets (ROA) = Net income / total assets
Bank loans (a financial firm’s assets) are predominantly funded by debt (interest is essentially cost of goods sold for a bank), so ROAs will be much lower than in non-financial industries
Return on assets is not directly comparable across lending products – so an ROA of 1% is not necessarily worse than an ROA of 3% if product A is less risky than product B.
For example, if product A is a secured mortgage and product B is an unsecured credit card debt, it makes sense that product B demands a higher return on the loan.
A secured mortgage lender has recourse to a property where the value of the collateral does not fluctuate very much and exceeds the value of the loan. The unsecured credit card debt has no such benefit.
Return on Equity (ROE) = Net income / shareholder’s equity
A key metric for measuring how effectively the bank is using its equity to achieve profits through lending.
Return on Risk Weighted Assets (RORWA) = Net income* / risk weighted assets
An adjusted return on capital that captures the risks taken to achieve returns. The credit risk for a small, highly levered company with no competitive advantage is not the same as a government bond.
Accordingly, banks allocate regulatory capital at risk based on the credit profiles for a potential borrower that their risk rating models suggest.
RoRWA is a good way to normalize how the corporate bank evaluates profitability on the loan. While ROA uses assets as the denominator in the formula, RoRWA will adjust the amount of assets based on their perceived risk.
*Note that the numerator may be calculated as pre-tax profit.
Revolving credit facilities are considered a loss leader product for corporate banks because they tend to run an economic loss for the bank. The loss occurs as banks set aside capital for creditors, while borrowers instead of drawing on the revolver prefer the longer-dated capital of bonds and use cash and commercial paper for short term credit needs.
As we’ve mentioned, however, in the broader investment banking relationship, the overall lending returns become acceptable if debt and equity capital markets underwriting are taken into account – borrowers essentially rewarding their banks with higher allocations.
Illustrative Example Let’s say that a corporate bank is lending to a large corporate client whose return on equity (ROE) is 13%, while the bank’s internal hurdle rate is 17%. As a standalone lending decision, this would not work. However, if they expect debt capital market refinancing over the next year and a potential M&A deal that could generate an all-in capital markets return of 22%, the bank may see this as a worthwhile decision.
Largest Corporate Banks
The main players in corporate banking are universal banks with investment banking divisions and large balance sheets. Top firms include:
Although Morgan Stanley and Goldman Sachs offer corporate banking services, they are not as prominent because they don’t have the same type of balance sheet (i.e., no customer deposits).
- Bank of America
- Wells Fargo
- JP Morgan
- RBC Capital Markets
- Truist Financial (formerly SunTrust)
Corporate Banking Roles
Although corporate banking is broadly considered an investment banking product, it is large enough so that there will be sub-divisions split across industry verticals and a loan syndications team. Similar to other divisions within the investment bank, the career trajectory begins at analyst and ends with a managing director role.
Corporate Banking Career Trajectory
At some banks, corporate bankers will also be in charge of credit underwriting that interfaces with the risk management function. At others, the credit underwriting will be handled by a mid-office counterparty credit team.
Corporate Banking Analyst
Corporate banking analysts are typically charged with the following tasks:
Corporate banking analysts split their time doing deal-related work and general relationship management or administrative work.
Deal-related work for corporate bankers will also be segmented into event-driven work (e.g., acquisition finance for an LBO or merger) and recurring revenue work (e.g., renewal of revolving credit facility).
If there is a live deal, the analyst will spend most of the day putting together credit memos and running base and credit case modeling scenarios for potential loans.
For the corporate banking models, analysts will run scenario analysis to see where the company’s debt covenants are (such as debt / EBITDA or EBITDA / interest expense) and whether or not there is a danger of a breach. They will also be looking at what debt paydown looks like in each case.
If there are no new money live deals, analysts will be busy doing credit monitoring and writing up annual and quarterly reviews for the lending portfolio as well as putting together loan market updates with the loan syndications team as marketing and relationship management tools.
Credit monitoring entails looking at the historical financials released every quarter by the companies the corporate bank lends to and solving for the leverage ratios (Debt / EBITDA) to make sure covenants have not been tripped and that they are unlikely to be tripped in the near future.
Loan market updates can be generic or industry specific. They are PowerPoint presentations that will show where interest rates have moved and how much new loan volume has been issued (sometimes compared to a prior comparable period). Corporate banking analysts will be in charge of putting together charts showing the moves in interest rates and other important macroeconomic factors.
Subsequent slides will have an industry update and a spread of new loans in the same industry or credit rating to show the client goalposts around where their loans would be priced if they went into the market. There may also be a comparison of the debt covenants that were negotiated for each loan. Unlike debt capital markets, loan terms are commercially sensitive and these presentations will usually be on a no-names basis when showing the recent loan issues.
When staffed on live M&A deals or when there is extensive credit work required during annual review season, corporate bankers can work upwards of 70 hours a week. That’s substantial, but much less than a bad week in investment banking.
Corporate Banking Associate
Associates manage and mentor corporate banking analysts and check their work, while taking on administrative interactions with members of client treasury teams.
Similar to investment banking, there are times when a corporate banking associates often must also take on many of the responsibilities of the analysts.
Corporate Banking Vice President
VPs run the lending process and serve as the middle management function in corporate banking. They may also be given small revenue-generating or relationship management responsibilities with clients. VPs will start to be responsible for execution, such as loan documentation negotiations and walking the client’s CFO and treasury team through the lending process.
Corporate banking directors have some client accounts and focus on revenue, net income, and lending book targets.
Corporate banking base salaries can be comparable to investment banking, but bonuses are significantly lower
Corporate Banking Managing Director
Managing directors originate and manage the client relationship. They are typically well known in their industry vertical and serve as go-to lenders on the largest accounts.
Corporate Banking Salary & Career Path
At corporate banks that are well integrated into the investment bank, base salaries are usually comparable to investment banking salaries, but bonuses are significantly lower to reflect the stickiness of client revenue and benefit of using the broader bank platform for relationship managers.
Corporate Banking Compensation: Base + Bonus
At a full service investment bank:
- Corporate banking analysts may earn $85,000 for a base salary and 20-50% bonus.
- Corporate banking associates may earn $100,000 – $150,000 base salary and 30-70% bonus.
Promotions from analyst to associate ranks are more common within corporate banking than within investment banking.
At corporate banks with less established investment banking businesses, salaries are lower than investment banking but greater than commercial banking.
Breaking into Corporate Banking
Note: During COVID, the process is similar, but these informational sessions and interviews have all gone virtual.
Corporate banking teams go to schools for information sessions either with or after the investment banking teams. The pool of target schools is much wider for corporate banks than investment banks.
At the interview stage, recruits meet various corporate banking junior and senior bankers. The last stage is with the group head. Sometimes corporate banking candidates meet with other investment banking product groups if they work closely together.
Technical interview questions tend to focus on credit and cash flow. Some interviews include a small case study where the interviewee is provided with a set of financials and asked to calculate credit ratios and make a lending recommendation.
Corporate bankers often get stuck at a certain level in their trajectory, with many trying to lateral to debt capital markets or investment banking.
Lateral hiring in corporate banking to replace early leavers or for team expansion is competitive but corporate banks are open to more backgrounds, including:
- Internal candidates from commercial banking
- Internal candidates from counterparty credit
- Internal candidates from risk management functions
Corporate Banking Exit Opportunities
Corporate banking analysts have fewer exit opportunities than their investment banking peers.
The nature of the work lends itself to analyst-to-associate promotions, and climbing the ladder to become a career corporate banker. However, corporate banking is still a pyramid structure with only a certain number of MDs in each group.
As such, corporate bankers often get stuck at a certain level or look for other opportunities within the same bank, with many trying to lateral to debt capital markets or investment banking.
Outside of the bank, corporate bankers rarely place into hedge funds, private equity, or corporate development.
Corporate Banking vs Private Banking
The big difference between corporate banking and private banking is the client base.
While corporate banking provides credit products for corporates, financials, and governments, private banking deals with high net worth (HNW) and ultra high net worth (UHNW) individuals and families.
While private bankers do offer credit products, they are just one offering alongside tax, estate planning, asset management, and concierge services.
As such, corporate banking has limited overlap with private banking. Such overlap exists when corporate bankers cross-sell their bank’s private banking services to the senior management of key relationship clients.
Corporate Banking vs Debt Capital Markets (DCM)
Corporate banking works closely with debt capital markets, as corporate treasurers look at lending relationships to inform their debt capital markets allocations. The corporate banking team also works closely with DCM for any acquisition financing or bridge financing.
Both groups offer credit products, although the debt issued in DCM is more permanent capital and does not stay on the bank’s balance sheet (bonds are distributed to institutional bondholders through the bank’s sales and trading function).
Pricing: Bonds (DCM) vs Loans & Revolvers (Corporate Banking)
- Bonds (DCM): Usually priced as a fixed coupon (although there are floating rate bonds) based on a credit spread to the underlying reference risk-free security (US Treasuries) at time of issue.
- Revolvers & Term Loans (Corporate banking): Pricing is a fixed margin relative to a benchmark floating rate in the bank market.
Corporate Banking vs Investment Banking
Corporate banking is sometimes referred to as “investment banking lite”. Similarities exist as the two divisions often work alongside each other as part of the broader capital markets platform. However, corporate banking is primarily focused on recurring relationship management via credit while investment bankers are more focused on idea generation and corporate finance advisory.
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Corporate Banking Trends
In mature markets such as the U.S., Canada, Western Europe, and Australia, corporates tend to have debt more “termed out” – capitalizing short-term debt into long-term debt without taking on additional debt – as there are deep debt capital markets where they can tap into longer dated bonds in the capital structure.
The larger the corporate banking client, the more flexibility they will have in corporate banking credit solutions.
In emerging markets, borrowers lean heavily on bank debt as the cheapest capital. Unlike commercial banking, corporate banks still often syndicate the loans to reduce single counterparty exposure.
All things equal, size is a credit positive. The larger the corporate banking client and the more investment banking products that can be sold to them, the more flexibility they will have in corporate banking credit solutions.
Smaller enterprises not on investment bankers’ radar may have small lending syndicates with stricter terms and less flexibility on pricing in order to meet lending hurdles. Large investment grade corporates, however, will have standard syndicated revolving credit facilities as a liquidity backstop with favorable pricing grids.
Bilateral vs Syndicated Loans
Most small- and medium-sized businesses conduct their banking business with one main commercial bank using bilateral loans.
Meanwhile, larger corporates and institutions utilize a broader lender base (a syndicate) through corporate banking.
This works well for both parties. Corporate banks want to spread their risk exposure to each client and clients want more investment banks at their disposal. Similarly, large borrowers may not want to be beholden to one bank. As such, most corporate banking facilities are syndicated out broadly.
In some cases, club deals are arranged in which loans are split between a smaller group of banks with equal pro-rata commitments where all participants get league table credit as joint bookrunner.
While bilateral loans are more easily negotiated between the bank and the borrower, syndicated loans are generally priced at market.