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Ultimate Guide to Corporate Banking

A complete guide to corporate banking, its products, roles, career trajectories, compensation, and comparisons to related fields

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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

 

  • Bread and butter products in corporate banking.
  • Most companies require revolving lines of credit which can be drawn and repaid as needed for operating and other activities (e.g., an “operating line of credit”).
  • Three major fee components to a revolving credit facility:
  1. Upfront Fees: Fee paid for putting the facility together, which are usually sub-10 basis points per year of tenor. For example, a strong investment grade borrower that enters into a 5-year revolver may pay 30 basis points (0.3%) on the total facility size on day 1, which equates to 6 bps a year. The longer the tenor, the higher the upfront fee will be.
  2. Utilization/drawn margin: Floating rate interest fee on the drawn portion of the revolver. Typically priced as a spread to a benchmark interest rate. For example, the benchmark rate may be LIBOR (which represents the bank’s marginal cost of funds) plus a certain number of basis points. However, this is not fixed and will depend on the underlying credit of the borrower via two pricing grid mechanisms. For most investment grade borrowers, their pricing grid will depend on their external credit ratings (from agencies such as S&P and Moody’s). For leveraged borrowers, the pricing grid will be based on credit ratios such as Debt / EBITDA. An example of an investment grade pricing margin would be LIBOR + 100/120/140/160 bps depending on whether the credit rating was A- or better/BBB+/BBB/BBB-, respectively.
  3. Commitment fees: Fees charged on the undrawn portion of the credit facility. Even though the borrower doesn’t take the bank’s money, the bank still has to set aside the money and incur a loan loss provision for the capital at risk. This is also called the undrawn margin or undrawn fee.

Considerations

  • Revolvers are seen by many as a liquidity source, as they can get short-term credit more cheaply through other avenues. For example, some investment grade companies may have access to commercial paper markets and use revolvers as a liquidity backstop option in case commercial paper markets close.
  • Banks fully commit to funding revolver draws when needed but most of the time the revolver remains unutilized. A revolver only becomes drawn when other funding options are not available, so it is utilized when it has the highest credit risk. Banks only get small commitment fees (roughly 20% of the drawn margin) when revolvers are undrawn, but still have to allocate loan loss provisions against the revolver as their capital is at risk. This contributes to revolvers being known as a loss leader.
Non-Revolving Term Loans

 

  • Standard loans in which the borrower draws the entire facility up front, incurs interest, and repays the full balance at the end of the term.
  • Issued for a variety of reasons, including funding capital expenditures, refinancing the debt stack, general operating activity, M&A, and recapitalizations.
  • A lucrative credit product for corporate banks as the whole commitment amount is drawn and therefore earns strong lending returns. Once a portion of the term loan is repaid, it cannot be redrawn, so the bank’s capital is no longer at risk.
  • Pricing is largely the same as the revolver, with term loans receiving a drawn margin on top of a benchmark rate, which may be LIBOR or the Prime Rate.
Letters of Credit (Standby and Performance)

 

  • A letter from a bank promising payment will be made (i.e., backing from an issuing bank), effectively replacing the credit risk of the creditor/borrower with that of the bank.
  • A standby letter of credit is a bank’s guarantee to provide a payment contingent on its client failing to pay, intended to only be drawn upon in the worst-case scenario.
  • A performance letter of credit guarantees that the bank will make a payment in the event its client cannot complete a non-financial contractual obligation.
  • Banks usually charge 50-75 bps for investment grade corporates and upwards of 100-150 bps for riskier companies.
  • Fees can be reduced if certain actions are taken, such as cash collateralizing the letters of credit amount.
Bridge Financing

 

  • Usually for interim funding for M&A transactions before more permanent capital is raised. Can be lucrative products.
  • For example, if a company is looking to fund a $1 billion acquisition by tapping into the capital markets for $500 million of notes and $500 million of new equity, it may take advantage of a bridge loan while the investment bankers go to market to raise capital.
  • M&A transactions often require funding to be secured as a condition to close, so banks have to indicate they are committed to financing.
  • Bridge loans are attractive because there are fees associated with funding and margin when drawn – the bank’s capital is briefly at risk as it is taken out by ECM and/or DCM.
  • Involve a commitment fee where the bridge lenders are paid on the size of the facility, whether the bridge is funded or not.
  • Involve a funding fee upon issuance of the bridge loan, for which the borrower may receive credit or a rebate if they pay down the loan quickly.
  • Involve drawn fees for the time the drawn amount is outstanding. Unlike normal corporate banking term loans, bridge financing is meant to be paid down. Drawn fees ratchet up the longer the bridge is drawn, incentivizing the borrower to repay quickly.
  • Bridge financing for M&A is not meant as permanent capital. Corporate banks do not want a “hung bridge”, where the bridge loan stays outstanding after being used to initially complete the purchase

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:

Interest Income
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
Net Income

 

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).

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.

Direct Hiring

Corporate banking recruitment is similar to that of investment banking recruiting, although there is more of an emphasis on networking and less of a rigorous technical interview.

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

Lateral hiring in corporate banking to replace early leavers or for team expansion is competitive but corporate banks are open to more backgrounds, including:

  • Accountants
  • 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.

Although credit funds seem like a natural fit, M&A, leveraged finance, and restructuring bankers tend to have stronger modeling skills and more deal experience.

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.

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