by elmads

Introduction

This is the continuation of my previous blog titled “Banking & Their History”

Banks are an important part of a country’s financial system. They are the intermediary of money, the custodian of wealth and the financier for business’ endeavours for growth and expansion.

In this blog we will go deeper into the 4 common types of a publicly listed banks. These are the Consumer & Community Banking (CCB), Commercial Banking (CB), Corporate and Investment Banking (CIB) and Asset & Wealth Management (AWM). There are others more but these are the popular 4 where most publicly traded banking companies have within their business operations.

A bank can either have one or more within their banking operations.

This is a service that banks offer specifically for individuals, like you, me and everyone else. The other term for it is retail banking.

This banking segment offers various products and services to people, via deposits and loans. Included here are checking accounts, savings accounts, debit cards, certificate of deposits, personal loans, credit cards and lines of credit to name a few.

Let’s talk about each basic services that retail banking offers. We’ll start first with the DEPOSIT accounts.

• Checking Accounts – this is an on demand account, which the person who has this kind of account can withdraw money anytime via an ATM, debit card purchase or cheques. Its purpose is for quick liquid access, and protection of cash. Checking accounts will have fees which will differ for every bank, some might charge fees for maintenance, or overdraft fees or out of network ATM fees. This kind of account sometimes can earn interest but with minimal percentage only most especially when compared to savings accounts. Just remember this Checking Accounts = For Fast Money Access.

• Savings Accounts – this is an account that gives interests for depositing money in their bank. Its purpose is for accumulating additional money from our parked capital. The interest in savings accounts are higher than checking accounts. Some savings accounts will have a required minimum balance to keep the account open, or will have maintenance fees and/or a withdrawal limit. Just remember that Savings Accounts = Our Money Making Some Money.

• Certificate of Deposits – This is a product offered by banks that provides higher interest rate premiums in exchange for the customer agreeing to give their money to the banks. It is us, lending our money to the banks for a fixed amount of time, usually months to years with the promise of them paying us a specified consistent amount of interest to us. At the end of the agreed term, the bank will return the full amount of money we lent them initially. It is just like bonds, but instead of a company or the government who issues it as debt contract, it is the banks. For more information regarding bonds, see my blog titled “What are Bonds”. Just remember that Certificate of Deposits = Our Money Locked for a couple of Months to Make Some More Money than what it will make with Savings Accounts.

These three are the most common deposit accounts, but there are others more. The other deposit accounts are innovations made by banks to entice more people to open an account with them, and to also cater one’s personal financial needs. Examples of this are the student deposit accounts and junior savings accounts.

We now move forward to the lending side, this is the core of how banks achieve profitability.

• Personal Loans – This a type of debt in which a person could ask a higher amount of money to borrow than what he/she will be able to do with credit cards. This is still subject to the banks approval depending on an individual’s credit history, financial status and job.

• Credit Cards – This is the easiest and fastest way to take on debt without needing any prior approval from banks every time a person uses it. This is because the financial and credit checks have been reviewed done by the bank already prior to them giving the customer the credit card. Nevertheless, credit cards usually have a small initial maximum limit that a person can use, which again is based from the banks assessment of the person’s overall credit worthiness. A credit increase can be applied by the credit card owner after a few months or years, and is still subject for review done by your chosen bank.

• Lines of Credit – This is a type of debt that is different form traditional ones like personal loans and credit cards. A person who applies and gets approved by banks for lines of credit have three factors that he/she needs to be aware.

Firstly, the person can only borrow a maximum amount of money as stated by the bank.

Secondly, the person can take whatever amount of money from that approved line of credit as long as he/she doesn’t exceed to borrow more than the approved maximum capacity.

Thirdly, the person will only pay interest on the amount of money he/she drew from the line of credit. Unlike personal loans, where we are required to pay interest on the whole amount of money we borrowed from the banks, regardless if we use it or not.

Lines of credits usually have a lower interest rate payment than credit cards and personal loans.

As an example, let’s say Evan was approved by ELMads Bank for a line of credit with a maximum worth of $10,000. At the 1^st month Evan took $1,000 only, and with that amount he’ll pay interest, then the second month he took $3,000 which he’ll also pay interest totalling $4,000 ($1,000 + $3,000). That’s the pros of lines of credit, we’ll be able to borrow money anytime as long as it will not exceed the agreed maximum capacity, and we only pay interest on the amount taken out.

These are the basic and common financial services being offered by Consumer and Community Banking. They act as the on-the-go banking services provided to the people, as a custodian and financier of money.

Banks mostly gain their revenue through interest income (difference between interest payments received from their borrowers “Lending” and the interest payment they pay on their depositors “Deposit”) received from their consumer and community banking operations.

If retail banking serves the financial needs of the people, then commercial banking offers financial services to corporations. It is basically the customer being served that differentiates between Consumer Banking and Commercial Banking.

That being said, the purpose is still almost the same, to be a company’s custodian of money and also assist corporations with their business operations by lending money.

Commercial banking could cater to a wide range of companies, it could be from small to large. It is also worth taking note that the clienteles being handled in this segment might be few in numbers, but massive in monetary amount. Whereas, the retail banking division is the direct opposite of this.

The bulk of a banks’ interest income is gained from both retail and commercial banking operations. Note that not all banks have both banking segments.

This is a financial service offered to corporations. J.P. Morgan Chase & Co. in the US defines this division as; “A banking that offers a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital-raising in equity and debt markets, as well as loan origination and syndication. Banking also includes Wholesale Payments, which provides payments services enabling clients to manage payments and receipts globally, and cross-border financing. Markets & Securities Services includes Markets, a global market-maker across products, including cash and derivative instruments, which also offers sophisticated risk management solutions, prime brokerage, and research. Markets & Securities Services also includes Securities Services, a leading global custodian which provides custody, fund accounting and administration, and securities lending products principally for asset managers, insurance companies and public and private investment funds” – Taken from J.P. Morgan 2020 Annual Reports. https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/investor-relations/documents/annualreport-2020.pdf

Basically, what it says here is that the CIB division offers solutions and their expertise to help a company solve problems that is anything related to financing like raising capital, grabbing opportunities in the markets where there is arbitrage, Mergers and Acquisitions (M&A), and others more.

In this segment, banks mostly gain their revenue through non-interest income. Meaning, the fees and commissions they get from this segment’s solution and support services. It is just like a professional fee income received by a medical practitioner.

This is a division of banking where the banks offer services to individuals and/or families who want their wealth to be managed. It generally involves the advice and execution of banks to handle their client’s finances and investments.

There are a lot of assets and financial instruments that makes investing confusing and overwhelming, but with a bank’s AWM services, clients wouldn’t need to learn anymore the complexities of the markets and do the research to choose the best suitable investment for them.

The managers will be in contact with the person involved in order to have a general idea of their risk appetite, their financial goals and plans for their future. This is where the managers will base the portfolio allocation of their client, an allocation that will align with their client’s wealth today to their future goals.

AWM is broken down into two, the Asset management and Wealth management.

J.P. Morgan Bank in the USA gave their description of the two;

-Asset Management offers multi-asset investment management solutions across equities, fixed income, alternatives and money market funds to institutional and retail investors providing for a broad range of clients’ investment needs.

-Wealth Management Provides retirement products and services, brokerage, custody, trusts and estates, loans, mortgages, deposits and investment management to high net worth clients.

In today’s world, most AWM services done by the banks are through actively manage portfolio accounts, meaning there is a specific portfolio manager that handles the money on the client’s behalf. Their job is to beat the returns of the general markets using different investment strategies.

If you want to know more about the basics regarding actively managed funds, check my blog titled “Passive & Active Funds” and “Mutual Funds” as well.

Banks mostly gain their revenue in this division through non-interest income, the fees they get for managing their client’s assets and wealth.

To sum it up

These are the 4 banking segments on how banks make money. In a bank’s financial statement, we will always encounter two categories in the revenue line, which is the Interest Income and the Non-Interest Income. The Interest Income is the net amount of money they get from their Deposit and Lending operations, while the Non-Interest Income are from the fees they get from their commissions and services , which are not directly related to their lending operations.

In general, we could say that Consumer & Community Banking (CCB) and Commercial Banking (CB) are mostly where they get their Interest Income while, the Non-Interest income mostly comes from Corporate and Investment Banking (CIB) and Asset & Wealth Management (AWM).

NOTE: Not all publicly listed banking companies have these four types of banking within their operations, some only have 2-3. For us to know what a publicly listed bank has in their banking operations, we need to read and look into their financial reports. That’s the simplest and fastest way to get the most accurate information of a publicly listed company.

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.