Commercial Banks vs Investment Banks: A Comprehensive Guide

Commercial banks and investment banks are two distinct types of financial institutions that play crucial roles in the economy. Commercial banks are responsible for providing basic banking services to individuals and businesses, such as accepting deposits, making loans, and facilitating transactions.

Commercial banks are typically regulated by government agencies and are required to maintain a certain level of liquidity to meet the demands of depositors. This means they must keep a significant portion of their assets in liquid form, such as cash or short-term investments.

Commercial banks tend to be more conservative in their lending practices, focusing on providing loans to individuals and businesses that are likely to repay them. In contrast, investment banks take on more risk by providing financing for larger, more complex transactions.

Investment banks, on the other hand, specialize in helping companies raise capital and advise on mergers and acquisitions. They often work with high-net-worth individuals and institutional investors to manage their wealth and provide investment advice.

The Financial Institutions Group (FIG) is a key sector in investment banking, and it's made up of six verticals: commercial banks, insurance companies, specialty finance firms, brokerages and exchanges, asset management firms, and financial technology companies.

These verticals all have one thing in common: they make money by turning other people's money into more money without having to deal with physical products. Commercial banks, for example, issue loans to companies and individuals, charge interest on these loans, and collect deposits from consumers and issue debt to back the loans.

The FIG sector is highly sensitive to interest rates and broader monetary policy, and companies in this sector tend to be highly leveraged because they use other people's money to make money. This means that they're heavily regulated, especially in commercial banking and insurance, where government officials set the rules and financial ratios that firms need to follow.

Here are some key characteristics of the FIG sector:

The Financial Institutions Group (FIG) is a fascinating sector that includes commercial banks, insurance companies, specialty finance firms, brokerage/exchange companies, asset management firms, and financial technology companies. These firms advise on raising debt and equity and completing mergers and acquisitions.

Commercial banks issue loans to companies and individuals, charge interest on these loans, and collect deposits from consumers and issue debt to back the loans. They make money via the spread between the interest income earned on loans and the interest expense paid on deposits and debt.

Insurance firms transfer risk, and customers pay premiums so that in the case of an expensive disaster, they are compensated by the insurance firm. These firms use the money to invest and earn interest, dividends, and capital gains in addition to the income from writing premiums.

The financials sector has generated the highest fees for large investment banks historically, so they devote many resources to it. This is primarily because the debt issuance volume is 10-20x that of other industries.

There are six verticals within FIG, and the first three – commercial banks, insurance, and specialty finance – are the most different in terms of accounting, valuation, and financial modeling. However, you could easily use a DCF model and standard multiples like TEV / EBITDA to value a broker-dealer, an asset management firm, or a FinTech company.

The top firms in FIG investment banking league tables are a bit nebulous, but if you limit the rankings to M&A advisory for financial institutions, GS, MS, and JPM tend to rank at or near the top.

Here are the six verticals within FIG:

Most financial institutions – except FinTech – have the following qualities in common: they tend to follow the broader markets but with “cycles” that don’t necessarily correspond to broader economic cycles.

The Financial Institutions Group (FIG) has its pros and cons. FIG investment banking is known for having the most deal activity of any group, with a high bar for technical skills. This setup can be quite lucrative for senior coverage bankers, who get clients that come back to their firm over and over for capital raises.

One of the main downsides of FIG investment banking is that it's perceived to be very specialized. This can make it difficult to break into non-FIG roles if you stick around too long. FIG is not the right group for you if your main life goal is to work at a private equity mega-fund as a generalist.

However, if you want to advise or invest in financial institutions, or you're planning to work in the group and transfer elsewhere, FIG should be less of a dungeon and more of a delight. FIG is a complex sector that's sensitive to many factors, including interest rates and broader monetary policy.

Here are some key pros and cons of FIG investment banking:

Higher interest rates can actually help financial institutions in some ways, such as increasing the spread between loan earnings and deposit and debt payments. However, higher interest rates can also lower asset values, which can hurt bank valuation even if it helps their operational performance.

Investment banks serve massive agencies, governments, and wealthy individuals, handling huge monetary deals and elevating capital. They specialize in complex transactions.

Deutsche Bank is a commercial and investment bank, offering regular banking services like checking and savings accounts, loans, and credit cards, in addition to investment banking services like mergers and acquisitions. It serves everyday clients and large organizations.

JP Morgan is an commercial and investment economic organization, providing conventional banking services like financial savings and checking accounts, mortgages, and business loans, as well as investment banking services like underwriting and asset management.

Brokerages, Exchanges, and Investment Banks are similar to normal companies, but their transaction volumes are closely linked to the capital markets.

They make money with commissions charged on transactions, whether small or large.

Higher interest rates tend to hurt these companies because people are less likely to chase returns trading meme stocks or crypto.

Some of these firms offer fee-based services to get more stable revenue and avoid complete dependency on the capital markets.

These companies include Morgan Stanley, Goldman Sachs, Charles Schwab, and others, which are listed in the article.

Their accounting and valuation are quite standard, but the operational metrics differ from normal companies.

Deutsche Bank is a business and funding bank that offers a wide range of financial services. It provides regular banking services like checking and savings accounts, loans, and credit cards.

As a commercial bank, Deutsche Bank serves everyday clients and large organizations. This means it's a one-stop-shop for all their banking needs.

Deutsche Bank's twin position as both a commercial and investment bank makes it a key player in both sectors. It enables mergers, acquisitions, and capital raising.

JP Morgan, another example of a bank with a dual role, offers similar services to Deutsche Bank. It provides conventional banking services to individuals and businesses, as well as investment banking services like underwriting and mergers and acquisitions.

Morgan Stanley, on the other hand, is primarily an investment bank that specializes in large economic deals, wealth management, and investment services. It doesn't offer traditional commercial banking services like checking accounts or retail loans.

Deutsche Bank's versatility and range of services make it a significant player in the banking industry. Its ability to serve both everyday clients and large organizations sets it apart from other banks.

Commercial banks focus on everyday money needs, offering services like accounts, loans, and credit cards to regular people and small to medium businesses. They have a low-risk business model, generating steady profits from interest and fees.

Commercial banking is a more stable and predictable field, with employees typically enjoying a better work-life balance and regular hours. However, the job may be repetitive and less dynamic, with career advancement potentially slower.

Commercial banks play a crucial role in providing essential services to everyday clients, making them a vital part of the financial world.

Investment banking offers high earning potential, with professionals earning massive salaries and bonuses from successful deals. It provides opportunities to work on complex, high-profile transactions, offering valuable experience and networking.

However, the high-risk nature of the work means there can be tremendous financial losses. The process often requires long hours and high pressure, impacting work-life balance.

Commercial banking, on the other hand, offers solid and predictable earnings. Employees typically have a better work-life balance with more regular hours. The job focuses on providing vital services to regular people and businesses, which can be rewarding.

But, commercial banking earnings are often lower compared to investment banking. The work may be repetitive and less dynamic. Career advancement can be slower, and the opportunities for working on high-profile transactions are limited.

Here's a comparison of the two:

Ultimately, the choice between investment banking and commercial banking depends on your career goals and lifestyle preferences. If you thrive in a high-pressure environment and are willing to take on high risks, investment banking may be the right fit. However, if you prioritize a better work-life balance and more predictable earnings, commercial banking could be the way to go.

Commercial banks often get involved in investment banking activities, such as providing fairness opinions and investor presentations. This is evident in deals like the Webster Financial / Sterling Bancorp merger, where Citi, Keefe, Bruyette & Woods (KBW), Stifel, JP Morgan, and Piper Sandler all played a role.

Fairness opinions are crucial in these types of deals, as seen in the Webster Financial / Sterling Bancorp merger, where JP Morgan provided a fairness opinion. This opinion helps ensure that the deal is fair to all parties involved.

Investor presentations are also a key part of investment banking, as they help attract investors to a deal. The Webster Financial / Sterling Bancorp merger had a deal presentation available in PDF format, which was likely used to attract investors.

Some deals involve multiple fairness opinions, such as the Old National Bancorp / First Midwest Bancorp merger, where both JP Morgan and KBW provided fairness opinions. This helps ensure that the deal is fair to all parties involved.

Here are some notable examples of investor presentations and fairness opinions:

Investor presentations can be a crucial part of attracting investors to a deal, as seen in the Charles Schwab / TD Ameritrade deal, where an investor presentation was available.

In investment banking, you can work on a wide range of deal types, including M&A, IPOs, and bond issuances. For example, Deutsche Bank worked on the Stone Point Capital / Amtrust Financial Services deal, which was a take-private transaction for the remaining 57% stake.

You'll spend time learning about your industry and pitching prospective clients on deals. In contrast, capital markets focus on just one category of deals, such as equity-related transactions or debt offerings.

In capital markets, you'll learn your specific product(s) very well, and your hours will be more predictable and lighter. However, your deal experience will still determine your skills, compensation, and exit opportunities.

Deals in capital markets can include equity-related transactions like IPOs and follow-ons, as seen in the Apollo Commercial Real Estate Finance / Apollo Residential Mortgage deal. You may also work on debt offerings, such as investment-grade or high-yield bonds, like in the Enterprise Financial Services Corp $50 Million Debt Offering.

Here are some examples of deals in investment banking and capital markets:

Note that while Leveraged Finance is technically in capital markets, it's closer to groups like M&A because most of the work relates to funding for acquisitions and leveraged buyouts.

Bank careers offer a wide range of opportunities in commercial and investment banking. Commercial banks provide basic banking services, while investment banks focus on high-stakes financial transactions.

Commercial banks employ a diverse workforce, including customer service representatives, financial analysts, and loan officers. Their work is often routine, with a focus on day-to-day banking operations.

Investment banks, on the other hand, require specialized skills and a strong understanding of financial markets. They employ professionals with expertise in areas like mergers and acquisitions, asset management, and trading.

Careers in banking can be quite diverse, but it's essential to understand the differences between commercial banking and investment banking. Commercial banks offer roles like tellers, branch managers, and loan officers, but some careers focus on specific areas like mortgage underwriting or portfolio management.

You can work in commercial banking, helping clients with mortgages for commercial real estate or underwriting applications. Some people even specialize in sourcing properties for clients.

In investment banking, many roles involve being a financial analyst, but duties vary depending on the area of focus. Some people work in foreign exchange markets, using currency exchange rates to gain profits, while others guide companies through M&A processes.

Investment banking career paths can be quite specialized, with some roles focusing on foreign exchange markets or M&A. You can also work in areas like ECM, where you'd learn about IPOs and convertibles.

To succeed in investment banking, it's crucial to prepare for common fit and technical questions. You can expect around 90% of the questions to be the same, regardless of the group you're applying to.

To succeed in a bank career, you'll need a solid set of skills. Communication is key, as you'll be working with clients and colleagues on a daily basis.

Interpersonal skills are also crucial, allowing you to build strong relationships with clients and colleagues alike.

Analytical thinking is essential for making informed decisions and solving complex problems.

Problem-solving skills are vital, as you'll need to navigate unexpected challenges and find creative solutions.

Mathematical skills are necessary for financial analysis and modeling.

Collaboration is also important, as you'll be working with teams to achieve common goals.

Investment bankers require a higher degree of knowledge in areas like financial analysis, technical analysis, and financial modeling.

Commercial bankers, on the other hand, need skills in risk assessment, sales, generally accepted accounting principles (GAAP), and asset management.

Here are some of the key skills you'll need to succeed in a bank career:

Investment banking salaries and bonuses can vary depending on the role and the type of bank. Analyst and Associate salaries and bonuses are standardized at mid-sized and large banks, so you won't see a difference between capital markets and investment banking.

However, as you move up the ladder, the fees charged by ECM and DCM are split between more banks and groups, leading to lower compensation for senior bankers in capital markets teams. Managing Director compensation is likely 20-25% lower in capital markets teams.

In investment banking, salaries are higher due to the high-risk nature of the job, with huge earnings and bonuses for successful deals. Commercial bankers have more predictable salaries and profits come from normal interest and fees.

The fees charged by banks in investment banking can be substantial, with a $1 billion public company selling itself in a sell-side M&A process potentially generating $7.5 million in fees. This fee might be split with another bank or industry group, but the team that does the bulk of the work usually gets most of the fee.

In an IPO, the fees are split between multiple banks, resulting in lower compensation for senior bankers. The Instacart S-1 lists around 14 smaller banks, giving you an idea of how many banks are involved in an IPO.

Working in capital markets can be appealing, but it's essential to consider the exit opportunities. Private equity is not feasible from most ECM or DCM teams.

You might be thinking that capital markets roles offer a better work-life balance, but the reality is that the exit opportunities are limited. For most people, the answer is inferior exit opportunities.

LevFin is an exception, providing realistic exits into private equity, direct lending, and mezzanine. But for most capital markets teams, these options are not available.

Corporate finance at normal companies, investor relations, fundraising at financial sponsors, and credit analyst roles are the typical exit options. These roles pay less than private equity and hedge funds.

Most Analysts who want traditional exit opportunities will transfer out of capital markets into other investment banking teams. This is because the exit opportunities in capital markets are seen as less desirable for the highly motivated crowd.

The main difference between investment banking and commercial banking lies in how money is transferred between entities. Investment banks raise capital by selling stocks and bonds, whereas commercial banks take in deposits and use that money to fund loans for other clients.

The Glass-Steagall Act, which was later repealed, initially separated these banking functions. Commercial banks couldn't handle investments, and investment banks couldn't take deposits.

Since the repeal, the lines between commercial and investment banking have blurred, causing overlap in the types of careers available. Taking on an internship in a commercial bank can help you understand banking and determine your preferred roles and functions.

Internships and networking are invaluable experiences that can help you decide if investment banking is a career you want to pursue.

In investment banking, you can expect to spend 70-80 hours in the office per week, with longer hours when deals heat up.

Working in investment banking can be unpredictable, making it hard to plan your life, even with measures like "protected weekends".

You'll likely work long hours, even on low deal activity days, because you'll be doing more pitching.

In contrast, working in ECM and DCM (Capital Markets) means you'll have more regular and shorter hours, with occasional spikes.

You might work from 7 AM to 7 PM in ECM and DCM, starting earlier but finishing much earlier than investment banking colleagues.

Forced all-nighters or weekend emergencies are less likely in ECM and DCM, but can still happen during deal spikes.

Bank of America Investment Banking offers a free job simulation that can take around 4 to 5 hours to complete. This simulation helps you learn what it takes to be an investment banker at one of the top banks.

Deutsche Bank is a business and funding bank that provides regular banking services like checking and savings accounts, loans, and credit cards. It also enables mergers, acquisitions, and capital raising.

You can evaluate a prospective acquisition target for your client with the Investment Banking team in Citi's free job simulation, which typically takes 5 to 6 hours to finish. This simulation requires skills like PowerPoint, company research, and financial modeling.

Transitioning from commercial banking to investment banking is definitely possible, and it's a path that many professionals have taken.

You could get into investment banking from corporate banking, as the skills and experience gained in corporate banking, such as financial analysis and client management, are valuable in investment banking.

Networking is crucial to make the transition, so building relationships with experts in investment banking can open doors.

Gaining relevant certifications or additional education in finance can improve your qualifications.

Many skills in commercial banking, like customer service and financial management, are transferable to investment banking.

However, investment banking requires knowledge in areas such as mergers and acquisitions, capital markets, and complex financial modeling.

Pursuing similar education, such as an MBA or specialized finance courses, can help bridge the gap.

Networking and gaining relevant experience through internships or projects are also vital steps in making this career switch.

Private equity firms often engage in large-scale economic transactions, similar to wholesale banking, by providing big deposits, bulk loans, and cash management services to fundamental businesses. This is in contrast to retail banking, which serves individual customers and focuses on everyday financial transactions.

Wholesale banking, as we discussed earlier, is all about big transactions between financial institutions and businesses. It's a different beast from retail banking, which is focused on serving individual customers. In fact, wholesale banking is often used by private equity firms to facilitate their deals.

In terms of scale and type of financial transactions, wholesale banking is more similar to investment banking than retail banking. Both wholesale and investment banking deal with high-stakes financial activities, such as raising capital and facilitating mergers and acquisitions.

Asset Management is a crucial aspect of Private Equity and Wholesale vs Retail deals. Macquarie Asset Management and LPL Financial / Waddell & Reed Financial, Inc. are key players in this space, with notable deals involving Macquarie, RBC, JP Morgan, and Wells Fargo.

These deals often involve complex financial structures, as seen in the Investor Presentation on the Deal for Macquarie Asset Management and LPL Financial / Waddell & Reed Financial, Inc. A Fairness Opinion from JPM is also a common feature in these deals.

T. Rowe Price / Oak Hill is another notable player in Asset Management, with JP Morgan and Evercore serving as advisors.

Private equity involves investing directly in private businesses or searching for public businesses to take them private. Private equity organizations focus on improving and growing groups before selling them for a profit.

Private equity firms commonly invest in companies with potential for growth, aiming to increase their value and then sell them for a higher price. This can lead to significant returns on investment.

Private equity organizations make investments, as opposed to funding banks which provide services. The goal is to create a successful exit, which can be through a sale or initial public offering.

Wholesale banking deals with large-scale economic transactions, typically between financial institutions and major businesses, including big deposits, bulk loans, and cash management.

These transactions are usually high-stakes and involve significant amounts of money, which is a key characteristic of wholesale banking.

In contrast, retail banking serves individual customers and typically involves smaller transactions, such as personal loans, credit cards, and checking accounts.

The main difference between wholesale and retail banking lies in the scale and type of financial transactions they handle, with wholesale banking focusing on large-scale transactions and retail banking focusing on individual customer needs.

Wholesale banking is often associated with high-stakes financial activities, such as raising capital, facilitating mergers and acquisitions, and providing advisory services for major economic deals.

This is in contrast to retail banking, which is more focused on providing everyday banking services to individual customers.