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Financial Institutions Group (FIG)

A group of professionals that provide advisory services to financial institutions

What is the Financial Institutions Group (FIG)?

The Financial Institutions Group (FIG) is a group of professionals that provide advisory services to financial institution clients. Some of the services that FIG offers include mergers and acquisitions, recapitalization, capital raising, financial restructuring, corporate valuations, expert financial opinions and other advisory services. Companies that may represent prospective FIG clients include investment banks and companies that provide financial services to businesses, banks, asset management companies, brokerages, banks, and insurance companies. Investment banks sometimes categorize their areas of expertise under FIG into a financial services group and insurance group with the aim of providing tailored services to their clients.

 

Financial Institutions Group (FIG) theme

 

Unlike other companies that profit from selling physical products, FIG companies make money by borrowing money cheaply and lending it expensively. Companies in the Financial Institutions Group are in the business of moving money around in form of deposits, loans and money markets. Hence, a significant proportion of their revenues and expenses are in the form of interest income and interest expense, respectively. For example, the profit and loss account for a deposit bank comprises large values of interest expense and interest income, and little or no entries for cost of goods sold and depreciation. Since Financial Institutions Group capital mainly comes from individual clients, there are restrictions on the type of assets and their quantities that they can hold.

 

Types of FIG clients

Depending on the nature of its business, the Financial Institutions Group (FIG) works with the following types of companies.

 

#1 Banks

Banks are institutions that accept cash deposits from the public through saving accounts, current accounts money market accounts, certificate of deposits and call deposit accounts. Banks hold the deposits and pay a little interest. Banks then use the deposits to lend out loans to borrowers at a higher interest that the interest paid to depositors.

Apart from the customer deposits, banks may also fund their lending activities using wholesale funding from the government, capital markets, and other financial institutions. The government may lend to banks through the central banks while large institutional customers such as endowment funds and pension funds may provide long-term funding in return for annual interest payments. Most banks shy away from wholesale funding because it is a sign that the bank is not as competitive as other banks and may be going through financial distress. Also, wholesale funding is more expensive than other sources of revenue, and the bank will need to settle for a reduced interest spread.

Another source of revenue for banks is share equity. Banks raise equity capital by selling shares to outside investors and paying a dividend in return. Since equity capital is expensive, it is only issued when the bank is in financial trouble or needs funds for an acquisition. Banks may make the shares callable, such that they can repurchase them at any time when it does not need them anymore, or when the capital position has strengthened.

Interest income from loans makes up 50% to 70% of the total revenues earned by banks. Other interest-earning assets that banks invest in may include mortgages, stocks and bonds, commercial financings and proprietary trading. Non-interest income makes up 25%-50% of the total revenues and mostly comprise fees charged on its services. For example, some banks charge lending and deposit fees, ATM charges and ledger fees. Banks also make money through credit card loans and the interchange fees charged every time a customer makes a transaction.

 

#2 Insurance

Insurance companies mainly make money in two ways: earning premiums from selling various types of policies to individuals and businesses and investing the premiums in interest-generating assets. The difference between the amount of money collected when selling policies and the amount paid out as insurance claims is the underwriting income. For example, if an insurance company collects $1 million in premiums and pays out $600, 000 in insurance claims, it makes a profit of $400,000. However, if the claims amount to $1.2 million, the insurance will have incurred a loss of $200,000. In normal circumstances, insurance companies collect huge sums of money annually, and they may not have to pay claims on those policies for years.

Insurance companies also earn investment income by investing the money they get from selling insurance products before paying for claims. They use the revenue to invest in profitable stocks so that they can make a profit before having to pay for claims. Sometimes, insurance companies can charge their products competitively so that they can receive more premiums than their competitors and then invest these funds in the stock market. The proceeds from invested funds allow insurers to continue insurance operations even when underwriting losses exceed the premiums collected. The most common instruments that insurance companies invest in include Treasury bills, high-grade corporate bonds, and interest-generating cash equivalents.

 

#3 Asset Management

Asset management companies earn an income by investing money for individuals and institutional investors such as pension funds and university endowment funds, in return for a fee. They allow investors to have more diversified investment options than they would if they made the investments themselves. By pooling assets, investors can avoid the minimum capital requirements that are placed for individual investors, and invest in large sets of investment with smaller capital.

The asset managers charge two types of fees: management fees and performance fees. The management fees are paid as a percentage of the total assets under management irrespective of the performance of their investments. Performance fees are calculated as a percentage of the returns earned by the asset manager beyond a specifically predetermined benchmark. For example, assume that ABC manages assets worth $10 million and charges a commission of 2%. ABC will earn a management fee of $200,000. If the value of assets rises to $12 million, ABC will receive a performance fee of $40,000. In total, ABC will earn $240,000 from that client.

Asset managers rely on Asset Under Management (AUM) to determine how quickly the assets are growing or shrinking. Whether the AUM is growing or shrinking is determined by the investment gains/losses, organic flows and acquired flows. Organic flow is the value of assets taken out of the asset manager’s control by the client while acquired flows represent the assets added or acquired from other asset managers.

 

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