Chapter-14

Traditional Sources of Fee Income:

1. Service Charges: Fees on checking/savings accounts, ATM usage, NSF
(insufficient funds), and excessive withdrawals.
2. Credit Card Fees: Includes card membership fees, late-payment fees, and
other service-related charges.
3. Commitment Fees: Charged for keeping a credit line available over a
specific time period.
4. Safe Deposit Box Fees: Income from renting secure storage boxes for
customer valuables.
5. Property Rental Income: Earnings from renting out the financial
institution’s property to individuals or businesses.

Newer Sources of Fee Income:

1. Investment Banking Commissions: Fees earned from security underwriting

services for corporations and governments.
2. Brokerage Commissions: Charges for facilitating the purchase and sale of
stocks, bonds, mutual funds, and other assets.
3. Fiduciary Income: Trust service fees for managing assets on behalf of
individuals and businesses.
4. Insurance Commissions: Commissions from selling insurance products like
policies, pension programs, and annuities. For example, Bancassurance
partnerships between commercial banks and insurance companies in
Bangladesh.

Investment Banking refers to financial services where experts provide advice and
help raise capital, manage mergers, acquisitions, and other financial activities for
large companies, governments, or institutions.

Example in Bangladesh:
Investment banks like IDLC Investments and Prime Bank Investment assist
companies in raising funds through IPOs (Initial Public Offerings), handling
mergers, and advising on market expansion.

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Investment Banking: Key Services and Characteristics:
1. Securities Underwriting: Securities underwriting is when an investment
bank agrees to buy all or part of a company’s new securities—like stocks or
bonds—and then sell them to the public. This ensures that the company
raising funds gets a guaranteed amount, even if investors don’t buy all the
shares. It reduces risk for the issuing firm and adds credibility to the
offering.
Example: Prime Bank Investment Limited underwrites IPOs for companies
in Bangladesh, such as Walton Hi-Tech, ensuring full subscription of shares
during the public offering.
2. Leveraged Buyout (LBO) Services: A leveraged buyout is when a group,
such as company employees or investors, purchases a business mainly
using borrowed money. Investment banks help arrange the necessary loans
and manage the transaction. The acquired company’s assets or profits are
often used to repay the debt, allowing ownership transfer with minimal
upfront capital.
Example: City Bank Capital Resources Ltd. provides advisory and financing
support for LBO deals involving local firms restructuring or changing
ownership through employee or management buyouts.
3. Hedge Fund Operations: Hedge fund operations involve managing private
investment funds that use aggressive strategies to earn high returns. These
funds are less regulated and take on higher risks by investing in a mix of
assets like stocks, real estate, and derivatives. Hedge funds are usually
targeted at wealthy individuals or large institutions.
Example: In Bangladesh, LR Global Bangladesh Asset Management
Company runs funds that operate with hedge-fund-like strategies, investing
in diversified sectors to maximize returns for high-net-worth clients.
4. Risk and Profitability: Investment banking is a high-risk, high-reward
business. Firms face uncertainty due to market volatility, global events, and
policy changes. While they can earn large profits from deals and advisory
services, wrong estimates or market crashes can lead to major losses.
Estimating security values and performing proper due diligence is crucial.
Example: Firms like EBL Investments Limited carefully analyze financial

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 risks and market conditions before managing IPOs or advising on large
financial deals to avoid potential losses.
What are the key characteristics of the investment banking industry?
1. The investment banking industry is fast-paced and competitive, requiring
firms to constantly innovate and adapt. (Example: IDLC and LankaBangla
compete for top IPO deals.)
2. High employee turnover is common due to stress, long hours, and the
search for better opportunities. (Example: Analysts at City Bank Capital
often move to foreign banks.)
3. The workforce is skilled, but job security is limited, especially during market
slowdowns or poor performance. (Example: EBL Investments reduced staff
during a quiet IPO season.)
4. Employees frequently move between firms, leading to challenges in
retaining talent and maintaining stability. (Example: Professionals often
shift between UCB Investment and IDLC.)
Linking Commercial and Investment Banking
Advantages of Combined Operations:
1. Increased Competitiveness with Foreign Banks: Combining commercial and
investment banking helps local banks compete better with large foreign banks.
2. Potential for Lower Client Fees: With more competition between full-service
banks, clients may benefit from lower fees.
3. Creation of Comprehensive Financial Service Companies: Merging both
banking types creates one-stop shops for various financial services.
4. Transformation through Acquisitions: Traditional banks are acquiring
investment banks to offer a wider range of services.
Risks and Concerns:
1. Economic Sensitivity: Job losses rise sharply during recessions, affecting the
banking sector, especially during the financial crises of 2000-2002 and 2007-2008.
Example: During the 2008 financial crisis, Standard Chartered Bank in Bangladesh
faced layoffs as the global economy slowed.

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2. Potential Misconduct Issues: Banks might engage in unethical practices like
"tying contracts," where customers are forced to buy securities along with loans,
or "spinning," offering special IPO deals to select clients.
Example: In Bangladesh, some local banks have been criticized for pressuring
clients into buying stocks or bonds when applying for loans.
3. Vulnerability to IB's Volatile Nature: Commercial banks become vulnerable to
the volatility of investment banking, as the performance of the capital markets
heavily influences their stability.
Example: Dhaka Bank and others faced challenges during market downturns as
their investment banking operations struggled with declining stock prices.
Future Challenges and Trends:
1. Optimal Mix of Services for Sustained Profitability: Investment banks need to
find the right balance between different services to stay profitable in the long run.
Example: Morgan Stanley struggled when it tried to combine its Discover and
Dean Witter services, as it faced challenges in maintaining focus and profitability.
2. Industry Consolidation: The trend of merging commercial and investment
banking (CB-IB) is increasing, with large firms acquiring smaller ones to expand.
Example: J.P. Morgan Chase bought Bear Stearns during the 2008 financial crisis
to strengthen its position in both commercial and investment banking.
3. Regulatory and Capital Requirements: Banks are facing pressure to raise
capital and reduce leverage ratios while dealing with stricter regulations after the
2007-2009 mortgage crisis.
Example: After the crisis, many banks, like Goldman Sachs, had to adjust their
capital structure and comply with tighter regulatory standards.
4. Future Uncertainties: The future success of combining commercial and
investment banking is uncertain, with ongoing market changes and tech-driven
innovations like AI.
Example: Despite the potential of AI, it’s unclear whether it will fully transform
the banking industry, with some companies still uncertain about how to
implement it.

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Mutual Fund Investment Products
A mutual fund is an investment product where money from multiple investors is
pooled together to invest in a diversified portfolio of assets, managed by
professionals. Investors earn a share of the fund’s income based on their
investment.
Example:
If you invest in a mutual fund with stocks and bonds, you own a portion of those
assets and share in the profits.
Structure & Function:

1. Investors Receive a Pro-Rata Share of Income

Investors earn a portion of the income generated by the fund’s assets, based on
how much they’ve invested.
Example: If a mutual fund earns $100,000 in dividends and you own 10% of the
fund, you would receive $10,000.

2. In Case of Liquidation, Investors Receive Their Portion of NAV

If the mutual fund is liquidated, investors receive their share of the Net Asset
Value (NAV) based on the value of the fund’s assets.
Example: If a fund with a total NAV of $10 million is liquidated and you own 1% of
the fund, you would receive $100,000.

3. Regulation and Management

Mutual funds must register with the SEC and provide a prospectus that details
their objectives and risks. They are operated by external management firms hired
by a board of directors.
Example: A mutual fund like Vanguard’s Total Stock Market Fund is registered
with the SEC and managed by Vanguard Group.
Why investors choose mutual funds?
1. High Long-Term Yields and Diversification: Mutual funds offer investors the
potential for high long-term returns while reducing risk through diversification, as
the fund invests in a wide range of assets.

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Example: IDLC Balanced Fund in Bangladesh invests in both stocks and bonds,
offering diversification to reduce risk while aiming for stable returns over the long
term.
2. Professional Money Management: For those who are inexperienced or too
busy to manage their investments, mutual funds provide professional money
management by experienced fund managers.
Example: Uttara Mutual Fund is managed by professionals who handle asset
allocation and investment decisions, allowing investors to benefit from expert
guidance.
3. Lower Commissions and Fees: Due to competition in the industry, mutual
funds often offer lower commissions and fees compared to other investment
options, making them more cost-effective.
Example: SBI Mutual Fund in Bangladesh charges lower fees compared to other
investment products, helping investors retain a higher portion of their returns.
Annuity Investment Products
An annuity investment product is a financial contract, typically offered by
insurance companies, that provides a stream of income to investors, often used
for retirement planning.
Types of Annuities
1. Fixed Annuities: Fixed annuities offer a guaranteed return, providing a steady
income stream to the investor or beneficiaries. Taxes are deferred until the
income is received.
Example: Prudential Life Insurance’s Fixed Annuity Plan in Bangladesh offers a
guaranteed return to policyholders, ensuring regular income for the investor.
Variable Annuities: Variable annuities allow investors to invest in stocks, mutual
funds, or other assets, with returns depending on market performance. Investors
can add more money over time.
Example: MetLife’s Variable Annuity Plan in Bangladesh allows policyholders to
invest in a mix of equity and debt instruments, with returns fluctuating based on
market conditions.

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3. Equity-Index Annuities (Hybrid Product): Equity-index annuities combine
features of fixed and variable annuities. They are linked to stock indices like the
S&P 500 but guarantee a minimum return even if markets decline.
Example: Delta Life’s Equity-Index Annuity in Bangladesh links returns to stock
market indices while ensuring a guaranteed minimum income, even during
market downturns.
Advantages:
1. Provides Retirement Income Security: Annuities offer a steady and predictable
income stream, making them ideal for retirees or individuals who rely on regular
income during old age.
Example: Prudential Life’s Retirement Annuity Plan in Bangladesh ensures a fixed
income for retirees, providing them with financial security in their later years.
2. Acts as a Hedge Against Outliving Savings: Annuities help protect against the
risk of outliving one’s savings by guaranteeing income for as long as the individual
lives.
Example: AIG’s Annuity Plan in Bangladesh offers lifetime income benefits,
ensuring that retirees don’t run out of money even if they live longer than
expected.
3. Can Generate Substantial Fees for Financial Firms: Annuities can be a source of
significant fees for financial institutions, especially for those offering complex
products with varying levels of service.
Example: Standard Chartered’s Investment-linked Annuity Plan in Bangladesh
generates fees for the bank as it manages the investments and provides
customized retirement solutions.
Disadvantages:
1. Competes with Bank Deposits: Annuities are often sold through banks, which
may compete with regular deposit accounts, offering lower liquidity.
Example: Dutch-Bangla Bank’s Fixed Deposit might be preferred over annuities
for customers seeking easier access to their funds.
2. Market Risk in Variable Annuities: Variable annuities carry market risks,
meaning the income from them can fluctuate based on market performance.
Example: MetLife’s Variable Annuity Plan in Bangladesh exposes investors to
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market risks, causing income to vary depending on the performance of underlying
assets.
Trust Services: These are services where a bank or financial institution manages
and looks after a customer’s property, such as money, land, or other assets,
according to the customer’s wishes or for beneficiaries.
Example: BRAC Bank’s Trust Services help customers by managing their
properties, like land or investments, and making sure they are used or distributed
as the customer decides, for example, to pass assets to their heirs in the future.
Types of Trusts:
1. Living Trusts: A trust created during a person's lifetime to manage their
assets while they are still alive and after their death.
2. Testamentary Trusts: A trust that is created through a will after someone’s
death, to manage and distribute their assets.
3. Irrevocable Trusts: A trust that cannot be changed or canceled once it is
created.
4. Charitable Trusts: A trust set up to donate money or assets to a charitable
cause or organization.
5. Indenture Trusts: A trust used to manage bonds and securities, often
created to oversee the terms and conditions of debt agreements.
Functions:
1. Managing Estates: Taking care of and organizing a person's property and
assets after their death.
2. Serving as Executors: Carrying out the instructions in a person's will,
ensuring their wishes are followed.
3. Handling Retirement Plans: Managing retirement savings and investments,
like pension funds, for individuals.
4. Safeguarding Assets for Minors or Legally Incompetent Individuals:
Protecting and managing assets for children or those who are unable to
handle their own finances.
Role & Future:

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 1. Fiduciary Responsibility: Trust officers are responsible for protecting and
managing assets, investments, and ensuring estates are distributed
correctly.
Example: Dutch-Bangla Bank offers trust services where their officers
manage estates and investments for clients, ensuring their wishes are
followed when the estate is distributed.
2. Future Growth: As more baby boomers retire and Gen X inherits wealth,
the demand for trust services is expected to increase.
Example: As more people in Bangladesh retire, banks like BRAC Bank are
seeing a rise in requests for trust services to manage inherited wealth and
estates.
3. Corporate Roles: Trust services help companies with managing employee
stock option plans (ESOPs), securities offerings, and global capital
expansion.
Example: Standard Chartered Bank in Bangladesh provides trust services to
manage corporate employee stock options, helping companies manage
their stock distribution plans.
Types of Insurance Products Sold Today:
1.Life Insurance
Definition: Life insurance is a financial product that protects individuals, families,
and businesses from the financial impact of a person’s death, ensuring the
beneficiaries receive a sum of money upon the policyholder's passing.
Underwriting & Additional Services: Life insurance underwriting involves
evaluating the applicant’s health, lifestyle, and risk factors to determine the
premium. Additional services may include endowment policies that combine life
insurance and savings, as well as riders like disability benefits or accidental death
coverage.
Example: MetLife in Bangladesh offers life insurance policies that not only cover
death benefits but also include a savings component that accumulates over time,
helping individuals save for future financial needs.

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2.Property/Casualty Insurance
Definition: Property and casualty insurance protects against risks and losses
related to physical property (like vehicles and homes) and liabilities from
accidents, medical costs, negligence, and fraud.
Underwriting & Profitability: Underwriting for property/casualty insurance
involves assessing the risk of damage to property or accidents, evaluating factors
like location, history of claims, and the type of coverage. Insurers aim to earn
more from premiums and investments than they pay out in claims.
Example: Allstate Insurance in Bangladesh provides comprehensive property and
casualty insurance, including home and auto insurance. Their underwriting
process involves evaluating property risks and offering policies that cover theft,
weather damage, and vehicle accidents.
Alleged Benefits of Financial-Services Diversification:
1. Industry Convergence: The merging of commercial banks, investment
banks, and insurance companies allows firms to offer a wider range of
financial services.
Example: DBBL (Dutch-Bangla Bank) in Bangladesh has partnered with AIA
Insurance to offer both banking and insurance services, expanding their
service offerings.
2. Diversified Revenue Streams: By combining traditional products (like loans
and deposits) with nontraditional products (like insurance and mutual
funds), firms reduce reliance on one source of income.
Example: BRAC Bank in Bangladesh offers loans, savings accounts, and
insurance products, diversifying their income streams and reducing
dependence on just interest from loans.
3. Cash Flow Stability: Different financial products generate revenue at
different times, helping to stabilize overall cash flow and reduce income
volatility.
Example: Standard Chartered Bank in Bangladesh benefits from its diverse
range of products, such as loans, investment services, and insurance, which
helps balance revenue streams and maintain stable cash flow.

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4. Lower Risk of Failure: Offering a variety of financial products spreads risk
across multiple sectors, reducing the likelihood of financial trouble if one
sector faces difficulties.
Example: City Bank in Bangladesh mitigates risk by offering banking,
investment, and insurance services, ensuring that downturns in one area
don’t heavily impact the overall business.
5. Improved Profitability: Having a balanced mix of financial products helps
smooth earnings, reducing vulnerability to market fluctuations and
improving overall profitability.
Example: Mutual Trust Bank in Bangladesh benefits from offering a wide
range of services like loans, insurance, and mutual funds, which helps
protect profitability even during economic slowdowns.

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