Financial Institutions Groups (FIG) 101: Got Book Value?

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Financial Institutions Groups (FIG)If you want to be a bit different from all the other bankers out there, financial institutions coverage just might be for you:

  • Valuation is completely different.
  • You need to understand the finer points of accounting and spot small details.
  • No one else outside of FIG understands what’s going on.
  • And hey, you might even learn how to cause a financial crisis or two.

As an added bonus, you’ll be busy regardless of whether we’re in a recession (banks consolidate to cut costs) or an expansion (banks consolidate to expand and new banks go public).

You just need to wrap your head around all the tricky concepts first and crack the FIG success code.

Read on for all of that and more – including how you can optimize your chances of getting placed in FIG, the most common deal types, how valuation differs, and whether or not you can ever get non-FIG exit opportunities.

Breaking Into FIG

Q: Let’s start from the beginning: how did you find your current role in your group?

A: I went to a top four school and networked through the alumni who were active in campus recruiting. They were very helpful in my process.

I was originally intrigued by my firm’s restructuring team, but through the selection process was placed into the financial institutions group.

It has been a great experience so far, and being in my group has really opened my eyes in terms of valuing companies and being a part of an active team.

In any phase of the economic cycle, you want to be in a group that is active with deal flow. I lucked out and was placed in a group that always seems to be busy.

Q: How does that matching process work? Is it based on sell days or just your preferences?

A: You hear presentations about the different groups and afterward you attend a short mixer of some sort.

You’ll need to make quality connections so that your favorite group members can vouch for you and make your case.

If you have too many connections but not enough depth, you can easily get placed into a group you didn’t even list as one of your choices.

It’s not necessarily a bad thing, but it will make your career path more non-linear, especially if you have one mapped out already.

It’s a mutual fit – groups that have a greater need will have more spots open.

Q: Okay, but what about if I’m not an entry-level hire?

If I’m a lateral hire, what could I do to increase my chances of being placed in the FIG team?

A: One of my favorite movie scenes is this one right here. You cannot arrive at the table with a “clean slate” when you go in for a FIG interview.

My Managing Director once said, “It’s much easier to write a term paper with stuff written on the document already than it is to write from a blank sheet of paper.”

So you need to read up on FIG analysis, including how valuation differs, how the industry is divided, and you need to be able to speak intelligently about industry trends.

For an academic approach, take a look at NYU Professor Aswath Damodaran’s work and some of the papers he makes available on valuing financial services firms.  You may also be interested in these cases on bank valuation issues and capital structure.

Other resources I recommend for more of an applied / hands-on approach:

Go through those and absorb everything you can, and make sure you can talk about a few recent FIG deals, what motivated them, and what you think about the valuation and deal terms. Maybe even produce a one-page summary…

They don’t expect you to know everything walking into the interview, but they do expect you to be enthusiastic and a fast learner.

Both elements come across in how you talk, how you interact with your interviewers, and through the quality of your work (or responses).

FIG Newton? How the Industry Works

Q: Wow, thanks for all of these tips. These are very helpful for anyone looking to join the FIG scene.

So what exactly do you cover? How is the industry divided, and are certain banks stronger in certain areas?

A: Historically, FIG has been the biggest revenue generator for many investment banks – so they devote a lot of resources to it.

Here are the main divisions within financial institutions, as well as a few middle-market and boutique banks that specialize in some of the areas:

  • Banks, Thrifts, and Depositories: Sandler O’Neil, Stifel Nicolaus Weisel (former Keefe Bruyette Woods), and Jefferies (former Barclays team)
  • Specialty Finance
  • Insurance: Macquarie (formerly: Fox Pitt Kelton)
  • Broker-Dealers
  • Investment / Asset Management
  • Financial Technology: FT Partners, Freeman + Co.

Of these areas, Banks, Thrifts and Depositories, Specialty Finance, and Insurance are by far the most different from “normal companies” because metrics like EBITDA and Enterprise Value simply don’t apply.

The other three sectors are not nearly as different, although there are some industry-specific metrics.

Here’s a brief overview of the business models in each of these sub-industries:

  • Banks, Thrifts, and Depositories: You deposit money, they pay you a certain interest rate, and then they issue loans to businesses and other individuals at a higher interest rate.
  • Specialty Finance: These are companies that provide “alternative lending” models – credit card companies, mortgage banks, commercial finance, leasing, mortgage REITs, asset-backed lending, and so on.
  • Insurance: You pay a premium to cover yourself or your property in case of emergency, and they pay you when emergency strikes; when it doesn’t (or until it does…), they invest the money to earn additional profits.
  • Broker-Dealers: They earn commissions on each trade or each deal (investment banks, stock exchanges, and so on).
  • Investment / Asset Management: They raise money from investors, invest it, and earn a return on their investment. Or, they may simply manage client funds and charge a percentage fee for that.
  • Financial Technology: Payment and transaction processing, card networks, financial software, and so on. The business models vary: commissions, recurring subscription fees, and more.

Q: OK, so those are a lot of areas and they all sound pretty different in terms of business models.

How does staffing work in FIG?

A: Depending on the firm, you can either be a generalist and receive assignments from any of the verticals, or be a specialist and just cover one area very well.

You just need to be flexible in your expectations – just because you like a certain sector doesn’t mean it’ll be incredibly busy.

As I said above, banks, insurance, and specialty finance are the most different sectors in FIG, so you’re more likely to be a specialist if you happen to work in one of those.

FIG Valuation: Book Value, Dividends, and… Regression Analysis?

Q: Right, so the experience is dependent on the sector but you’re more likely to be a specialist in certain areas than in others.

What about valuation? A lot of readers are curious about this one because it’s so dramatically different for FIG.

A: Most practitioners who cover Financial Institutions argue that valuation is very different from all the other sectors’ valuations (ex: consumer retail, industrials, etc.).

The reality is that the valuations are different in calculation, but not in approach.

You still use both intrinsic valuation and relative valuation, including methodologies such as trading comparables and precedent transactions.

If you take a look at the Fairness Opinion for BlackRock / Barclays Global Investors (see page 20), you can see how the measures are evaluated in practice.

That is an example of an asset management valuation, and you can see the metrics and multiples they use: P / E, EV / EBITDA, and EV / AUM (Assets Under Management).

It’s not dramatically different from normal companies because asset management firms don’t make money with the interest rate spread as banks and specialty finance firms do.

As for the actual methodologies used, let’s break them down by sub-sector:

Discounted Cash Flow: Most applicable for broker-dealers, investment / asset management, and fin-tech. The same as your standard DCF.

  • Dividend Discount Model: FCF is meaningless for banks, specialty finance, and insurance firms, so you use dividends as a proxy for their free cash flow instead.
  • Multiples – P/E: You could use this for almost anything.
  • Multiples – P /BV and P / TBV: More applicable for banks, insurance, and specialty finance since their market values should be close to their book values. Sometimes Tangible Book Value is used, so you subtract Goodwill & Other Intangibles (which can artificially inflate Book Value).
  • Multiples – EV/EBITDA: Applies more to asset management, broker-dealers, and fin-tech; EBITDA is not used for the other sub-industries.
  • Multiples – EV / AUM: An important metric for asset management.
  • Multiples – Price Per Share / Embedded Value Per Share: This one’s specific to life insurance; embedded value is an intrinsic value methodology there.
  • Multiples – (Debt + Preferred Equity) /  Total Capital: specific to insurance
  • Regression Analysis (Net Flows): Asset Management Inflows that are directed to a firm’s AUM divided by the firm’s Assets Under Management, graphed against P/E. This metric tells you how price is related to the firm’s ability to attract new money.
  • Regression Analysis (Price / Book Value vs Return on Average Equity): Here you are keeping an eye for the premium (discount) of companies’ datapoints to the curve itself.
  • Pro Forma Analysis (Merger Consequences Analysis or Accretion-Dilution): Pretty standard, but it can get complicated with banks (deposit divestitures, regulatory capital adjustments, and so on).

See page 18 here if you’re interested in an investment firm case study.

For a reinsurance client presentation on valuation, try:

Fairfax Financial / Odyssey Re:

On the bank/thrift side of things, geographic presence is a big motivation to engage in M&A, as illustrated here.

Taking a look at a transaction between stock exchanges, you can see that the valuation measures are very similar to the standard set.

Q: That all seems pretty straightforward except for the regression analysis part – I didn’t think we’d see that used much outside of research / econometrics.

Anything else we should know about valuation in FIG?

A: Another big aspect here is working with and analyzing regulatory capital.

All banks and insurance firms must keep a certain amount of “capital” (basically, shareholders’ equity, adjusted for a few other items) on their balance sheets at all times.

That plays into the valuation because, for example, in a dividend discount model you can’t just blindly assume a 10% or 20% growth rate.

You have to check to make sure that the bank has the minimum amount of regulatory capital required, and then tie all growth and dividend issuance assumptions to that ratio.

So if you’re assuming that they issue a certain percentage of net income as dividends each year, their capital levels must remain above the minimum percentages even after they issue those dividends.

Bonus: Check out this comprehensive tutorial on Bank & Insurance Modeling to learn even more.

Brokers & Dealing

Q: I see, so it sounds like a tweak to the traditional DCF where you can just make the assumptions you want to make, within reason.

What types of deals are most common in your group?

A: Generally the split is pretty even among equity, debt, and advisory assignments. If the market is not doing so well, expect regional depositories to be acquired by larger players.

When times are good, expect a higher proportion of equity deals.

It’s consistent with corporate finance theory – if a firm issues equity, it’s a sign of good times within the issuer.

If a firm issues debt, it means that they need the funds for something more specific than general corporate funding.

Q: That’s interesting to see a more even split compared to other sectors.

What do the industry pages look like in pitch books?

A: Your pages differ depending on the sector you’re covering.

The financial sector is greatly affected by policy updates and regulations, so you might even be staffed on government presentations.

A set of pages might reference major developments and how these developments translate into challenges or opportunities.

Here’s what you might expect to see discussed in the different sub-sectors (just the ones I’m familiar with):

Banks, Thrifts, and Depositories:  Benchmarking pages include a segment on how well-capitalized depositories are. For regional banks, you’re likely to see something on the geographic concentration of branches.

In Manhattan, there’s always a fight between Bank of America and Chase over the number of physical branches and that’s the type of information you might see.

Investment Management: Trends on where money is going will be important to mention (types of investments and the level of overall net new money). The retention of clients through strong customer service and a track record for solid returns is crucial.

Insurance: The main areas concern life, auto, and property insurance. Factors that affect an insurance company include consumer confidence, employment levels, and interest rates.

For more specific forms of insurance, you might even see something on changes and trends in social attitudes (e.g. peoples’ views on work ethic and stability for disability insurance).

Exchanges: Believe it or not, exchanges do face competition. How other firms are able to out-innovate (process, price, etc.) the economies of scale poses a risk to exchanges. Some banks actually internalize trades and take away this trade volume from exchanges.

Exit Opportunities: What Exit Opportunities?

Q: Interesting to note all that. It sounds like you learn about the broader trends in the economy, but do you also get broader exit opportunities?

Some people say FIG is an incredibly specialized group and that you can’t do anything outside of FIG afterward – true or false?

A: It is, and it isn’t. Some people say being in FIG is a handicap for private equity recruiting.

If you’re in FIG, however, you have a much better story in terms of getting into strategy / corporate development roles at financial institutions.

You are definitely more specialized, and that can limit PE opportunities – but you’re also in a much better position for funds that invest in financial institutions.

Most normal PE firms won’t even touch financial institutions because they don’t understand them – but there are a few specialized PE firms that focus on FIG (e.g. JC Flowers) and they’re not likely to recruit someone without FIG experience.

And if you want to stay in a financial center, FIG experience can be very helpful even if you move into another group, another firm, or another industry altogether.

So much business in places like London and New York depends on financial firms that understanding them in-depth and having contacts there can make a big difference in almost any field – if you start your own company one day in one of those cities, guess who your main customers might be?

Q: Right, those are great points and I hadn’t thought through that one about FIG being central to business in financial centers.

So how can readers tell if FIG is right for them?

A: If you like reading up on the sector and you enjoy following financials you’re good to go.

The quality of your work is dictated by how badly you want to perform, and how interested you are in your work.

Some of the top leadership on Wall Street today actually had some background in the sector – for example, Morgan Stanley CFO Ruth Porat was originally a tech banker who then worked in financial sponsors / financial institutions.

And so I don’t think you can really argue with FIG as a solid way to start off your career.

Q: Awesome, thanks for your time.

A: Sure thing – enjoyed speaking with you!

About the Author

has worked in investment banking for several years covering the industrial sector. In addition to being an avid mentor for his alma mater, he volunteers for the Association of Latino Professionals in Finance and Accounting. In his spare time, he enjoys fencing and attends networking events in New York. He graduated from Stanford with a BA in Economics.

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55 Comments to “Financial Institutions Groups (FIG) 101: Got Book Value?”

Comments

  1. Sol says

    Thanks for the great interview. I’m a little doubtful about the optimism presented in this view though. The interviewee noted that there might be exit opps in FIG PE and financial centers (?) if you want to start in your own company. From other opinions I’ve searched online, it seems the general opinion is that FIG is an extremely niche industry and that unless you really love it, you should get out ASAP. Definitely doesn’t sound like the place for college grads to start their careers. Is this true?

    • says

      I think there’s some truth to that, but the same thing happens with most industry groups – recruiters always try to pigeonhole you into exit opportunities related to that industry. If you do tech you’ll get funneled into tech-related opportunities. Maybe it’s a little easier to switch industries outside of FIG, but you’re still limited to some extent.

    • says

      You could argue that it is. In practice, bank CEOs come from all different areas within the firm including S&T, IBD, etc. Knowledge of how financial institution accounting and valuation work is helpful but you don’t necessarily need to work in FIG to pick that up.

  2. M says

    I work in a FIG team in Asia and it seems that the FIG team always has the longest hours in the bank. Same goes for my friends in other banks. Is this the case in the States/UK?

    • says

      Hard to say – everyone likes to think they have the longest hours. You do work a lot in FIG but the hours really depend on your group, deal flow, and what the economy is doing. I do think that FIG can be more technical than other groups, especially in areas like insurance, so that can make it worse.

  3. Grotbags says

    I just wanted to ask a question regarding networking.

    If I have already met with a person from the same group, and am now trying to reach out to a more senior guy in that group, should I mention that I have talked to the other person in the email?

    My thinking: if I mentioned the other guy, he might just say oh well then just talk to him instead and don’t waste my time. But if don’t mention it, he might find out anyway, and the other guy I talked to might get pissed off.

    Any advice is welcome. Thanks.

    • M&I - Nicole says

      If you got along fine with the other person and he/she liked you and is ok with you contacting his/her senior, do so.

      I would try to network with other people in the same firm and see how the other person gets along with that senior guy. If they get along fine, I would not bother contacting the senior person if the other person didn’t like you and/or minds you contacting his/her senior. If the two didn’t get along fine, I’d go ahead and contact the senior guy anyway.

  4. Grotbags says

    Another Question regarding networking – I talked to a guy over the phone a couple of days ago, but I want to meet with him in person. Also because I’m in the midst of recruiting so I don’t want to wait for a few weeks before reaching out to him again. When should I email and How best can I word it? Thanks.

    • says

      Just say that you’re actually about to leave town or travel or something and you’d like to meet him in the next few days if possible – you know he’s busy, but you really value his insights and would appreciate being able to do that before you have to take off.

    • M&I - Nicole says

      Just ask him if he’s available for a coffee/drink on email. Offer to drop by a coffee shop/pub close to his offer

  5. Vivien H. says

    Nice but I’m more interested in what happens behind closed doors at the FDIC between fridays & sundays ie a bank is declared in receivership & the next monday it opens shops as subsidiary of a big one…does anyone have any idea where and how to break in? It’ll be more fun there…

  6. Michele says

    I tried to call this MD earlier this afternoon but didn’t get through. I assumed he’s busy so just left a voicemail message and asked him to call me back. If he doesn’t give me a call back, should I call him later today or early tomorrow morning?

    • says

      I would not leave voicemail until you’ve tried dozens of times and couldn’t get through. In this case, I would just try back early morning or late at night to avoid gatekeepers until you get in touch and try each day.

  7. KM says

    Hey, nice article! I was wondering if someone who’s working on a bank-merger deal might have to work on more complicated models such as RAROC or risk-management related?

    • says

      Merger models can be more complicated (deposit divestitures etc.) but generally you don’t see RAROC and so on. From what I’ve seen and discussions with friends in FIG, anyway.

  8. c_z says

    Amazing coverage on FIG.
    I am a first year in a BB FIG. I learned a lot from this interview and would recommend the resources mentioned by Luis as well.
    Kudos to both Luis and Brian.

  9. Class of 2012 says

    Does anybody know of an equivalent to the above mentioned “Financial Institutions, Markets, and Money” for the European Financial Institutions Market? Business Models for large universal banks (Barclays/JPM, Deutsche/BAC) might not be materially different, however dealings with institutions like the ECB and national central banks and regulatory issues might differ. Thanks!

  10. AJ says

    Another great interview; very informative as always.

    I was wondering what backgrounds are common amongst FIG bankers who do not break in to banking right out of undergrad? I’ve met with many bankers working in tech, retail, and healthcare coverage groups, and it seems that many of the associates have worked in the industry they are covering firsthand at some point, either right before banking or before B-school. Would you say it is more common/plausible for FIG bankers to come from corporate finance or corporate development backgrounds?

    Also, quick resume question- is it appropriate to list specific modeling courses that I have completed, such as your BIWS course or Training the Street courses for example, on my resume?

    • Class of 2012 says

      At my firm we have one Director in FIG who previously worked at an Asset Management company in Portfolio Management. He switched careers after going to grad school.

    • M&I - Nicole says

      Its hard to say because some break in right after college, some break in having corp fin backgrounds/backgrounds with other FI.

      Yes.

  11. Chris says

    Thanks for a great article.

    I’m assuming most FIGs are based in New York, but are there any that are housed elsewhere?

  12. Amy Geng says

    Hi Brian, thanks for the great article here. It’s very informative and helpful!
    You mentioned that there are some FIG-focused buy-side firms like JC Flowers, wonder what other names you know that also have dedicated FIG coverage?

    Thank you so much!

    Amy

  13. Pakari says

    Brian & team,

    This was a great post and very informative but I have a question titled towards exiting FIG.
    To give a background: I am currently an analyst in FIG at a BB. I dont want to sound disrespectful, but I absolutely hate FIG. I find it very boring, and am trying to do an internal lateral to a different coverage team (Consumer/Industrials/Healthcare/Energy. In a nutshell, I just dont want to be in FIG so I am trying for anything that can get me out of here.

    I was hoping to seek views on what could potentially be classified as “understandable” reasons for leaving FIG? For instance at my BB, its not considered an “ok” thing to talk about exit options hence I cant bring up the reason that I would like to leave FIG because of limited exit opps. Furthermore,I think saying that FIG is too technical for me – which is actually the case too – could potentially be disrespectful to other teams that I talk with as it would give the idea that I find their work too simplistic or less intellectually challenging.

    I am really at cross roads over here. Can you please guide me on what reasons can one potentially use to exit FIG? I am talking with some other coverage teams next weeks, and want to get my story straight. My reasons for leaving FIG are pretty much that I am not interested in this sector, and I dont have the desire to learn much about it as I find it boring. I would appreciate some guidance on a “further refinement” of words or just even “better reasons”. Thanks again!!

    • M&I - Nicole says

      Depending on which group you’re interviewing for, you can just say something along the lines of “While I have learned a lot from my experience at FIG, I realized that I have become more interested in [XX] sector given [Name the reasons why you're interested in that sector]. Then talk about how you think your skills/experience can translate to that group.”

      • Pakari says

        Thanks Nicole, but like I mentioned in my original post, I am just wanting to get out of FIG so I am looking at every other industry team (Cons/ Healthcare / TMT / Indutrials / Energy & Power). I think if I started coming up with specific reasons to join non-FIG industry teams, I would lose my authenticity.

        Do you recommend some “generic reason” to exit FIG instead of me coming up with [x] reasons to join Consumer, [y] reasons to join TMT, [z] reasons to join Industrials etc. Dont you think that would be a much better approach? I would have happily used the “pigeonhole” factor or the “limited exit opps” if I knew the seniors at my bank would have been ok with it.

        Thank you again for your help.

        • M&I - Nicole says

          You can just say you enjoyed your time at FIG but you’ve realized that FIG isn’t what you want to be pursuing in the long term and you would like to join another industry group such as XX (In your interview) because [XYZ] It is more convincing if you have a story explaining why you want to join that particular group or people may question your intention of joining their group and wonder if you’d stay in the long run

  14. Sudo says

    Thanks for this, it’s a great article. Really helpful. I have an interview coming up with a FIG team though my question is regarding one of the generic questions. I graduated from a not known university for undergrad last year (Economics) but managed to get experience at an M&A boutique during my time there. Then I got on to a Masters programme at one of the “top” schools but in a not related subject (Political Economy). It’s most likely they will ask why I picked this course. My honest reason is that I was interested in policy and economic applications & brand school. However, I am sure I will come across as someone not dedicated to banking. Is there any way I could put a positive spin on my course choice?

    • M&I - Nicole says

      Not necessarily. Just say that you were interested in learning more about world policy and economics and you’ve always wanted to get a masters. You thought that was the right time to get your masters (right after graduation). Now that you’ve achieved your goal, you want to go back to banking given your previous experience, your passionate about finance, investing, and learning how transactions work, and that you want to do work that makes a broader impact and apply your knowledge from your masters to the corporate world. And then why FIG (perhaps you are very interested in analyzing FIs, or you feel that you can make a bigger impact by advising them – tie that with your passion in world political economy)

  15. John says

    Are there good resources specifically for Canadian FIG activity? American Banker I think is much more suited for the US.

  16. Ankit Patil says

    Great Article. Thanks for getting into details.

    Its really helpful to me as have an opportunity t talk with MD in FIG in bulge bracket firm. And I am really worried that i will blow this up.

    Please can anyone suggest to get best out of this phone call. Its just for 20 mins.

  17. StillConfusedBanker says

    I received a 3rd year lateral offer in FIG from a Leveraged Finance group. FIG at my current BB is very modeling and M&A intensive, whereas the Lev Fin team was a Capital Markets group. Would I have a shot at megafund and top middle-market PE exits coming from two years of Lev Fin and one in FIG? Or would I be limited in my exit opportunities to the buyside?

    Thanks

  18. Ben says

    I am trying to network with a boutique doing only FIG. I like everything about the firm so far (deal flow, culture, etc), but right now my answer on why I want to do FIG specifically is weak. Can I say I really want to learn more about the specific valuation techniques used in the retail bank industry? I have nothing in my background that necessarily supports that claim (the little finance experience I had did not involve any FIG deals)

    Thanks

    • M&I - Nicole says

      Have you been following banks? Are you familiar with bank modeling? I think you may want to choose 1-2 FI you’ve been following, and be able to talk about it. Talk about what fascinates you re. analyzing FI companies, and how its different from other industries.

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