Real Life Investment Banking Stories #1
How good Financial Modelling skills will impress your investment banking seniors?
It was my first week working at a bulge bracket bank in Canary Wharf, a place where all aspiring bankers aim to be. Looking out of the window, I could see JP Morgan, Barclays HSBC and Bank of America. It was a good feeling - I had arrived! It was only a few years back I had come to London with only £2k in cash which I had accumulated after four years of work experience in India. For those who work in Asia will appreciate how low the salaries are. I was as they say in the banking circles - NINJA - No Income - No Jobs - No Assets. The only thing I had was my ability to build financial models at speed given that I had been trained by an ex-Merill Lynch Investment Banker from New York who had decided to start a valuation company back in India.
Fast forward circa five years from first snagging a job Goldman Sachs, I had just joined a bulge bracket team in Canary Wharf covering the autos sector. A team which was pretty much decimated after one of its co-pilots had left to join a rival investment bank. My first week into the job and the other remaining lead analyst (my boss) was looking to upgrade BMW to a “Buy” rating when China was going through a currency crisis - a brave call given that c.25% of BMW’s revenue stemmed from China.
Her investment thesis was that that the stock was oversold and the recession would be short-lived (on which she was spot on). Given my financial model nous, I had a look at the model - turned around to her and said – if you like, I could quickly decipher the valuation of BMW without its Chinese operations. This could support her analysis and add a mathematical leg to her “Buy” stool - and something for the bulls to hang their hats on. She raised her eyebrows and said “Sameer Can you do that?” followed by “How much time would you take?” to which I replied “probably a day”. She was happy to allocate me a day of my labour on that exercise. Within half a day, I had deconstructed the model and computed the valuation of €80 per share for BMW without its entire Chinese operations. This price was 5% higher than the current stock price. Key takeaway from the financial model that I deconstructed - if BMW’s entire Chinese operation went to zero, the German company’s shares were still worth 5% more than current share price i.e. Arbitrage trade 101. She was ecstatic about the analysis and used it in the valuations section of her report to draw her conclusion and upgrade the stock to “Buy”.
In bulge bracket equity research houses when an analyst wants to change the rating on the stock he/she needs to make a presentation to the head or the deputy head of research along with another sector team head. When she decided to upgrade BMW we walked into a meeting in which the seniors awaited us to discuss our rating. First question out of the block from the deputy for my senior analyst i.e. my boss, “We are extremely nervous that you have decided to upgrade BMW in the eye of the storm here given all that is happening in China. “So, tell me what is the valuation of BMW’s shares without it’s Chinese operations?” My boss had a smile on her face – she turned around and pointing her finger at me said – Sameer has just joined our autos team this week and helped us break down the valuations of BMW without its Chinese operations. We have arrived at a share price of €80. The senior looked down at the report to find that current share price was €77 and the formal business conversation quickly transitioned to a social one where the next 15 mins of the conversation was about my senior analyst’s personal life.
There you go! First week in a new job and everyone from the senior management knows me by my first name. All thanks to the strong Financial Modelling skills. Being an excel jockey pays handsomely in the cut-throat world of investment banking.
If you want to add some basic financial modelling skills feel free to join us on our Free 2 days investment banking course (worth £1,000) by sending your CV to info@cityinvestmenttraining.com and registering here: https://www.cityinvestmenttraining.com/intro-ib-course