Importance of Financial Modelling skills as an investment banking analyst

Real Life Investment Banking Stories:

Importance of Financial Modelling skills as an analyst - It pays handsomely to be an excel jockey in investment banking.

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 - A sum I had earned after garnering four years of work experience in India. For those who work in Asia the sum will resonate as they will better appreciate on how underpaid we are even in Corporate Finance :).

I was as they say in the banking circles - A NINJA - No Income - No Jobs - No Assets. The only skill I was armed with 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 autos team as an analyst in Canary Wharf. A team 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 really do that?” followed by “How much time would you take?” to which I replied “probably a day”. She was happy to allocate a day of my labour and I got cracking on the model.

Within half a day given the knowledge on more than a 50 excel hacks, 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 (an absurdly bearish assumption), 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 final 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 (Basically waiting to grill us). 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 (Phew!!) . 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 I was able to pick up from my ex-boss. Being an excel jockey pays handsomely in the cut-throat world of investment banking.

If you are an excel jockey or not it will be great if you could share some of your own excel related IB stories in the comments below.

If you are new to the world of banking and want to add financial modelling skills feel free to join us on our Free 2 days investment banking course (worth ￡1,000) by sending your CV to [email protected] and registering here: https://www.cityinvestmenttraining.com/intro-ib-course