The future of Investment Banking (Oliver Wyman/Morgan Stanley)

What’s the outlook for Investment Banking in 2014 and beyond?

Well, according to a new report published by Oliver Wyman and Morgan Stanley, banks need to act fast and re-allocate capital and resources to optimise where they have real advantage, and focus regionally and domestically.

The report which includes results of client surveys suggests clients plan to ‘polarize’ their spend on partner banks and specialists in areas such as servicing multi-asset, whilst squeezing the rest.

This is a really fascinating report (link available at end of this post), well worth taking the time to read, some key takeaways from the report are:

Market under-estimates scope for wholesale banks to increase returns as they are forced to focus on business optimisation and resource allocations

Drivers being:

  • Greater visibility on regulations
  • Higher ‘game changing’ leverage ratios of 4-5%
  • Lacklustre revenues and weak FICC
  • Too much capital and costs tied up in areas of low client payback
  • Old model of cross selling & cross subsidies no longer valid
  • Client demand changing rapidly, and client margins likely to deteriorate further
  • Clients polarize spend on partner banks and specialists
  • Over competition in areas where banks lack an edge
  • Still more capacity (6-8%) to be stripped out, banks need to optimise the core
  • New operating models and different market structures – new winners and losers
  • Fundamental shift where value in the industry is captured
  • The corporate franchise should be a key growth driver, but returns are resolutely low so far.

Industry ROI

The likely evolution of business models

The case for significant optimisation is strongest in Fixed Income

  • Banks need to grasp the benefits of market structure change, cut capacity further and re-allocate capital faster, primarily from the structurally shrinking Rates business towards new forms of credit provision.
  • Rates revenue down 60% since 2009, yet 30-40% of Basel 3 assets still tied up in OTC Rates markets
  • Another $15-20bln capital needs to be taken out of rates and strip out costs from voice sales and manual trading

Lererage ratio constraints

Winners and losers and capturing new value

  • Banks will optimise very differently, tough choices on overseas operations
  • US and some EM banks have advantages.
  • Clients value global capabilities – in content and in execution – but they do not need it from every bank.
  • More banks will look to pull back and focus on their core home regions.
  • Investor clients are actively looking to deal more with partner banks and specialists, reducing spend with the middle tier of core providers

Consolidation with Partners & Specialists

Full report available from Oliver Wyman website here:

One Response

  1. […] is driving change in capital market structure, and as highlighted in the future of investment banking, banks continue to move towards a ‘capital-lite’ business model, as they seek to […]

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