Beleaguered Investment Banks Facing Uphill Battle
With Revenues, Operating Profits, and Return on Equity Still Under Pressure, Banks Must Narrow Their Focus and Play to Strengths; Upgrading Digital Capabilities Is Mandatory, Says Report by The Boston Consulting Group
(firmenpresse) - NEW YORK, NY -- (Marketwired) -- 05/11/15 -- Facing ongoing challenges from disruptive industry trends, investment banks must take action on a number of fronts if they hope to put themselves on a positive trajectory for the future, according to a new report by . The report, , is being released today.
The report, BCG's fourth annual study of the capital markets and investment banking (CMIB) business, provides a detailed examination of key market developments, placing special emphasis on the evolution of digital technology and the steps that investment banks must take to adapt to a shifting industry landscape.
"Investment banks can no longer ignore the power of the information technology era in which we live," said Philippe Morel, a coauthor of the report and the global leader of BCG's capital markets segment. "It has forced other industries to completely overhaul their business models, and is now being brought to bear on the world of capital markets. The time for digital adoption is now."
According to the report, global CMIB industry revenues declined once again in 2014 to $239 billion, down 3 percent from $246 billion in 2013 and down 12 percent from $271 billion in 2010, as cyclical and structural headwinds continued to pressure the top line. Fixed-income, currencies, and commodities (FICC), which made up 55 percent of all revenues in 2010, saw its share of the total fall to 49 percent ($117 billion in 2014). Unusual volatility and low client flows have been the primary reasons for poor performance, although structural issues have also plagued the market. Moreover, new regulations that limit proprietary trading, such as the Volcker Rule in the U.S. and ring-fencing in the U.K., will undermine the ability of investment banks to act as market makers in the years ahead.
On a more positive note, advisory revenues grew 4 percent to $62 billion in 2014, driven primarily by very strong M&A revenues, which grew 14 percent to $16.5 billion, the strongest growth in five years. BCG expects 2015 to be another good year given the cyclical nature of M&A, which tends to follow five-to-seven-year cycles.
Return on equity (ROE) in the CMIB industry continued to fall in 2014, to 7 percent, from 11 percent in 2013 and 12 percent in 2012. BCG expects the downward trend to continue, with industry ROE remaining below 10 percent unless major restructuring occurs. In addition, industry operating profits were at historical lows in 2014, down 28 percent since 2010 to just $68 billion. Equity capital markets, debt capital markets, and M&A were the only bright spots, buoyed by strong issuance thanks to low interest rates. Rates trading has suffered the largest decline, falling 64 percent to just $8 billion in 2014, down from $22 billion in 2012.
According to the report, the information advantage that investment banks have traditionally enjoyed is being eroded at the very moment when information technology is entering a new evolutionary phase. Digital advances are facilitating the flow of information away from banks and into new channels. These advances are also allowing data to be created and controlled by nonbank entities. Some CMIB firms see the handwriting on the wall and are implementing measures to stay ahead of the curve. Other firms are adapting too slowly, if at all.
BCG says that investment banks must conduct a systematic review of all areas where the business model can be upgraded through digital improvements, including cost reduction and better distribution that lifts revenues. Partnerships will play a key role, and these can occur all along the value chain. There are many opportunities in digital trading, for example. The CMIB industry also needs to reinvent itself on both the cost and revenue sides by sharing nondifferentiating operations via utilities, just as retail banks have done for many years in the processing of payments, credit cards, and mortgages.
The report also says that it is no longer possible for investment banks to be all things to all people. Banks can hold key relationships with some clients and source products as necessary, and they can also maintain a competitive or pole position in other products, but the days of being both a relationship leader and a product leader in multiple products are over.
"Today," said BCG's Morel, "it is better for investment banks to commit to a few product lines in which they can gain the pole position and succeed in the new scale-driven, electronic, winner-takes-all environment. The alternative is to compete in too many areas and achieve only low, loss-leading market shares."
To download a copy of the report, please go to .
To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or .
The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 82 offices in 46 countries. For more information, please visit .
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