Disappointing economic performances reported by main banking players in the last couple of years are expected to continue in the near future, reflecting an overall stagnating economic environment not only in Europe, but potentially also in U.S. (dependent on fiscal cliff starting in January 2013),and in the so called Emerging Markets (e.g. IMF lowered growth estimate for the Chinese economy for the year from 7.7% to 8.2%). Consequently, this situation of uncertainty will further drag down confidence levels and undermine clients activity. Recent data provided on M&A activity showed that 2012 YTD volumes are down 28% compared to a 10-year average, despite attractive low funding costs. Business confidence also remains low, with US Business Fixed Investments representing a significant lower amount compared to cash held on companies' balance sheets.
Investment banks are also facing increased investor's risk aversion leading to less liquid markets, thus reducing sources of revenues from their equities and fixed income business areas. Indeed between 2010 and 2012 equity volumes dropped by 24%3, whereas corporate fixed income volumes decreased by 15%4.
[...] The consensus is that investment banks still have to decrease their risk-weighted assets (calculated according to Basel III regulation) by 25-35%13. According to recent industry's studies, this reshaping process has provided a 300bp ROE improvement thus far. Nonetheless, in order to increase profits and achieve satisfactory return levels (previously defined as an additional of ROE improvement will be needed, and most of this improvement will be accomplished through the rationalization process Oliver Wyman analysis Overcapacity reduction and release: Consolidation is usually the best response to negative cycles, since it is a quick and efficient way to address overcapacity and creates a sustainable economic model for the banks remaining in the business, leading to costs reduction and increased pricing control. [...]
[...] The managements' impact in this process will be fundamental. In the near future, RoE will change by hundreds of basis points, and it's going to be responsibility of senior management to make it a positive change rather than a negative one. The realization of the strategic agenda will be crucial. Operational management will be as much a driver of RoE points placement as business position. Figure 10: Management initiatives: impact on RoE and distribution around average Figure 10 shows the challenging pipeline of initiatives that management teams are facing in the near future, and the estimated impact on RoE of each initiative20. [...]
[...] Bank-by-bank footprint consolidation will be one of the key factors in order to achieve returns improvement. Several banks, of any kind and dimension, will have to reduce investments in business where they are not able to achieve a strong comparative advantage, and at the same time will have to increase the investments where they do. As mentioned before, the economic models of the main players will face strong challenges. The 2011 crisis, combined with the capital consumption introduced by Basel II.5, markedly decreased the profitability of the investment banks. [...]
[...] Duplication of costs: the banks sector supplies a huge proportion of its own cost structure, and costs are duplicated across firms. Benefits of scale are very limited c. Aversion to changes: some banks are reluctant in changing structures and processes that have never been changed recently. The need for changes is not correctly perceived, and this factor makes the reorganization process more difficult to be implemented 2. RWA reduction: even though, as previously analysed, the banking industry has set very ambitious targets, it is expected that those targets will be achieved. [...]
[...] Investment Banking Outlook Summer 2012 At a turning point? Retrieved from http://www.rolandberger.com/media/pdf/Roland_Berger_Investment_Banking_20120710.pdf Goldman Sachs, (2012, November). Goldman Sachs presentation. Poster session presented at the Bank of America Merrill Lynch Banking and Financial Services Conference, New York, NY Goldman Sachs, (2012, February). Goldman Sachs presentation. Poster session presented at the Credit Suisse Financial Services Conference, Miami, FL Accenture, (2011). Focus for Success: The High Performing Investment Bank. [...]
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