Few Wall Street banks will survive trading overhaul -report

Tue Apr 30, 2013 12:31pm EDT

* Boston Consulting Group sees some banks dropping full-service trading

* Big Wall Street banks to post returns on equity of 15-16 percent-BCG

* Boutique firms will post ROE of 30 percent or more-BCG

By Lauren Tara LaCapra

NEW YORK, April 30 (Reuters) - Just a few Wall Street banks will be able to maintain large trading operations after adjusting to new rules and will achieve returns-on-equity of just 15 percent to 16 percent, according to a Boston Consulting Group report on Tuesday.

Banks like JPMorgan Chase & Co, Goldman Sachs Group Inc and Deutsche Bank AG will be able to maintain large trading operations because of their market share, reputation and technology investments, according to a presentation given by the consulting firm's executives. But smaller competitors will have to exit businesses altogether or focus just on particular segments of the market.

"There are too many powerhouses out there and we don't expect more than half of them to survive," said Philippe Morel, a Boston Consulting Group senior partner and a co-author of the report.

Banks that are not in the top seven in terms of global market share for individual trading businesses will have to exit trading businesses, he added, and only about four global banks will remain dominant players across stock, bond and derivatives markets.

Banks have been facing intense pressure from shareholders to increase their returns-on-equity, a measure of how much profit they can squeeze from their balance sheets. But their profits have been getting hit from both sides: higher costs from new regulations and less revenue from client deals and trading.

Goldman Sachs, for instance, last year reported a return-on-equity of 10.7 percent, just one-third of its pre-crisis high. Boston Consulting Group predicts that new rules will knock another 3 percentage points off returns before business model changes can get big banks up to 15 percent to 16 percent returns.

Smaller advisory firms like Evercore Partners Inc and Lazard Ltd, which do not have trading operations, will be able to deliver returns above 30 percent, Boston Consulting Group predicts.

Big Wall Street banks have been cutting costs through layoffs and other efficiency programs. They have only recently started to consider serious changes business models in response to new rules, Boston Consulting Group executives said.

UBS AG was one of the first banks to announce a major restructuring last year, saying it would exit fixed income, currency and commodities (FICC) trading entirely, cutting 10,000 jobs in the process. Analysts have questioned whether other banks including Morgan Stanley may have to do the same.

Deutsche Bank analysts last week indicated that only a handful of banks, including JPMorgan, Citigroup Inc, Barclays PLC, Bank of America Corp and Goldman have the scale to stay in fixed income, currency and commodities trading, the areas most affected by new rules.

Boston Consulting Group predicts that six business models will emerge as financial firms respond to new rules.

In addition to "powerhouses" like JPMorgan and "advisory specialists" like Lazard, there will also be "haute couture" firms that sell sophisticated products to investors and deliver returns on equity of 16 percent to 18 percent.

The group sees "relationship experts" with strong corporate client relationships selling products sourced from other firms and delivering returns of 13 percent to 14 percent. "Utility providers" will provide technology, operations and accounting support for larger firms and deliver returns of 15 percent to 17 percent.

Finally, hedge funds, which will capture more of banks' proprietary investing business, will post returns of 20 percent to 25 percent, according to Boston Consulting Group.

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