* Boston Consulting Group sees some banks dropping
* Big Wall Street banks to post returns on equity of 15-16
* Boutique firms will post ROE of 30 percent or more-BCG
By Lauren Tara LaCapra
NEW YORK, April 30 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
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
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
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
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.