LONDON Nov 21 There may be room for only a
handful of firms at the top table of investment banking as the
industry reshapes, leaving bosses scrambling to keep their seat
and influence at the same time as they need to shrink.
Even the biggest global players have been cutting costs
heavily in the face of a changing regulatory landscape that has
caused a shift widely viewed as structural, rather than
"By the time we are finished with the unintended
consequences of regulation, my feeling is we will have five to
six (global) banks remaining," Anshu Jain, Deutsche Bank's
chief executive, said on Wednesday.
Others share that view. Tougher regulations and shaky
markets have forced all banks to streamline, and the shakeout is
expected to relegate many to a second tier that lacks the scale
to compete and needs to narrow its focus to be profitable.
"It will be ever more minnows and whales," said Peter Hahn,
of Cass Business School's finance department. "Some will be
rubbing their hands with glee to see rivals pull back, and if
there used to be 20 banks that wanted to be in the top five,
there are now maybe eight. But it is still more than five."
Wall Street powerhouses will take the majority of the top
slots, bankers and analysts predict.
J.P. Morgan and Goldman Sachs will stay at
the top table, with Citi, Bank of America Merrill Lynch
and Morgan Stanley also staking a claim. In
Europe, Deutsche Bank and Barclays expect to be in the
Others, including Credit Suisse, UBS,
HSBC and BNP Paribas, each have key areas of
strength but are seen as more likely to be among a second tier
in the pecking order, along with the likes of Royal Bank of
Scotland, Royal Bank of Canada, Nomura
and Societe Generale.
As banks have to hold more capital to conduct business, many
areas are viewed as unprofitable and others marginal, forcing
bosses into big decisions, particularly in Europe.
UBS this month announced that it would axe a further 10,000
jobs as it exits big parts of debt and rates trading to focus on
its stronger equities and advisory operations.
State-backed RBS has abandoned ambitions to challenge Wall
Street's biggest names and slashed its investment bank to narrow
its focus on fixed income and foreign exchange.
Change elsewhere is more modest. New CEOs at Deutsche Bank
and Barclays are trimming businesses and still reviewing plans,
while Credit Suisse this week restructured, but stopped well
short of UBS's radical moves.
Being in the top five in each product areas is crucial to
being profitable in it - and to be in that batch, banks need a
market share of about 6 percent in most areas.
There is no chance of banks returning to the boom years
before the 2007/08 crisis, when their return on equity - a key
measure of profitability - often topped 20 percent. Most need to
cut jobs, pay and other costs just to get above the average cost
of equity of 10-12 percent, analysts estimate.
Technology is becoming increasingly important, as banks try
to grab more "flow" business - income from the low-margin
processing of clients' orders. This offers huge benefits of
scale because technology has slashed the cost of trading.
14 into 5?
Banks also have an eye on rivals as they consider their
plans. UBS's retreat from fixed income, for example, should
allow rivals to pick up business and lift margins.
BNP Paribas said on Wednesday that it should be able to
steal investment banking business from rivals lagging behind it
in adjusting for the new regulatory regime.
"The more competitive large firms are positioning themselves
for a battle of attrition in trading - confident that a new
business model will arise with profitability accruing to the
last few standing," Brad Hintz, senior analyst at Bernstein
Research, said in a note on Wednesday.
Tackling industry overcapacity is likely bring further
severe job cuts and at least a third of the global players will
exit, consultancy Roland Berger predicted this week.
There are 14 firms that maintain a global investment banking
footprint with aspirations in FICC (fixed income, currencies and
commodities), equities and advisory; and in three to five years
there will be fewer than 10, Roland Berger said.
"Perhaps only five will maintain a full-scale model across
all major products and regions," it said. "(Banks) with global
ambitions have to ask themselves whether they should stay on and
invest to realistically close market share or profitability
gaps, or whether they should exit."