First there was the enormous report from JPMorgan on the state of the investment banking industry. Now we have another enormous report from Morgan Stanley and Oliver Wyman, also on the state of the investment banking industry.
Morgan Stanley/Oliver Wyman’s report is an update of something they produce every year (last year they gave a detailed breakdown of 20k predicted job losses). It’s similar to JPMorgan’s, but also different. If you want to ensure the longevity of your career and maximization of your earnings potential, you need to know this:
JPMorgan thought 2012 would be a reasonable year for FICC, but MS/OW are predicting a good year. They think there will be 5-10% revenue growth. The biggest growth will come in commodities, they think, where revenues might increase 10-15%.
2012 has not started well for investment banks. First quarter investment banking fees were down 30% year on year according to Dealogic. However, MS/OW think equities and IBD revenues will rise 5-10% globally this year. The biggest growth is expected to be DCM, supported by the LTRO and low interest rates.
Several banks have already exited several businesses, as summarised by the table from MS/OW below. However, they predict that this is only the start of the matter: 2012 will be the year in which, “banks cannot just shrink at the margin to reach adequate returns on capital. Firms now have to choose where they may have comparative advantage and then invest in scale to win in these markets, or exit.”
In practice, they say this means the removal of another 7.5% of industry capacity – and more if the hoped for cyclical recover isn’t forthcoming.
MS/OW have created the chart below suggesting where capacity needs to come out most of all. Note: Europe is the biggest focus bu tAsiais not immune. In total, MS/OW think 8-12% of additional capacity (AKA headcount) needs to come out of European wholesale banking.
Business by business, they predict banks will pull out of:
- Advisory and research - in markets where they can’t make enough money to justify the high costs involved
- Illiquid trading – where they don’t have the risk appetite (thereby benefiting those that do).
- Flow trading – where they don’t have scale and market share
- Emerging markets – where capital and funding constraints force a focus on business at home. Large firms will pull out of marginal emerging markets. Small firms will pull out of large G7 hubs.
“Some global banks, chiefly the Europeans, will exit geographies where they can’t compete, giving advantage to scaled regionals and some US firms,” predict MS/OW. “Home market advantages will be reinforced, pushing medium sized and smaller banks to focus domestically.”
French banks, in particular, are looking a little sketchy and are expected to continue pulling out of the US, and all dollar-denominated lending businesses. Overall, UBS and Credit Suisse could struggle on the grounds that: they're sub-scale in the big US growth market (see below) and they fall into an unfortunate category of banks, 'forced to leave attractive segments due to low competitive edge or funding pressures or who are left with a portfolio of activities with little synergy.'
The US market is now more attractive than Europe and (surprisingly) Asia, say MS/OW. They estimate the US market is now 8% more profitable than either Europe or Asia, due to: the higher cost of maintaining businesses across countries in Europe and Asia; to higher post-trade costs in Europe and Asia; to faster economic growth in the US than Europe; and to the concentration of US market share in top firms.
They point out that US banks have already cleaned their balance sheets and are therefore in a strong position to expand, claiming: “This presents the US banks with an enviable problem: whether to double down and reap the rewards of gaining further market share in the attractive US market, or whether to use the strong home base to sustain market share gains abroad.”
By comparison: “The European banks face the opposite issue: at a disadvantage globally and with more difficulty taking share in the US, European wholesale banks will be under more competitive pressure in the coming years, particularly in non-European markets.”
Major US banks such as JPMorgan, Goldman Sachs, Citi, Bank of America, and Canadian banks with a large US presence (RBC)
will be well positioned to take advantage of European banks' withdrawal from the US market.
Conclusion: if you want your career to be bulletproof in the next few years, you could do worse than work for a US bank in the US. If you want to take a risk, work for a European bank in Argentina.
We’ve flagged collateral management as a growth area before. MS/OW confirm this.
In future, they say “A greater proportion of economic profit will come from the infrastructure supporting clearing, collateral management and service delivery. “
If you work in collateral management, you may find yourself being bid for by both banks and custodians, which are battling for collateral management and collateral transformation revenues.
Other areas of growth include clearing, pre-trade data and some areas of execution. The chart below suggests you do not want to be working in settlement and you do not want to be working in custody.
As banks pull back from lending, MS/OW think investors like pension funds, CLO-managers and insurance companies will fill the gap.