If you work in fixed income currencies and commodities for a bank which is far from being an overall market leader and you’re in a business which has negligible share in its niche, bad luck.
According to analysts at Morgan Stanley this is the year in which banks will start shaping themselves to fit the new Basel paradigm. If you’re outside the envelope: tough.
What to avoid
Certain fixed income activities will become uneconomic under Basel III. These includesecuritisation and correlation trading.
However, if you are not working in securitisation or correlation trading, you can’t assume you’re safe.
“The next six to 12 months are when banks are going to be making decisions about where to de-scale,” says Huw Van Steenis, head of EMEA banking research at Morgan Stanley.
“It will be a judgement call on a bank by bank basis, with decisions based upon existing strengths,” he adds. “Future profitability in FICC will come from ruthless focus.”
Translated, this means one of two things:
1) Work for a flow monster In the new environment, analysts at Morgan Stanley predict the banks that remain profitable across FICC will be those with significant market share. Globally, these are: Goldman Sachs, Deutsche, JPMorgan, Bank of America and Citigroup and BarCap
2) Work in a niche area for a non-flow monster If you’re not going to work for a market leader in FICC, you’re advised to work for a smaller player which has market share in a particular business area.
For example, MS analysts are predicting that UBS will build on its current strength in FX, but may not try gaining share in US swaps.
By the same rationale, you’ll be ok if you’re working in rates and FX at RBS, but less so elsewhere in its fixed income business. Credit Suisse may pull back from its aspirations to build in commodities, but will retain its strength in residential mortgage trading. Morgan Stanley itself may pull back from its rates aspirations. Nomura may decide to focus on Asian clients.
What will be fine
If FICC is in for a shake-out, equities isn’t. Morgan Stanley analysts predict banks will, ‘flock to equities’ to offset the reduced returns in FICC.
“Equities is an attractive business where smaller niche players can survive, whereas FICC is driven more by scale, technology, balance sheet and distribution,” they surmise.
Also fine will be advisory bankers, where business is expected to pick up and Basel III will have zero impact on profitability.
You have six months in which to make the necessary adjustments. Starting now.