They're over. The hard years of zero revenue growth and terrible returns and constant cutting are coming to an end. This year's big 'Blue Paper' banking report from analysts at Morgan Stanley and Oliver Wyman says banking is back on a growth trajectory. Now it's asset managers' turn to suffer.
If you want to thrive in finance in the next five years, the 40-page report has some suggestions on how to go about it. We've summarised the key points for you below.
You probably don't want to be working for an asset manager or a hedge fund now. The analysts point out that both are suffering "sustained fee pressure". More hedge funds closed last year than at any time since the financial crisis. Nor are things likely to get any better - fees are expected to fall a further 10% by 2019, forcing asset managers to restructure and cut costs.
By comparison, investment banks are expected to benefit from a gentler approach to banking regulation, which could release $20bn of capital - particularly in U.S. banks. This newly free capital is expected to encourage banks back into some business areas and to raise their return on equity (RoE). There are risks to this bullish scenario. The analysts point out that an end to globalisation could cause problems for the 20-30% of wholesale banks' revenues that are earned in cross-region activities, but even this could create opportunities. In M&A, for example, clients may want to restructure businesses to suit the new policy framework.
Where the growth will be:
With asset managers and hedge funds struggling, you don't want to be serving them as your clients. John Cryan's new strategy at Deutsche Bank involves focusing the business more heavily on corporate clients and Deutsche isn't likely to be alone in this. As the chart below shows, corporate clients combine high growth and low capital commitment, and are the future.
The best clients:
Corporate clients or not, you might want to avoid cash equities, where the analysts think banks will follow Nomura in making cuts. They estimate that $10-$15bn has disappeared forever from the equities revenues pool as a result of structural changes, but that banks have yet to cut capacity to match this. Worse, MiFID II is likely to lead to further compression of cash equity commissions - especially in research. This dynamic is expected to be especially evident away from top tier equities players.
The analysts note that the wholesale banking industry is a lot more concentrated in all sectors than it used to be: the top five players today are ~two times larger than the next five compared to ~1.6 times back in 2006.
Nor is it just cash equities. The analysts note that margins are under pressure in all highly liquid product areas - including U.S. Treasuries and FX. Here, they predict that banks will increasingly cede share to non-bank trading venues where market making takes place electronically and headcount is at a bare minimum.
The situation in London is complicated by Brexit. Jobs that are in London now may not be in London by 2022. The chart below shows where the analysts expect Brexit related changes to take effect. Advisory (M&A) and origination bankers should be safest in the City.
The compliance boom is bust. As the chart below shows, the analysts are predicting that banks' regulatory spending will decline 40% between now and 2020.
The worst regulatory jobs are those which are repetitive and lend themselves to automation. The best are those which involve dispensing complex advice. The chart below shows which to avoid and which to target.
It's not just regulatory jobs that are at risk from automation. Salespeople in banks are expected to face further pressure from the arrival of tools that can analyse data to provide trade ideas and seed customer communications and conversations. " Analytical solutions are emerging that replace some of the legwork to produce reports and prospectuses in research and banking traditionally performed by armies of analysts," say the analysts. As the chart below shows, the cost savings from automation are big in sales and trading, but have already been largely realised. Control functions look like the next area of focus (along with investment banking divisions, IBD).
Where the automation will work:
Lastly, you might want to look at some of the areas where revenue growth is likely to be strongest. The analysts are predicting that the revenue recovery between now and 2022 could be strongest in areas which banks cut in response to increased capital requirements after the crisis. These include securitisation, rates and credit trading. The chart below shows where they expect revenue growth to feature most strongly this year in particular. Equity capital markets (ECM) look likes a good place to start.
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