With most banks still not meeting their costs of capital, pruning senior staff, weeding out juniors, and looking for ways to cut infrastructure costs, it's harder than it's ever been before to have a career that endures in investment banking.
If you want to survive for the next two years - let alone the next ten or twenty - Morgan Stanley's banking analysts and Oliver Wyman have some suggestions for you. The researchers and the consultancy firm have just released their annual 'Blue Paper' on banking for 2016. If you're looking for a strategic road map to banking career survival, this is probably as close as you'll come.
The first thing you need to know is that you can't count on the market buoying you along. At very best, the Blue Paper suggests revenues will increase marginally over the next two years - mostly in equities and IBD (M&A, ECM and DCM). At worst, it says credit revenues will collapse, rates revenues will contract, and IBD revenues will flounder. The process of exiting entire business lines isn't over with: the paper notes that one-third of industry capital – equivalent to US$100-150bn of equity – is still deployed in business lines that produce returns returns of less than 12%.
Investment banks' revenue projections:
Traders of fixed income products will clearly have the toughest time of it. Revenues in fixed income trading have fallen already and are expected to fall further still. By the end of this year, the Blue Paper predicts that fixed income currencies and commodities (FICC) revenues will be down 30% compared to where they were in 2013.
Not all areas of fixed income trading will be equally affected, however. As the chart below shows, credit and securitized products desks are bad places to be in 2016. FX desks are less so. Within credit, some areas - such as European government bond trading desks - are particularly risky and best avoided. Credit Suisse already announced plans to kill its European primary dealership last year, and the Blue Paper says other banks are likely to follow.
Given the difficulty moving between products and desks in fixed income, credit and securitization professionals may feel their options are limited. If you fall into this category, the Blue Paper has three suggestions: firstly aim to work for one of the top five banks in fixed income trading (J.P. Morgan, Citi, Bank of America Merrill Lynch, Deutsche Bank, or Goldman Sachs), where margins are higher and market share is consolidating; secondly, aim to work for the 'product leaders' in your particular market (as the chart below shows, it's actually at the product level rather than the bank level that the greatest cost advantages are incurred now); thirdly, if you lose your job in banking, look for alternatives with the buy-side and with 'third-party liquidity providers'.
The Blue Paper suggests that buy-side firms could have greater need of fixed income traders from investment banks in future. As liquidity dries up, it says asset management firms need to move away from being mere 'price takers' towards being 'price makers'. Trading will move to a 'buy-side to buy-side' model in which firms will need to take intra-day risk and execute trades to their best advantage. They're likely to benefit from investment banks' unwanted trading talent as a result.
At the same time, 'third party liquidity providers' or alternative trading systems which match buyers and sellers' orders are expected to seize a greater share of the market. Fixed income traders who are familiar with electronic trading systems might just be rehoused here.
It's becoming more important to find a bank that's a leader in your product than a leader in the broader business:
The Blue Paper's advice for equities traders is much the same as for fixed income traders. Fundamentally, you need to work for the leaders in your product and for the banks that are strongest in equities. "In equities, only the largest global players and truly specialist firms are set to return a profit over the cycle," says the paper. The top five global banks in equities trading are: Morgan Stanley, Goldman Sachs, J.P. Morgan, Credit Suisse and Bank of America.
As the chart below shows, the top banks in equities trading do very well. The remainder do not.
Why you want to work for an equities trading leader:
As in fixed income trading, some areas of equities are expected to do better this year than others. You don't want to be working equity derivatives, for example.
The 2016 Blue Paper has some very specific implications for anyone who wants to keep a sales job now.
As Deutsche Bank and others have made clear, most clients don't generate much in the way of revenues. If you want to stay alive in a sales role in an investment bank today, you therefore need either to work with the top 30% of clients who generate 80% of the revenues, or you need to be part of the team working out how to service the other 70% of clients efficiently.
"The challenge is now to cover the middle 300-500 clients that make up 40-50% of the revenue base," says the Blue Paper. If you want to be at the forefront of the new arrangements for covering these clients, you'll need to be good with data and you'll need to good with technology. In future, banks will mine client data to create automated programs to serve their least productive clients, say Morgan Stanley and Oliver Wyman. If you're an old school salesperson with marginal clients, you're in danger of being replaced by a machine.
Investment banking divisions (IBD) will not be immune to the pain. Overall, the Blue Paper predicts that IBD revenues will fall around 10% in 2016. Revenues are expected to fall most in equity capital markets (ECM) as margins are compressed. Acute pain will also be felt at banks whose business is geared towards leveraged finance (think Credit Suisse), at banks focused on Continental Europe and Asia where "local competition is fierce, the coverage model is extremely expensive and relationship lending is under-priced," and at marginal players who, "struggle to cover the fixed costs of the coverage platform and the capital drag of the lending book."
If you want to survive in IBD, you ideally need to be focused on the robust US or UK markets, to work for a leading player or a niche specialist with a strength in your area, or to work for either a leading global bank in a global "hub" or a local bank in its local market. Do this, and you will be sort of invincible.
The "rapid pace of regulatory change" prevented banks from making any real cuts to infrastructure costs over the past few years, says the Blue Paper. However, costs have become unmanageable. Every single front office job in an investment bank now comes with associated control costs of $300k, says the Blue Paper. In 2009, that figure was $200k.
In the next few years, banks are expected to set about cutting back office costs by 10% to 15%. Anything that can be automated will be automated. Any incidences of duplication will be removed.
If you work in a role that could be done by a computer, now's therefore the time to move on. The same applies if you work in a role that someone else is already doing somewhere else at your firm.
Where will you move on to? Try the buy-side. As asset managers move to a "price taker" model, the Blue Paper says they will need to invest significantly in their control functions.
Where the cuts will come in the back and middle office: