McKinsey & Co. have got a big new banking report out. Based on interviews with 200 'industry leaders' at 175 banks, it purports to be as comprehensive as it gets.
Predictably, it contains some bad news. Although banks have cut costs and headcount already (McKinsey says fixed income currencies and commodities headcount fell 33% at major banks between 2010 and 2015), there are more cuts to come. McKinsey says the 'average top 10 bank' still needs to cut costs by 20%, or an average of $2.5bn. A lot of people are going to feel a lot of pain.
However, there are a few things McKinsey implies you can do to come through the coming cull. And these are as follows:
In the next three to five years, McKinsey says a whole new market structure is likely to emerge in global banking.
Firstly, anything from five to seven of today's 10 global banks are likely to stop being global banks offering all things to all people. They will cut entire product lines and cull regional offices. The banks that don't will have "scale" across products and regions.
Secondly, a tier of eight to 12 global players with scale in 'chosen product bundles' will appear.
Thirdly, national and regionally focused banks with strong corporate client bases will consolidate their local strength and offer some investment banking products.
And fourthly, non-bank competitors will start in particular areas and expand their range of businesses.
To survive, McKinsey suggests you'll need to work for a successful firm within this framework. You don't, for example, want to work for a global bank that's sub-scale in your product or region. Nor do you want to work for a bank with regional aspirations that lacks a local corporate client base.
As we've noted on several occasions, investment banking sales jobs are in a period of upheaval. McKinsey agrees. It says clients of investment banks are complaining that they, "feel overserved by sales in an electronic/flow products world, and that banks are struggling to provide critical liquidity in products when it really matters."
As we describe here, sales jobs in banks in future will be divided between high touch and low touch jobs. If you work in sales, you need to position yourself so that you don't fall between the two.
Digitization is the only silver lining to McKinsey's cloudy banking picture. As digital tools spread through banking, it thinks revenues could increase by 4% to 12% and that profits could increase by 16%.
The chart below shows how this is supposed to happen. In the front office, McKinsey says, "data mining, machine learning and artificial intelligence can be used to improve decision making and the quality and efficiency of insight generation." In the middle office they can, "drive predictive trade capture and improve reconciliation and rootcause analysis" as well as flagging risks through automated surveillance procedures.
Source: McKinsey & Co
Digitialization might be a good thing - unless it leaves you without a job. As they focus on, "front-to-back automation" McKinsey suggests jobs may go in areas like product control and risk management, which are better performed by intelligent algorithms.
You might want to stay away from large European investment banks. McKinsey notes that the largest of them generated an average return on equity of just 5% in 2015 and suffered from a high cost base. McKinsey doesn't name names, but as we've noted previously, costs are particularly elevated at Deutsche and Credit Suisse.
Last week's report from Coalition stressed that rates trading businesses have had a good 2016. That may be so, but that doesn't mean it will last. As capital requirements increase and new regulations like the Fundamental Review of the Trading Book come into force, McKinsey suggests that rates trading businesses in particular will become less attractive. Along with credit, the rates trading business stands to be particularly impacted by the FRTB and McKinsey thinks the impact will be particularly felt after the 2019 implementation date. " Not all players will be able to get their advanced [risk] models approved in time and so will have to revert to the more punitive standardized models."
If you think you can ask for a pay rise in your banking job, then think again. As the chart below shows, revenues per head in banking are stagnating as costs per head increase. Even if you're bringing in more revenues yourself, you're fighting a losing trend.
Source: McKinsey & Co
McKinsey says that part of the problem with cost cutting in investment banks is that banks are too focused on cutting in the front office and less cognizant of the difficulties of cutting in the middle and back office. Even when banks close trading desks, they often need to keep "supporting technology" for other parts of the business, says McKinsey.
And then there's MiFID II. As far as we can see, MiFID II is encouraging banks to hire big name researchers in preparation of the day that clients will actually have to pay for research. McKinsey disagrees saying that brokerage firms are already, 'downsizing and “juniorizing” research teams.' It also says that some brokerage firms are exiting research altogether, and choosing to compete on the excellence of their execution.
As the number of 'fair value' accounting adjustments (known as XVAs) increases, so does demand for XVA traders. Credit valuation adjustments (CVAs), funding valuation adjustments (FVAs) and initial margin adjustments are all now commonplace, says McKinsey, Regulatory capital cost adjustments (KVAs) are becoming more important.
These adjustments are aggregated and hedged against on XVA desks. In future, McKinsey predicts that banks will be able to standardize trade approval procedures and centralize their reporting capabilities of capital hurdles and KVA consumption per line of business.
Finally, you might want to work in fintech. McKinsey thinks fintech firms have been misunderstood and that most are, "focused not on disrupting the banking model but on enhancing the client experience or enabling specific elements of the value chain." They want to work with banks, not against them. Nice fintech firms you might want to work for are shown in the chart below.
Source: McKinsey & Co