IFR Editor-at-large Keith Mullin
I CHAIRED A genuinely fascinating session on April 19 which I had rather haughtily entitled: “The Future of Global Investment Banking: Evaluating Performance & Defining Optimal Strategies for the New Cycle”. It was supposed to be an open debate with a wide range of market participants from different disciplines.
It ended up being a panel made up purely of strategy consultants; the investment banks I’d invited to participate wimped out completely and gave it a very wide berth. I’m not sure what on earth they were afraid of, other than their inability to articulate a credible story perhaps. But hey, I’m not one to take these things personally…
In the event, though, I think the session benefited from the presence of professionals whose job is to drive the ponderous and the conceptual into the realm of the possible, because that’s where we are in the various strands of the investment banking conversation.
We discussed the impact of the regulatory tsunami mainly on the banks but also on the regulators themselves; we debated the follow-through impact on investment banking strategy set against a firm ‘put-the-banks-back-in-the-box’ political agenda and the less than stellar macroeconomic overlay.
TAKING THE ESSENCE of an intense 90-minute conversation is tough, but what were the key take-aways? Well, the IFR panel was unanimous in believing the new investment banking leadership has understood that things have to change. So far so obvious. But while they were in so many ways either clueless or didn’t care too much in a rising market about individual client return metrics and the costs of product provision, they now understand that the economics of the business have changed across the spectrum and that we’re not going back any time soon to those carefree pre-financial crisis days when the only thing that mattered was making money and how quickly.
Most now understand that the economics of the business have changed across the spectrum
Investment banking is morphing back into a frankly dull utility business sporting optically uninteresting (from a pre-financial crisis perspective) returns on equity – although less volatile returns on equity – in which only a handful of players still have a desire to – and will – maintain global multi-product status.
Others are finding out, some the hard way, that they have to give up those pre-Lehman glory-hunting global pretensions and live the new “reality of realism”, if I can put it that way, where the driving issues are ensuring relevance to the demands of clients to whom you can be truly relevant. That means a sub-stratum of players will emerge which either have global pretensions at a single-product level or will rein in their operations into a more regional or even domestic orientation.
Investment banks should no longer need to feel the obligation to handle entire product supply chains internally. It’s expensive and there are actually elements of the product chain that investment banks are not optimally set up to handle. That said, there remains a fairly robust reticence to route trading and/or processing flow via third parties where those parties are deemed to be competitors.
By the same token, there is not deemed to be a viable non-competitive third-party entity through which client flow in FICC or equities can be routed. There is a huge opportunity for an independent trading or processing engine to emerge and deal with the vanilla flow emanating away from the small number of flow monsters.
THE CULTURAL FLUFFINESS that is accompanying the hard-nosed decisions about business strategy, return on equity optimisation and shareholder value were deemed to be something of an occupational hazard given what happened in the run-up to and since 2008. But far from being the slightly off-the-wall debate I’ve certainly suggested in this column this aspect has been, the IFR panel felt such discussions were an integral component of the debate at this juncture.
I asked the panelists to evaluate their thoughts as to how successful they imagine investment banks would be in the New World using a one-to-10 scoring system, with one being ‘no hope’ and 10 being a slam-dunk success. Being consultants with client conflict and client relationship issues to deal with, the responses were, of necessity, general. But it’s clear that IFR’s assembled group of experts felt that there would be winners and losers in the quest to re-calibrate the business model, bearing in mind the full complement of financial regulation and taking into account clients’ changing needs.
While the consensus score was 7.4 – I must say that sounds a little high to me – they all conditioned their scoring around a wide standard deviation. Just looking at the top 15 global firms by IB wallet, the consultants scored some of the banks three and others between eight and nine. It became clear through the discussion that not every investment bank has smelled the coffee and woken up to the new realities.
The most sobering thought is this: asked whether new entrants would emerge with the requisite skills to avoid the sins of the incumbents and with the will to succeed in the new investment banking arena, there was a feeling that this wouldn’t happen. Not because the barriers to entry are necessarily too high but because the rewards for success in the new investment banking paradigm simply weren’t attractive enough. Now that’s food for thought!
