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Markus Böhme, Kiarash Fatehi, Pierre Reboul
Investment Banking Outlook Summer 2012 – At a turning point?
Competence Center Financial Services
their Return on Equity is likely to remain in single digits and many peers underperforming today may see their economic model even more challenged over the next 3 to 5 years. structural overcapacity still largely exists. Value chains. . Unless banks make major changes to their business models. Even with rounds of productivity measures. therefore. > Even though these trends reflect structural changes such as revenue shifting to emerging markets and new regulations such as Basel 2. > Fixing individual and industry economics will not come easy. they are also harbingers of the squeeze that investment banks are going to face.5/3. We believe that around 75. will undergo transformation and true exits – which we have hardly seen so far – will be inevitable over the next 3 to 5 years. capturing growth opportunities mainly in emerging markets. and in some cases position themselves as a solution provider for those players who need to consequently refocus their value chains to survive. Many midsized and smaller players in developed markets came under pressure. > Performance strongly differed both within and among peer groups: Global universal players with a higher focus on the fixed income business on average outperformed investment banks with a lower focus on fixed income. depending on how the sovereign debt crisis in Europe unfolds. After a soft second half of 2011.Our theses in a nutshell > Global investment banking revenues continue their roller coaster ride. > We think that now is the time for banks to step decisively up to this challenge to reap early mover benefits by a bespoke mix of swiftly implementing sustainable models. they strongly rebounded in the first quarter of 2012. We project a weaker Q2 with full year revenues in the EUR 200-260 bn range. At the same time many peers in emerging markets roared full steam ahead.000 jobs and one third of industry risk taking capability are still on the line.
and local players active in these lines of business. the European sovereign debt crisis has heightened in intensity. where does investment banking go next? 1) We define global investment banking as the collective IBD (M&A.Competence Center Financial Services 3 Looking Back August 2007 marked a watershed event in global investment banking1). structured origination). Exhibit 1: To hell and back – After their post crisis peak global investment banking revenues are coming in around 2006 levels Investment banking revenues1). DCM. With dark clouds continuing to cast a shadow over financial markets and economic activity. Equities. and FICC revenues (before loan loss provisions) calculated at constant 2011 exchange rates Source: Roland Berger. regional. company disclosure and presentations On the heels of this roller coaster ride Basel 2. 2006-2012e [EUR bn] Emerging Markets 270 265 18% 23% 230 28% Developed 82% Markets 77% 72% 240 200 260 ~ 75 ~ 70 ~5 EE WE ~ 10 Japan North America ~5 MEA ~45 Emerging Asia ~ 10 Latin America ~10 A/NZ 2006 2011 Bear Base Opticase case mistic 2012 scenarios Developed Emerging 2010 1) Adjusted IBD.5 and other new regulatory requirements are starting to kick in and despite myriad rescue attempts. . Almost five years later we are looking at an industry that has gone through a roller coaster ride as global revenue pools tanked in 2008. ECM. Equities. Liquidity began drying up in asset backed securities markets and events eventually unfolded into the subprime crisis that claimed banks throughout the US and Europe. rose out of the ashes in 2009 and subsequently hovered back to approximately pre crisis levels before further decreasing by more than 10% from 2010 to 2011 (exhibit 1). Currencies and Commodities) businesses and revenue streams generated by global. and FICC (Fixed Income. 2011 [EUR bn] Revenue trend.
first and foremost to Asia with Brazil being a second hotspot. In 2011 the game changed and many local players in developed markets lost their edge as shrinking market shares and revenues propelled cost-income-ratios into unsustainable territory. Exhibit 2: Despite a strong Q1 the full year 2012 revenue pool might only yield a small uptick and substantial downside risk persists JUNE 2012 PROJECTION Quarterly IB revenues. > While the FICC roller coaster ride and DVA/CVA effects2) have been the key drivers behind ups and downs. they have also somewhat masked that Equities and IBD businesses are stagnating and contracting in developed markets. In addition regulatory headwind puts further pressure on capital efficiency. > Many players will continue to see their economic models challenged. 2006-2012e [EUR bn] 270 265 230 FICC 200 240 260 FICC – roller coaster ride > Normalization vs. extraordinary Q1 2009/10 levels > Weak flow and position losses in Q3/4 2011 > Once again subdued activity after Q1 2012 rebound Equities – softening > Heavy dip in Q4 2011 > Softer activity with limited Q1 pickup IBD – softening > Downhill from strong Q2 2011 > Limited pipeline 2006 2010 2011 Bear Base Opticase case mistic 2012 scenarios 60 59 57 43 Equities IBD Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q2 2010 Q4 2010 Q2 2011 Q4 2011 Q2 2012 1) Adjusted IBD. company disclosure and presentations 2) Debt Value Adjustments and Credit Value Adjustments: Mark-to-market changes in the value of own debt issued and counterparty exposure as mandated by IAS but often recorded in banks' IB and especially FICC divisions. Equities. .4 Investment Banking Outlook Summer 2012 – At a turning point? We believe that the answer lies in first understanding the underlying structural changes that the industry has experienced and thinking of scenarios in how the market will develop. Q1 2010 – Q1 20121) [EUR bn] 88 85 80 62 ? 39 IB revenues by product groups. just as new regulation such as Basel 2. We see three main shifts that are transforming the industry: > Continued shifts of revenue pools to emerging markets.5 kicked in boosting capital consumption especially for European based players. The top 16 global investment banks and universal players took a double hit when markets softened in 2011. and FICC revenues (before loan loss provisions) calculated at constant 2011 exchange rates Source: Roland Berger.
Equity > Global Ø EM rev. Equity > Relatively global > Emerging focus > Mixed player > Developed focus > FICC focus > Limited IBD/Equity > Country focus > Country focus > Mostly bifurcated: Banks vs.and midsized players were among those hit hardest. FICC. In sharp contrast many – especially Asian and Latin American – emerging market local players continued to grow profitably. meanwhile. Exhibit 3: Not all players are born equal – At least five peer groups compete with distinct business and economic models Peer group IB economics (Basel 2. drying up of client flows and position markdowns as the sovereign debt crisis unfolded (exhibit 2). these trends are continuing to affect the industry.Competence Center Financial Services 5 The picture is not homogenous – for example.5)1). brokers ~30% ~60% >90% ~35% minimal 0-5% ~35% ~45% ~30% ~10% Advanced Internationals Emerging Markets Locals (Banks + Brokers) 8 9 10 Capital efficiency (Rev/RWA) Emerging Market Locals > 50 players 95-100% ~10% 1) Estimate. Ø IB/CIB share3) share4) ~20% ~100% Global Universals Developed Markets Locals Global IBs Cost effici iency (CIR) 90 80 70 60 50 40 30 20 0 1 2 3 4 5 6 7 Global Universals 8 players Advanced Internationals 15 players Developed Markets Locals > 50 players > IBD. not all ships were lifted equally by the tide. seemed to fare better (exhibit 3 and 4). many German small. who enjoyed broader sources of flow such as FX and rates businesses driven by transaction banking. However. company disclosure and presentations What Lies Ahead So far in 2012. Once again emerging markets players roared full steam ahead. First quarter results strongly rebounded from the second half of 2011. which was characterized by higher risk. Among global players the field was split but on average universal players. Small and midsized locals in developed countries. FICC. saw a mixed picture with many of them registering only a moderate recovery or even further revenue contraction against the global trend.5/3 impact on CT1 ratio will come through CIB Markets' RWA uplift 2) Revenues calculated at constant 2011 exchange rates 3) Emerging market revenue share of total peer group revenue 4) Investment Banking revenue share of total CIB peer group revenues Source: Roland Berger. assuming 70% on disclosed B2. . 2011 [%] Note: Bubble size indicates peer group IB revenues2) 110 100 Examples of players Global IBs 8 players Business model > IBD.
But even if the sovereign debt crisis is still as intense by the end of the year as today. but not nearly as negative as 2008. Even under rosier scenarios. revenues seem unlikely to revert to 2010 levels (exhibit 2). In this case the revenue pool may shrink by another 15% to about EUR 200bn. Our base case scenario envisions a 9% RoE and in our bear case. company disclosure and presentations However as banks close the books on the second quarter and will begin reporting results in a few weeks. Nobody can and wants to project the impact of a euro meltdown. the downside for investment banks for the rest of the year will be substantial. with a fairly quick recovery and a much more favorable trading environment and deal pipeline. a mere 5% RoE (exhibit 5). In this case all bets would be off. We believe however. the questions that persist are just how bad will the drop off be and where do we go from here? Even assuming that the sovereign crisis slowly abates. As a result of this challenging environment one European and North American player after another has already lowered their RoE targets: 12 to15% became the new standard down from the earlier 25% targets. Even when factoring in the stream of restructurings and lay offs already announced.6 Investment Banking Outlook Summer 2012 – At a turning point? Exhibit 4: Recent performance diverges both between as well as within each peer group Contracting Moderate recovery Rebounding Continued growth Q1 2010 2011 2012e Global Universals Global IBs Locals Advanced Advanced Locals Q1 2010 2011 2012e Q1 2010 2011 2012e Q1 2010 2011 2012e Global Universals rebound stronger than IBs Developed market players increasingly under pressure EM franchises as growth driver? Continued growth? Source: Roland Berger. that the industry's economic model is more challenged than those lowered targets suggest. Although this sort of Q1 to Q2 drop has been more the rule than the exception over the last few years (exhibit 2). the industry will only return to single digit post tax RoEs on average. Emerging Markets Developed Markets Globals . we expect to see a sharp drop off from the first quarter. we would expect the full year outlook to be just around 2011 levels – a year that was rough.
In addition they lack regular FICC flows from transaction banking. for an average developed market focused player or even global players driven by their European and US businesses. squeezing capital and economics.Competence Center Financial Services 7 Exhibit 5: Unless markets revert to a bull trajectory it is bye-bye to double digit RoEs for 2012 except for high growth pockets in emerging markets Industry RoE1) – 2012 Base case scenario [%] Ø 2010 RoE: 15% 9 Ø 2011 RoE: 7% 5 Global Universals Bear Scenario Cost-income ratio [%] Peer groups 0% RoE range [%] 20% 11 Global IBs Base Case Optimistic Scenario Developed Markets Players Emerging Markets Players 80 70 65 1) After-tax. company disclosure and presentations Once again emerging markets focused players are poised to deliver higher returns – provided there will not be a sharp reversal of fortunes. and confidence falters tanking emerging markets growth. On the other side IB players face even more headwind since they are less focused on FICC and hence benefitted less from the Q1 revenue uptick. Over the next 3 to 5 years. . We do not know when exactly this will happen and how long local regulators will allow for transition. assuming an effective tax rate of 30% for all peer groups Source: Roland Berger. these single digit RoE's lead to an unsustainable trajectory. Despite that uncertainty we are sure that post tax industry RoEs might remain in single digits therefore falling some 7% to 8% short of targets unless more drastic action is taken (exhibit 6). European players will face further headwind as the full effect of proposed regulations such as Basel 3 kick in. However.
000 were realized by year end because attrition came down sharply. headcount reductions have increased individual players' productivity but did not reduce capacity in the overall industry.5 to hedge funds and other institutional investors – a space often coined as 'shadow banking'. The industry's client focused trading and risk management capacity itself has hardly been reduced. > Some (especially large) players successfully mitigated large parts of the Basel 2. announced reductions take longer to work their way through the system – of about 25. These programs however.000 job cuts announced by the top 16 players in mid 2011 only 15. but none of them was a major player in these business lines anyway.0'?) Cost reduction of industry cost base by around one-third > ~15% headcount reduction > Reduced compensation benefits of around 10% > 15-20% decrease of non-compensation budget ~10% Repricing > Limited roll over increased capital requirements > Capacity and demand gap starts to close 7-8 4 12-15 9-11 5-7 Target RoE Baseline Basel 3 Mid-term Profita2012 effect baseline bility gap Baseline 2012 given by base case and optimistic scenario Source: Roland Berger Capacity reduction and exit d it pressure Restoring growth Such gloomy scenarios make it impossible for most European and US players to retain their capital allocations. > Mostly. Furthermore. Evidence suggests that this reduction has yet to occur: > Few players have truly exited full lines of business. . Santander and BBVA have left commodities.5 driven RWA (Risk Weighted Assets) uplift through RWA reduction programs. consolidated books > Risk management activity transferred to institutional investors ('shadowbanking 2. To close this RoE gap the industry would truly need to reduce capacity to sustainable levels. largely pertained to legacy asset sell offs and transfer of certain securitization tranches and other assets whose capital consumption would have skyrocketed under Basel 2.8 Investment Banking Outlook Summer 2012 – At a turning point? Exhibit 6: What would it take to continue to sustainably earn positive economic profits in the IB industry? Mid-term perspective RoE [%] How could the profit gap be closed? Capital reduction of ~30% of industry RWAs in order to overcompensate Basel III uplift > Larger. For example RBS and UniCredit have exited from parts of Cash Equities and Credit Agricole.
> Repricing (and hence increasing the revenue pool at flatter volumes) by about 10%.0' as hedge funds would have to pick up half of this amount – with the other half requiring a real consolidation into fewer.Competence Center Financial Services 9 We feel that real capacity reduction is the only way to restore economics in the mid-term. > Reducing the industry cost base by around one third – even with sizable cuts on the non compensation related cost. more capital efficient books. further structural compensation adjustments. as well as sizable headcount reductions would be required. Unprecedented rounds of layoffs – well beyond the 10. How can the industry and individual banks mend their economics – especially when the weight of their portfolio is not geared towards emerging growth markets? We predict four key developments (exhibit 7): Exhibit 7: Eventually. capacity reducing and efficiency boosting mergers and joint ventures as well as a fundamental reduction in vertical integration in particular for local players will be required to achieve 12 to 15% RoE assuming a flat to moderate revenue pool trajectory (exhibit 6). including the effects of guarantees and the effect of large albeit deferred bonuses. A shake out with real product line exits.000 already announced but not executed – would become inevitable.000 jobs in the industry would have to be cut. One scenario to close the collective RoE gap would mean: > Reducing industry RWAs by about 30% or close to 2 trillion euros – this would mean we are heading towards 'shadow banking 2. industry players will need to take radical action – Four major areas for profitable change > Next wave of headcount reduction and productivity based compensation > Complexity reduction > Process re-engineering and automation Stepped-up efficiency programs Refocused + industrialized value chains > Challenged local players truly refocus on unique client value proposition and scale back trading platforms > Large platforms leveraged into true bank for bank offerings > Industry utilities emerging Source: Roland Berger > Universals withdrawing capital > Lower risk taking capacity for some players > A real wave of (product line) exits Reduced over-capacity Battle for (emerging) ( g g) growth markets > Global leaders 'localizing' > Local leaders professionalizing . We would estimate that about 15% of the 500. which would not seem realistic without reduction of overcapacity.
Singapore. client segments and regional niches. CIB or merchant banking growth. For smaller players this might mean concentrating on sales. Perhaps another five years down the road we will look back on 2012 as the year that decided the fate of banks that survived and those banks that did not. Likewise industry utilities and true "bank for bank" leaders will emerge to fill this void while other large players might choose to focus on certain products. basic structuring and counterparty risk absorption with strict focus on their privileged corporate banking and other quasi-captive franchises. there will be more aspirants than opportunities as the battle for emerging growth markets heats up: Global firms build their presence on the ground (especially beyond hubs such as Hong Kong and Singapore). . Moving decisively and robustly executing this transformation while maintaining day to day focus on capturing business and managing risk in volatile and adverse market conditions will be paramount. > Some capacity will continue to shift into emerging markets and more and more bankers will head from London and New York to Sao Paulo. Winners will evade the looming shake out by refocusing on their true edge and value proposition. Regional champions such as Standard Chartered in Asia or Itau in Latin America invest into their IB capabilities and local players get serious on various forms of IB. and Hong Kong as well as places like Jakarta. > Moving fast will be essential and earning the right to grow and consolidate will mean stepping -up efficiency programs.10 Investment Banking Outlook Summer 2012 – At a turning point? > A refocusing and industrialization of value chains is necessary. in which critical mass can be reached independent of a full scale offering. > Sooner or later the industry will tackle its over-capacity as mid-sized players that neither managed to focus nor to catch up with volume leaders will need to exit some product lines. However.
Germany Phone: +49 69 29924-60 E-mail: kiarash.com Pierre Reboul Partner 11.fatehi@rolandberger. 049321 Singapore Phone: +65 65 97-4577 E-mail: markus. Bockenheimer Landstraße 2-8 60306 Frankfurt.Competence Center Financial Services 11 Contact Markus Böhme Partner 50 Collyer Quay.com .reboul@rolandberger. rue de Prony 75017 Paris.boehme@rolandberger. France Phone: +33 1 53670-325 E-mail: pierre.com Kiarash Fatehi Partner OpernTurm. #10-02 OUE Bayfront Singapore.
all rights reserved www.com .Amsterdam 12 Investment Banking Outlook Summer 2012 – At a turning point? Barcelona Beirut Beijing Berlin Boston Brussels Bucharest Budapest Casablanca Chicago Detroit Doha Dubai Düsseldorf Frankfurt Gothenburg Hamburg Hong Kong Istanbul Jakarta Kuala Lumpur Kyiv Lagos Lisbon London Madrid Manama Milan Montreal Moscow Mumbai Munich New York Paris Prague Riga Rome São Paulo Seoul Shanghai Singapore Stockholm Stuttgart Tokyo Vienna Warsaw Zagreb Zurich Roland Berger Strategy Consultants 07/2012.rolandberger.
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