Oliver Wyman and Morgan Stanley 2013 Wholesale and Investment Banking Outlook Report

This year’s annual report finds that the extent of the forces driving the fracturing of the global wholesale and investment banking industry is yet to be fully understood. Global wholesale banks and market infrastructure providers face three major forces that will drive change in the industry:

Regulatory balkanization: the report anticipates a 2-3% drag on RoE as a result of the overlapping challenges of multi-jurisdiction, ring-fencing and national subsidiarisation. Diverging national regulatory agendas pose a major risk to the global banking model.
OTC reform is accelerating: overall the report anticipates a less than 1% reduction in RoE for the industry as a result of OTC reform, which is less than the market anticipates. However, while the overall effect will be bounded, the value shifts will be dramatic. Client behavior will be impacted greatly – 45% of investors surveyed expected reduced volumes in OTC swaps in the next two years, and more than 60% of investors have not selected their clearing providers yet. The chronic shortage of collateral will generate new opportunities for some firms.
The fixed cost challenge: while much progress has been made on restructuring financial resources, the industry is struggling with higher infrastructure and fixed costs. 2-3% points of additional RoE has to be found by firms finding greater economies of scope and scale, and solutions to make their cost structures more variable and mutual.

Evolution of Industry Returns

There is positive news on returns, which hit 12% in 2012 – lofty by recent standards. Despite the significant challenges, 12-14% RoE for the industry is in sight between 2014 and 2016. Our analysis shows that returns for the winners could be 3-4% points higher than the average and up to 8% points higher than the losers. It’s all dependent on banks addressing their three biggest challenges and taking advantage of new business opportunities.

Morgan Stnlaey Oliver Wyman 2013 Wholesale and Investment Banking Outlook Report

1What is the Wholesale & Investment Banking Outlook?

This is our annual report about the investment banking industry which we publish jointly with Morgan Stanley. We launched the report in April 2008 in the middle of the financial crisis, after the big losses had hit. In the first report we wanted to provide a broader context, so we considered the previous 20 years’ of financial crises and their impact on the industry and its earnings, in comparison with our outlook for the following year, 2008-9. Since then we’ve published the report at the end of each first quarter, featuring our analysis of the coming year in investment banking, in terms of changes to the business, future earnings and innovations.
2Is this relevant to audiences outside of the banking industry?

I think so. Banking is a significant industry and has, for better and worse, affected the success of other global and local industries. Since 2007 it’s evolved from being a niche topic that only banks, policy makers, regulators and ratings agencies were interested in, to a mainstream topic that many people feel passionately about. It’s become headline news. And I think that’s a good thing. We should all understand what’s happening in banking as it underpins our economic lives. And it’s in a state of flux.
3How is banking going to change in the coming year?

While global banking has undergone significant change during the last few years, the real business model change is only just happening. Global wholesale banks and market infrastructure providers face three major forces that will drive change: regulatory balkanization, ; reform in the over-the-counter financial instrument processing industry which will affect the volume of these trades, and therefore revenue; and the fixed cost challenge, which is the need for the industry to reduce infrastructure and operational costs.
4Is the investment banking industry going to change permanently in the coming year?

The sector has been evolving for some time. The change so far has spanned many aspects of businesses: revenue and cost in terms of operations and compensation; changes in skills and resourcing; the review of institutions’ portfolio of businesses; and, of course, responding to regulatory demands. Now the change is going to be less focused on becoming compliant and more on finding the business opportunity and growth – I think it’s fairly optimistic. We think we’ll return to a relatively healthy 12-14% RoE between 2014 and 2016.