Outlook for Global Wholesale & Investment Banking
With global wholesale markets undergoing profound cyclical and structural change, the key question on the minds of investors and management is how regulation and the economy will challenge the shape and profitability of the industry.
In the second annual joint Oliver Wyman and Morgan Stanley research report, Outlook for Global Wholesale & Investment Banking, we explore the outlook, range of potential outcomes and implications for leading Wholesale and Investment Banks, as well as the wider implications for exchanges, inter-dealer brokers and asset managers.
The broad conclusions reached in the report are as follows:
- Our base case for 2010 is that investment banking industry revenues will drop 10-15% before marks as extraordinary gains pass and margins tighten, because the fall-off in the Rates business will be too large to be compensated by moderate growth in Equities, Emerging Markets and Corporate Banking
- Bid-ask spreads have tightened again to close to pre-crisis levels, placing greater demands on scale, trading efficiency and electronic platforms
- We see some long-term growth areas, but lower leverage means the upside will be curbed; Asia/Emerging Markets, absolute return investing and buy-side deepening, disintermediation and FIG ALM all present growth opportunities
- A measured and coordinated portfolio of regulation is appropriate for the industry, and under this base case we expect regulations to cost the industry ~4% of RoE; however, we have major concerns that a punitive set of regulation could cost the industry 8% of RoE, resulting in significant industry shrinkage
- Funding, leverage and capital reforms are critical. To focus on funding, for example, with a ~EUR 1.5 trillion capital gap in Europe alone due to the new Basel III framework, we expect liquid balance sheets (US brokers) and transaction banking-led business models to outperform. The continued closure of the securitization market, largely due to new regulation, remains a major concern
- Profound change is likely in OTC derivatives in the next three years, with a shift to centralized clearing and potentially multi-dealer trading systems
- We see new normal RoEs in the range of ~11-16%. However, the spread of returns between winners and losers will probably persist for far longer than after previous asset quality crises, as those with healthy balance sheets and cheaper funding will capitalize on today’s opportunities Non-bank financials, such as exchanges and asset managers, will take a greater share of industry wallet as the banking industry becomes much more heavily regulated
- Focus and scale are now critically important for the banks. The crisis has seen 15-20% of market share change hands. While strong 2009 cash flow has driven a return to intense competition on talent, relatively few firms have strong balance sheets to press their advantage. Some regional players, particularly those geared towards Emerging Markets, will capitalize on the opportunity
