Wholesale Banks: Outlook for Global Wholesale and Investment Banking
The global securities markets are in the midst of profound change. In this joint Morgan Stanley and Oliver Wyman research report, we explore the outlook and implications for institutions active in capital markets and investment banking. The report compares the current downturn to the major financial crises of the last 20 years, examining the respective effects on industry earnings, and forecasting the implications for the industry.
The broad conclusions reached in the report are as follows:
Outlook for revenues and returns
- Last-cycle industry returns of circa 18% were boosted by leverage, structured products and beneficial macro-economics; the long term historical average is closer to 15%
- A drop in demand, change in business mix, and regulatory changes to capital and funding requirements will make it hard to approach these levels; unpicking these effects we estimate 12-13% as a target range for 2010
- In 2008 conditions were highly challenging, with the industry posting a loss even before operating costs - while credit writedowns are well documented, less well understood is the >$50BN of industry trading losses from extreme Q3/Q4 market conditions
- In revenue terms, 2009 is actually off to a very strong start with dramatic repricing across traded markets and credit markets - margins up 50-300% - and we anticipate a modest rebound in full year results
- Across regions we anticipate a shift in wallet back towards the US in the short term driven by a significant localisation of the industry as issuers and investors look to their home markets
- Across clients a shift back to a more traditional client mix is underway as corporates and real money investors drive more of the wallet at the expense of shrinking pools from Hedge Funds, PE & retail
- Across the product mix a reversal of unbundling is taking place with a much stronger link between credit and the cross-sell of other products
Implications: a new competitive paradigm
-
Locals and some regionals look to reverse the loss of market share to the globals over recent years
-
In the traded markets a rush towards the flow businesses is driving a new strategic emphasis on building scale and operational efficiency
-
This potentially leads to bifurcation amongst the top ten globals and the emergence of a shorter list of ~5 truly global flow monsters
- Longer term, there is potential for profound change to the industry as moves in regulation, political policy, globalisation and the boundaries between Wholesale and Asset Management - all of which remain to be played out - have significant impact on RoE and therefore the ability of the industry to attract growth capital
