This year’s annual Oliver Wyman and Morgan Stanley "Wholesale and Investment Banking Outlook" report, Decision Time for Wholesale Banks, anticipates imminent changes in industry structure as banks rationalize their portfolios and market shares shift.
A confluence of factors now seems likely to trigger significant structural changes over the next 12-24 months. Our findings in the report include:
- The pressure on returns is now critical, but higher fixed costs and more trapped capital mean banks cannot just shrink at the margin to reach adequate returns on capital. Firms now have to choose where they may have comparative advantage and then invest in scale to win in these markets or exit.
- Regulation is reshaping the nature of financial intermediation. The step change in the cost of unsecured funding and higher capital is starting to drive more lending into the markets, changing the respective roles of banks and investors.
- There is a growing de-globalization of banks and markets, driven by financial protectionism and a regulatory push for capital and funding in subsidiaries.
- The basis of competition is shifting, with the infrastructure behind clearing, collateral management, and distribution networks taking more prominence above financing and trading capabilities.
- Industry returns of 12-14% are achievable, but the spread of returns between winners and losers is likely to be higher than in the past due to the structural changes in the market.