SOURCE: The Boston Consulting Group

November 19, 2007 12:11 ET

Subprime Crisis Hit Investment Banks Hard in Third Quarter, but Business Models Remain Sound, Says BCG

NEW YORK, NY--(Marketwire - November 19, 2007) - Leading investment banks felt the effects of the subprime crisis in the third quarter and should take steps to strengthen their risk management strategies and practices, according to The Boston Consulting Group's latest quarterly Investment Banking and Capital Markets report.

BCG's report gauges the impact of the crisis on the investment banking industry. Its Investment Banking Performance Index, which tracks the profits of ten leading investment banks, fell by more than 100 percent in the third quarter.

"The crisis has had a dramatic effect in the short term," said Achim Schwetlick, one of the leaders of BCG's investment banking practice and coauthor of the report. "But it's important to note that, outside of mortgage and structured-credit products, the majority of business models in investment banking remain fundamentally sound."

On average, the leading players' pretax profit margins declined by about 37 percentage points in the third quarter. Their revenues dropped nearly 60 percent from the previous quarter and were about 39 percent lower than they were during the same period last year. "Goldman Sachs was the only bank in our performance index that increased revenues in the third quarter," noted Ranu Dayal, another of the report's authors.

Sales and trading revenues were about 67 percent lower than the previous quarter. "Revenues from fixed-income activities, in particular, were hit hard," Schwetlick said. "They fell by a staggering 93 percent in the third quarter." Corporate finance and advisory revenues were about 29 percent lower than the previous quarter.

The report describes the main causes of the subprime crisis -- such as the widespread use of securitization and structured debt, and a weak grasp of risk on the part of banks, investors, and consumers -- as well as several factors that have compounded the crisis. "An already difficult situation has become even more challenging because of a lack of liquidity," Schwetlick added, "and growing doubts about structured assets, in general."

The report details actions that banks can take to enhance their risk management strategies and capabilities. They can help restore trust and confidence by updating their "stress scenarios" to reflect the new economic environment, for example. They should also focus on strengthening core risk capabilities by, among other things, improving the valuation capabilities for structured products.

BCG's Investment Banking Performance Index tracks the profits of ten leading investment banks -- Bear Stearns, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanley, and UBS.

To receive a copy of the report or schedule an interview with one of the authors, please contact Eric Gregoire at + 1 617-854-4570 or gregoire.eric@bcg.com.

About The Boston Consulting Group (BCG)

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit www.bcg.com.

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