Contact Information: Contact: Eric Gregoire + 1 617-854-4570
Subprime Crisis Hit Investment Banks Hard in Third Quarter, but Business Models Remain Sound, Says BCG
| Source: The Boston Consulting Group
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.
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