SOURCE: The Boston Consulting Group

The Boston Consulting Group

May 17, 2016 12:00 ET

A Battle for Turf Shakes Up the Investment Banking World

With Revenue Streams Migrating to New and Diverse Players, Banks Must Look Beyond Traditional Roles and Transform Business Models to Stay Competitive, Says New Report by The Boston Consulting Group

NEW YORK, NY--(Marketwired - May 17, 2016) - Although unfavorable economic conditions, escalating capital requirements, and stubbornly high costs have continued to depress the performance of many investment banks, the capital markets industry as a whole -- including buy-side and sell-side entities, information service providers, and exchanges -- thrived in 2015 as divergent institutions vied for territory, according to a new report by The Boston Consulting Group (BCG). The report, Global Capital Markets 2016: The Value Migration, is being released today.

This fifth annual study of the capital markets and investment banking business by BCG provides a detailed examination of key market developments -- particularly as related to revenues, balance sheets, and costs -- and places special emphasis on how sources of value are shifting within the industry and how investment banks can transform their business models to strengthen their positions.

"Ultimately, the right size, the right model, and the right approach are needed to return investment banking to consistent profitability," said Philippe Morel, a coauthor of the report and the global leader of BCG's capital markets segment. "Dealers must learn to compete within the critical sectors of the new capital markets ecosystem -- data and financial technology. How they fit themselves into increasingly electronic, standardized, and transparent markets will be crucial."

Key Market Developments
According to the report, global investment banking revenues declined to $228 billion in 2015, down 5% from $239 billion in 2014 and 16% from $271 billion in 2010. Revenue generation, at the lowest level since 2009, was hindered by relatively weak performance in secondary trading and by high business costs overall. In addition, the prospect of central bank tightening in developed markets was swamped by a severe downturn in emerging markets. Revenues from fixed income, currency, and commodities businesses fell by 8% year over year (YOY), from $117 billion to $107 billion. Return on equity for investment banks fell to a postcrisis low of 6% (excluding fines and litigation costs).

The report also says that investment banks have struggled to rationalize their balance sheets in the face of increasing capital costs and leverage ratio requirements. In terms of capital consumption, a minimum leverage ratio of 3%, as well as an enhanced leverage ratio for global systemically important banks, will increase the cost of doing business relative to the size of assets held.

On the cost side, business line transformations and strategic exits from selected activities have begun to filter through to the bottom line. Operating expenses YOY fell by 2%, driven primarily by reductions in head count, operational spending, and lower litigation expenses. Yet since 2010, despite cuts of roughly $8 billion in operating expenses, the overall cost of doing business for investment banks has risen by 4%.

Value Shifts in the Capital Markets Ecosystem
The report says that the capital markets ecosystem, as a whole, was robust in 2015. New pools of value emerged and opportunities arose amid ever-intensifying competition. Moreover, a broader truth came to the fore: the clear fact that investment banks are not the only players competing for revenue. Asset managers, hedge funds, high-frequency traders, exchanges, information service providers, clearing-houses, infrastructure firms, and custodians, for example, all have critical roles. As banks retrench and relinquish control of the value chain, this broader set of industry participants is being presented with an opportunity to compete for revenues that, traditionally, may not have been considered up for grabs. It is no coincidence that the past two years have been among the most active in the history of capital markets M&A. Diverse types of firms are making the necessary strategic moves to capture as large a slice of the future revenue pie as possible.

Business Model Transformation
Investment banks need to transform themselves to compete in tomorrow's capital markets industry, the report says, specifying that six core pillars -- vision, distribution, client centricity, IT and operational excellence, organizational vitality, and financial and risk control -- are critical to building a comprehensive, sustainable strategy. The report adds that investment banks must explore initiatives that will result in quick wins to fund the journey, take transformational steps to ensure medium-term success, and build a leadership team that personifies the target organization and culture. Such measures, as well as a sense of urgency, will be the key enablers of long-term financial health.

Ultimately, according to BCG's Morel, investment banks have the wherewithal to right their ships. "They are losing the battle so far," he said, "but that does not mean they will lose the war."

A copy of the report can be downloaded at www.bcgperspectives.com.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. 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 85 offices in 48 countries. For more information, please visit bcg.com.

About bcgperspectives.com
Bcgperspectives.com features the latest thinking from BCG experts as well as from CEOs, academics, and other leaders. It covers issues at the top of senior management's agenda. It also provides unprecedented access to BCG's extensive archive of thought leadership stretching back 50 years to the days of Bruce Henderson, the firm's founder and one of the architects of modern management consulting. All of our content -- including videos, podcasts, commentaries, and reports -- can be accessed by PC, mobile, iPad, Facebook, Twitter, and LinkedIn.

Contact Information

  • The Boston Consulting Group
    Eric Gregoire
    Global Media Relations Manager

    Tel +1 617 850 3783
    Fax +1 617 850 3701
    gregoire.eric@bcg.com