22 November 2010

Financial News: investment banks are seeking to redefine their business model

The combined impact of the financial crisis and regulatory reform has divided the industry into four clear groups: banks such as Deutsche Bank, Goldman Sachs and JP Morgan that had a “good” crisis and which have emerged strengthened in relative terms as so-called “flow monsters” benefiting from a concentration of client business; damaged but ambitious banks such as Citigroup or UBS which are seeking to regain their place at the top table after a torrid few years; mid-tier investment banks which are either questioning their commitment to the industry or seeking to carve out a new niche; and those that believe they have spotted an opportunity in the dislocation – these range from Barclays Capital to smaller players such as RBC Capital Markets. Not all of them can or will thrive, but the challenges facing all of them are the same.

Moynihan said: “The world of investment banking is dominated by two big questions: where is the growth going to come from? And, on the regulatory side, when will we know what the impact will be and where will different banks be left standing? For the time being, we are still several quarters away from a sustained economic recovery, it is unclear whether many of the higher margin businesses will return, and unclear what the natural level of returns will be in future.”

Emerging markets are top of almost every bank’s list of growth opportunities. With some $300bn in capital flows this year, banks are engaged in a frantic war for talent and business, hiring teams or buying local players in Asia, the Middle East and Latin America, to make up for the relative macroeconomic decline of their home markets. Connecting the emerging markets to developed markets – whether through what HSBC calls the “new Silk Road” or what Standard Chartered calls the “arc of growth” – has become the new holy grail of investment banking. The regulatory side of the equation is also forcing a redefinition. Tougher capital requirements are the game changer here, according to Moynihan, who argues that banks are concerned without yet starting to panic.

Part of the change is reflected in banks shifting capital and resources to lower margin and less capital-intensive businesses such as transaction services (Bank of America Merrill Lynch, HSBC and JP Morgan), corporate banking (Bank of America Merrill Lynch, Barclays Corporate and Citigroup), and asset management (Goldman Sachs). The head of one investment bank in Europe said that too many banks had too much political and economic capital invested in their corporate and investment banking operations for them to make a detached decision, and that shareholders would punish them should they jump too soon.

 

© Financial News