Outlook for Global Wholesale and Investment Banking - BlackRock ...

March 16, 2010BanksExhibit 57Our base case forecasts for European i-bankingrevenues down ~16% underlying but up ~16% on areported basisEUR bn1009080706068.021.5European Ibanking revenues3.916%93.3-16%79.082.6Exhibit 58Our base case forecasts for US i-banking revenuesEUR bn80706050403064.521.5US Ibanking revenues2.171.1-15%60.464.75040302010009 Reported 09 Marks 09 DVA 09 Underlying 10e Underlying 11e Underlying2010009 Reported 09 Marks 09 DVA 09 Underlying 10e Underlying 11e Underlyinge = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley Researche = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley Research2. Market share gains will be thekey in 2010 – and we thinkspread of returns is likely toremain wideWe expect scale to define the industry story post the crisis.Focus on market share will therefore be key in 2010, withsome banks still in recovery mode and trying to regain lostshare, while the ‘leaders’ are keen to press their advantage.‘Flow monsters’ – with scale, trading efficiency and electronicplatforms – are likely to see the greatest upside in thechanging industry structure.We see the race for scale as one of the most definingstories in 2010 and a key driver of longer term-valuation.The constructive start to 2010 in rates and FX clearly helpsthose players with strong market shares, straight-throughprocessing and outstanding risk management. Now thatmargins have broadly “normalized”, scale to cover fixed costsand trading efficiency to extract bid-ask spreads will becomeever more important. That is why players in the 5-10 positionin some categories are looking to rebuild (for example, UBS inrates and credit). It is also why leaders are looking to gainshare. JPMorgan is a good example: at its recent investorday, it said it would like to represent 15% of total sales andtrading revenues of the top 10 firms, up from ~12.4% in 2009(as well as 10% share of global IB fees versus 9.2% in 2009).To get there, it expects to invest in equities and commoditiesas well as electronic trading platforms and best-in-classsystems to get there. Deutsche and Barclays are now veryfocused on becoming top 3 players in equities. This race forscale will be one of the most defining stories in 2010, in ourview, and a key driver of longer-term valuation. This said, wewould have expected many players to be focusing theirportfolios more than they have to date, but we observe thatmost banks are trying to keep their options open in such anuncertain world and to pursue the revenues that are available.We therefore think some disappointment is likely.We see several key battle lines for market share:Between the relative ‘winners’ and ‘losers’ from thefinancial crisis – to what extent can those that havesuffered most in the crisis – UBS, BAC-MER, RBS – makeup their share; and to what extent can those that havegained share – GS, CS, JPM – hold or win further share. Itis clear from JPMorgan and CSG’s targets that they arekeen to gain more share in this transitionary year.Between the top 14 banks and the next group – Most ofthe latter are regionals, which have opportunities to gainshare in trading.We expect advisory boutiques to continue to takeM&A share from larger firms, as companies such asLazard and Greenhill have taken advantage of dislocationduring the financial crisis to hire key bankers. Forexample, Greenhill plans to almost double its MDheadcount from 35 at the end of 2007 to 69 at the end of2010. On a combined basis, we expect Greenhill andLazard to boost their M&A share from ~11% in 2006 to~16% in 2010. Continued regulatory uncertainty could46