Investment Banking Outlook Summer 2012 (PDF ... - Roland Berger

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8 Investment Banking Outlook Summer 2012 – At a turning point? Exhibit 6: What would it take to continue to sustainably earn positive economic profits in the IB industry? Mid-term perspective RoE [%] 12-15 Target RoE 9-11 Baseline 2012 Source: Roland Berger Restoring growth 4 Basel 3 effect Baseline 2012 given by base case and optimistic scenario 7-8 How could the profit gap be closed? Capital reduction of ~30% of industry RWAs in order to overcompensate Basel III uplift > Larger, consolidated books > Risk management activity transferred to institutional investors ('shadowbanking 2.0'?) Cost reduction of industry cost base by around one-third 5-7 > ~15% headcount reduction > Reduced compensation benefits of around 10% > 15-20% decrease of non-compensation budget Mid-term Profita- baseline bility gap ~10% Repricing > Limited roll over increased capital requirements > Capacity and demand gap starts to close Capacity reduction and d exit it pressure Such gloomy scenarios make it impossible for most European and US players to retain their capital allocations. To close this RoE gap the industry would truly need to reduce capacity to sustainable levels. Evidence suggests that this reduction has yet to occur: > Few players have truly exited full lines of business. For example RBS and UniCredit have exited from parts of Cash Equities and Credit Agricole, Santander and BBVA have left commodities, but none of them was a major player in these business lines anyway. > Mostly, headcount reductions have increased individual players' productivity but did not reduce capacity in the overall industry. Furthermore, announced reductions take longer to work their way through the system – of about 25,000 job cuts announced by the top 16 players in mid 2011 only 15,000 were realized by year end because attrition came down sharply. > Some (especially large) players successfully mitigated large parts of the Basel 2.5 driven RWA (Risk Weighted Assets) uplift through RWA reduction programs. These programs however, largely pertained to legacy asset sell offs and transfer of certain securitization tranches and other assets whose capital consumption would have skyrocketed under Basel 2.5 to hedge funds and other institutional investors – a space often coined as 'shadow banking'. The industry's client focused trading and risk management capacity itself has hardly been reduced.
We feel that real capacity reduction is the only way to restore economics in the mid-term. A shake out with real product line exits, capacity reducing and efficiency boosting mergers and joint ventures as well as a fundamental reduction in vertical integration in particular for local players will be required to achieve 12 to 15% RoE assuming a flat to moderate revenue pool trajectory (exhibit 6). One scenario to close the collective RoE gap would mean: > Reducing industry RWAs by about 30% or close to 2 trillion euros – this would mean we are heading towards 'shadow banking 2.0' as hedge funds would have to pick up half of this amount – with the other half requiring a real consolidation into fewer, more capital efficient books. > Repricing (and hence increasing the revenue pool at flatter volumes) by about 10%, which would not seem realistic without reduction of overcapacity. > Reducing the industry cost base by around one third – even with sizable cuts on the non compensation related cost, further structural compensation adjustments, including the effects of guarantees and the effect of large albeit deferred bonuses, as well as sizable headcount reductions would be required. We would estimate that about 15% of the 500,000 jobs in the industry would have to be cut. Unprecedented rounds of layoffs – well beyond the 10,000 already announced but not executed – would become inevitable. How can the industry and individual banks mend their economics – especially when the weight of their portfolio is not geared towards emerging growth markets? We predict four key developments (exhibit 7): Exhibit 7: Eventually, industry players will need to take radical action – Four major areas for profitable change > Next wave of headcount reduction and productivity based compensation > Complexity reduction > Process re-engineering and automation Stepped-up efficiency programs Refocused + industrialized value chains > Challenged local players truly refocus on unique client value proposition and scale back trading platforms > Large platforms leveraged into true bank for bank offerings > Industry utilities emerging Source: Roland Berger > Universals withdrawing capital > Lower risk taking capacity for some players > A real wave of (product line) exits Reduced over-capacity Battle for (emerging) ( g g) growth markets > Global leaders 'localizing' > Local leaders professionalizing Competence Center Financial Services 9
Page 1 and 2: Markus Böhme, Kiarash Fatehi, Pier
Page 3 and 4: Looking Back August 2007 marked a w
Page 5 and 6: The picture is not homogenous - for
Page 7: Exhibit 5: Unless markets revert to
Page 11 and 12: Contact Markus Böhme Partner 50 Co

Investment Banking Outlook Summer 2012 (PDF ... - Roland Berger

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