Major investment banks’ return on equity has fallen from close to 20% in 2006 to less than 8% in 2014, finds EY. This means firms will have to make significant changes to return to double-digit profitability — they’ll need to offset the impacts of higher costs and intensifying competition.
Investment banks have been facing a more stringent regulatory environment, litigation, and fines and trading losses due to control failures. As a result, aggregate costs for major investment banks increased from US$148b in 2005 to US$185b in 2014. This is a 25% increase over nine years.
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In addition, institutions are now competing with boutique banks and global custodians with financial markets infrastructure in the trading, clearing, settlement and reporting spaces. Boutiques advised on 22% of global M&A deals in 2014, compared to 16% in 2007.
“To once again achieve 12% to 15% ROE, Canadian investment banks must optimize both assets and operations to ensure they’re maximizing efficiency and returns,” says Andre de Haan, EY’s financial services leader. “They must also become client-centric. Only by bringing an end to current operating models, can banks bring an end to the common perception that they tend to put their own interests before those of their clients.”
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Optimizing assets and operations
Many institutions have taken initial steps to simplify their business, rebalancing their focus and exiting non-core business lines. But further legal entity consolidation can save banks millions each year. EY estimates that each legal entity costs a bank up to US$600,000 annually, yielding significant savings and reducing risk and complexity.
Renewed focus on clients
Trust in investment banks has generally been eroded. To regain trust, banks must: identify their core clients and their needs; improve systems to monitor client satisfaction; enhance the client experience by creating a single-shop-front.