2011-03-25-奥纬咨询-Wholesale_and_Investment_Banking_Outlook_2011_38页_521kb

Summary of BLUE PAPER: Wholesale & Investment Banking Outlook

Core Content

This document outlines the outlook for the wholesale and investment banking sector in the context of regulatory changes and market dynamics. It emphasizes the potential for banks to achieve mid-teens returns on equity (RoE) despite the challenges posed by new regulations and evolving market conditions.

Main Views and Key Information

1. Potential for Mid-Tech RoE

• The market underestimates the potential for banks to achieve RoE in the range of 12–16% in wholesale banking.
• Three-quarters of banks' revenues are already "fit" for new regulations and can support respectable RoE.
• Regulatory changes are expected to reduce industry RoE by 4–6% in the base case, but management action can offset this and bring returns back to 13–15% over the next two years.

2. Impact on Clients

• Regulatory changes will lead to repricing and reduced credit provision in impacted business lines, especially in credit, structured rates, and long-dated lending.
• Corporates, pension funds, insurance companies, and municipalities will be significantly affected, with potential material repricing or reduced lending.
• Non-bank sectors (e.g., asset managers, hedge funds) are expected to benefit from the shift in activity and may present new opportunities.

3. Strategic Shifts for Banks

• Banks must restructure their portfolios and focus on equities and advisory businesses, which offer higher RoE (even after regulatory impact).
• Fixed Income (FICC) is expected to shrink in revenue, with credit trading suffering more than foreign exchange trading.
• Scale, distribution, and technology will become increasingly important as banks seek to improve efficiency and returns.

4. Cost Reduction and Efficiency Gains

• Banks are expected to reduce costs by 6–8% in the next 12–18 months.
• Cost flexibility and operational gearing will be crucial for banks to adapt to volatile client flows.
• Front-to-back office restructuring and electronification of trading and clearing are key to improving efficiency and reducing costs.

5. Regulatory Uncertainty and Discontinuities

• Regulatory uncertainty may lead to discontinuities in the sector, especially if rules are implemented too quickly or too slowly.
• Key risks include:
  • Uneven capital requirements for too-big-to-fail firms across countries.
  • Funding cost evolution and changes in capital structure.
  • Subsidiarisation, where banks may be required to allocate more dedicated capital to different entities.
• Stress testing and scenario planning are essential for navigating these risks.

6. Market Structure and Technology

• The shift to electronic trading and central counterparty clearing will be a major driver of change.
• OTC derivatives reform, Volcker Rule, and commodities regulations will have significant implications for FICC and other trading activities.

7. Opportunities in the Non-Bank Sector

• A significant shift in business is expected to occur towards the non-bank sector, including hedge funds, private equity, and asset managers.
• This shift may present a $5–9 billion revenue opportunity in the long term, although it is still unclear if banks will be able to capture this.

8. Role of Management in Driving Performance

• Management must make strategic decisions on which businesses to grow, shrink, or exit.
• Portfolio reshaping, cost control, and technology investment are critical to achieving the targeted RoE.
• The "flowmonsters" (large-scale banks) are best positioned to benefit from these changes.

9. Regulatory Reform and Its Implications

• The regulatory reform is addressing key issues such as bank solvency, funding resilience, and systemic risk.
• However, uncertainty in calibration, international coordination, and impact on credit provision remain concerns.
• Phased implementation will give banks time to adjust, with Basel 2.5 in 2012 and Basel III over the next seven years.

10. Conclusion

• While the path to mid-teens RoE is challenging, it is achievable with decisive management action.
• Efficiency gains, portfolio shifts, and strategic focus will be essential.
• The non-bank sector is likely to become a growing source of opportunity, but the extent to which banks can capture this remains uncertain.