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Press Releases

  • April 30, 2013
  • Investment Banks Face Tough Battle to Survive and Thrive

  • Amid Severe Regulatory and Market Pressures, Only the Strongest Institutions with Carefully Chosen Business Models Will Achieve Superior Returns on Equity, Says New Report by The Boston Consulting Group

NEW YORK, April 30, 2013—Investment banks, facing onerous regulatory constraints and a more intense competitive environment, need to make difficult choices on a number of fronts if they hope to raise lagging returns on equity and convince both investors and corporate boards of directors of their ability to deliver value, according to a new report by The Boston Consulting Group (BCG). The report, Survival of the Fittest: Global Capital Markets 2013, is being released today.

According to the report, after-tax return on equity (ROE) levels of 15 to 20 percent for investment banks appear to be a thing of the past for most players. The industry average was in the 10 to 13 percent range at the end of 2012, and an estimated further 3 percentage points of negative impact from regulation has yet to be absorbed. This means that institutions must make the right choice of core business model, undergo a rigorous portfolio review, and revamp their operating models to reduce costs and increase efficiency if they hope to achieve ROEs of 12 percent, the minimum that investors will require.

“The capital markets and investment banking industry is in the midst of a multiyear transformation that necessitates tough strategic choices,” said Philippe Morel, a BCG senior partner and a coauthor of the report. “Although the market for its services will remain vital, the value that banks will be able to capture will continue to shrink. Some players may be forced to exit the industry entirely, and many more will leave certain asset classes or gradually reduce their exposure and investments in unprofitable areas. In short, only the fittest will survive.”

The report explores key market developments, addresses the different choices that investment banks face as seen through both a “client” and a “product” lens, and proposes six business models that BCG sees as the most advantageous. In their purest form, these models have the potential to generate ROE well above the 12 percent level that many players will struggle to achieve. The report emphasizes, however, that significantly higher ROE levels—those that are closer to the performance of other sectors of the financial services industry—will be attainable only by relatively few institutions within each of the six business models addressed.

Key Market Developments

  • Revenues in the investment banking industry rose by around 2 percent in 2012—compared with declines of 13 percent in 2011 and 23 percent in 2010—with wide variation by asset class. Revenue growth should be modest in 2013, and future revenue levels will remain below those of the precrisis years. Total industry costs fell slightly in 2012, but cost-to-income ratios remained high compared with precrisis years.

  • Rapidly developing economies (RDEs) remain a considerable opportunity for investment banks, although hurdles such as varying client and investor expectations, heavy government influence, and market fragmentation can hinder value creation.

  • Banks are making rapid progress with regard to new regulatory requirements, signaling the end of a fairly long period of deleveraging. Many banks are reaching Basel III–mandated capital ratios several years ahead of the deadline, and many have already achieved liquidity coverage ratios of 100 percent or more, well above the minimum target of 60 percent by 2015. But compliance is being achieved at the expense of ROE, and the impact of regulation varies by asset class.

  • As different asset classes mature and trading becomes more standardized (sometimes accelerated by regulation), the electronification of the investment banking industry is increasingly taking hold—and squeezing margins in the process. As automation progresses, the dynamic between IT and people capabilities will need to be rebalanced.

Six Advantageous Business Models

The six business models that BCG cites as the most advantageous and—for the top few institutions in each model—capable of generating ROEs comparable to those in other financial-services sectors are powerhouses, haute couture institutions, relationship experts, advisory specialists, hedge funds, and utility providers.

Powerhouses are the largest capital-markets players, with dominant share in one or more asset classes. Haute couture institutions focus on creating sophisticated products for hedge funds, private banks, sovereign wealth funds, and the like. Relationship experts leverage proximity and customized knowledge to build deep, long-term ties with clients—usually corporate and small to midsize financial institutions. Advisory specialists provide premium advice to their clients’ top management, particularly in M&A and capital structuring. Hedge funds concentrate on creating superior alpha, particularly over long time horizons. And utility providers focus on insourcing from investment banks and providing them with IT, operational, and (potentially) accounting solutions.

The report says that the choice of business model is largely driven by legacy, capabilities, and resources, and that a great deal depends on the company’s starting point.

“A relationship expert cannot suddenly decide to become a powerhouse any more than haute couture players can suddenly become hedge funds,” said BCG’s Morel. “And institutions will have to operate within the economics and risk profiles that are acceptable to their shareholders. But within the limits of the paths that each player can reasonably pursue, there are still tough decisions to make—and they will have to be made.”

A copy of the report can be downloaded at

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or

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About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 82 offices in 46 countries.

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