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Investment Banks Improve but Aren't Out of the Woods

Revenue Decline Eases as Wider Capital Markets Ecosystem Shows Solid Growth; Digital Transformation Is Imperative as Revenue Pools Continue to Shift, Says New Report by The Boston Consulting Group

NEW YORK—Although investment banks have generally raised their performance levels, they face a wide range of challenges in their quest to achieve positive revenue growth and stay competitive amid ongoing change in the capital markets industry, according to a new report by The Boston Consulting Group (BCG). The report, Global Capital Markets 2017: Mastering the Value Migration, is being released today.

BCG’s sixth annual study of the capital markets and investment banking business provides a detailed examination of key market developments, current trends—including regulatory dynamics, the growing influence of data and technology, and shifts in market structure—and the steps that various types of players must take to thrive in the future. Of particular importance is the ongoing shift of global revenue pools from banks to nonbanks, a dynamic that BCG calls “the value migration.”

“The value migration has continued along many paths,” said Philippe Morel, a coauthor of the report and the global leader of BCG’s capital markets segment, “from smaller investment banks to large universal banks, from regulated to unregulated entities, from firms with weaker digital capabilities to those that are data and tech savvy. Although a lessening of the effects of quantitative easing, along with impending deregulation, may dampen the impact of the migration, institutions must still find ways to master it and make it work to their advantage.”

Revenues

According to the report, global investment banking revenues decreased by 1% in 2016, a decline that was less severe than the 5% slide suffered in 2015. The improvement was primarily the result of higher market volatility, rising interest rates, and a significant increase in fixed income, currencies, and commodities trading volumes in the fourth quarter. The capital markets ecosystem as a whole continued to grow, with total industry revenues rising by 5% to $656 billion. The largest increases were posted by alternative investments such as hedge funds and private equity, the former turning in a robust performance after a weak 2015. Exchanges, venues, clearing-houses, and information providers also fared well. Return on equity for investment banks was 8% in 2016, up from 6% in 2015. The share of total industry revenues earned by banks, for both investment banking and custodian services, now stands at approximately 39%, a sharp decline from the 52% share held a decade ago.

Regulation

The report says that while regulatory easing is expected to occur in the US, it is not yet clear how broad and sweeping the changes to postcrisis regulations such as the Dodd-Frank Act will be or how any potential new measures put forth by the US administration might play out. Amid global uncertainty over regulatory evolution, however, one of the few certainties is that nonbank institutions (including principal trading firms, hedge funds, and other specialized capital markets participants) are at a significant regulatory advantage compared with banks—an edge that nonbanks are likely to retain.

Digital Transformation

Given rapid market evolution, ecosystem players—especially banks—must continue to push for digital transformation of their businesses, BCG says. Successful digital innovation requires a comprehensive reevaluation of people and incentives, organizational structure, processes, and operations. Regardless of where a firm chooses to focus, players of all stripes will need to ensure that their operating models are aligned with an increasingly electronic, data-driven, digital market in order to succeed and spur innovation. It is critical, the report adds, for institutions to make a strong commitment to leveraging technology for more digitally innovative ways of doing business.

Staying Competitive

Market evolution is forcing capital markets players to reinvent themselves, to move beyond their traditional lines of business in order to capture new pockets of value, and to retreat from activities that are no longer profitable, according to the report. To succeed in these areas, institutions must identify the subsegments of the industry that have the highest growth potential and that align with their own core competencies and established competitive advantages.

“Reinvention will ultimately mean different things for different types of institutions,” said Charles Teschner, a coauthor of the report and the leader of BCG’s capital markets segment in North America. “But for all types of players, the time has come to take a hard look at their own strengths and weaknesses, and at the direction of the overall market. Institutions must then make the strategic decisions that will carry them to 2020 and beyond.”

A copy of the report can be downloaded here.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About Expand Research

Founded in 2001, Expand Research is transforming the way the world’s financial markets make business and technology decisions by providing timely decision support and research services on business and technology strategies to leading financial institutions globally. In July 2011, Expand became an independent subsidiary of The Boston Consulting Group. It has offices in London, New York, and Singapore. For more information, please visit expandresearch.com.

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 85 offices in 48 countries.

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