These are tough times for banks. Investment banks need to identify and strengthen core businesses that could drive growth and increase competitiveness in a market featuring increased regulatory burdens and a shrinking revenue pool.
Focus on sophisticated, highly customized solutions for large and professional investors, financial institutions and corporates
Fully-integrated, seamless service delivery to corporate clients across all products
Leverage digital to service the broader investor universe beyond traditional buy-side clients
Offer best-in-class products via peer platforms, connecting to the core
Investment banks of all sizes have to take a systematic view of the new environment due to regulation, market structure changes and technological possibilities to try to restore their overall profitability. Revenues have fallen substantially from their short post-financial crisis rebound as both volume and margin have declined across most products. Concurrently, global structural regulatory change has driven compliance costs and capital requirements higher, offsetting the effects of headcount and other cost-reduction measures for many industry players.
The result: most of the “low-hanging fruit” seems to have been plucked on the cost side and hopes for a sustained near-term revenue rebound are fading, leading many industry players to conclude that these factors now structurally impact their business.
In response, a few players have begun making the tough choices to prune their product offerings and, subsequently, their franchise. However, these efforts were mostly designed to eliminate what was deemed unsustainable. Investment banks are still faced with daunting challenges of new regulatory mandates, as well as other constraining factors such as rising client expectations.
Some leading players have taken a new track. They have not only pruned their investment banking core but also have begun to integrate it much more closely with other businesses to deliver a superior proposition to a broader set of clients. We believe this trend could gain further momentum in a digital world. To help secure and regain competitive advantage, banks need to think through a number of difficult questions.
These answers might vary by product. Depending on their size, banks should come to different conclusions about what their franchises require and what they could deliver.
Banks need to determine if they should broaden their footprint or if they could shift their focus on segments to unlock value.
While the bifurcation between more corporate investment banks- and investor-driven models will likely continue, banks could step beyond the traditional core.
A select few players might still conclude they can excel at the core; others might move closer to an investor-, corporate-, or platform-driven business model. Regardless of where they end up, banks could need to pair further pruning with a strategy that identifies a clear direction and additional pockets of value to restore profitability.