Investment banks face bleak future according to McKinsey
"INVESTMENT banks face a fight for survival as returns and revenues shrink, according to two reports released today.
A study by McKinsey & Co claims that investment banks are heading for a “day of reckoning” that will see many firms fall by the wayside. And figures compiled by data provider Dealogic show that European revenues from primary advisory business have slumped to a 14-year low.
Data for primary business deals announced in August 2011 – such as advice on mergers and acquisitions, floats and debt sales – show revenues fell to just $546m (£334.8m) in Europe. The last time they were lower was in August 1997, when they hit $474m, whereas last August banks netted $935m.
The dire numbers coincide with McKinsey’s assessment that, without drastic action, investment banks’ returns on equity will drop to just seven per cent from a current average of 20 per cent. That is below McKinsey’s nine to 11 per cent estimate of the cost of equity, making most banks non-viable as businesses if they fail to take action.
New capital requirements from Basel III will be responsible for three quarters of the hit to returns, McKinsey claims. Worse still, it did not model the additional effect from unilateral measures such as the UK’s bank levy or proposals by the Independent Commission on Banking (ICB). With mitigating actions, such as shutting down chunks of their business, altering pay schemes and hiking prices, McKinsey says banks should be able to push returns up to 11-12 per cent and, with successful overhauls of business models, to 12-14 per cent. But the study warns that the decline in trading volumes that has seen banks lay off thousands of workers “will be exacerbated by regulation, especially in structured credit and rates”. The knock-on effect will see the cost of financial services and credit rise for businesses, as banks pass on some of the costs of regulation.
McKinsey adds that banks’ fixed income, commodity and currency (FICC) divisions and structured credit will be worst hit. Some products like collateralised debt obligations (CDOs) “may even cease to exist” while others will see a “six-fold increase in capital requirements”, potentially making them unprofitable. The charge for counterparty risk could rise by a factor of 2.5, McKinsey suggests, for trading unusual over-the-counter (OTC) derivatives that cannot be cleared by central clearing houses.
Source: http://www.cityam.com/news-and-analysis/investment...
Wouldn't be the worst thing
Wouldn't be the worst thing to happen.
Someone is upset that they
Someone is upset that they are in consulting.
Oreos wrote: Someone is upset
Someone is upset that they are in consulting.
Lol haha
Pretty impressed one black
Pretty impressed one black man can destroy an entire industry with a stroke of the pen!
because the market was
because the market was under-pressure on Aug 1997, so as current market situation. Something needs to be changed and the profit will go back up
The time is now...
The future of investment
The future of investment banking has been "bleak" for the past four years...
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They base this off one month
They base this off one month of data, a historically slow month for deals, in an uncharacteristically volatile period? There is nothing new here...we all know about Basel and we all know that traders at banks are getting their balls chopped off.
It’s no mystery that ass has always been tits’ greatest enemy... It’s almost like a Muslim-Jewish thing, but with tits and ass.
RonaldBacon wrote: Oreos
Someone is upset that they are in consulting.
Lol haha
Beat me to it, dammit.
As for CDOs and a few other products going away: so what, new ones will be created. In a few years, this will all be a distant memory. There were almost no rules (enforced) for a while, now they gov't is cracking down, this kind of crap is culturally cyclical.
I notice that the older I am the more I sound like Illini Programer
- accountingbyday
Banks have been expecting
Banks have been expecting this for a while, hence why half of your coworkers have been laid off and your analyst program is 1/3 the size it was in 2007. We saw the same thing happen after the Great Crash as risk-appetite got taken off the table. This finally culminated with Glass-Steagall which created the FDIC but stipulated that insured banks stay out of the capital markets. It also allowed the Fed to set bank savings account rates (which it fixed at 4% for the next fifty years) and restricted the mortgages and financial products they could offer.
During the first few years of the depression, volume on the NYSE dropped dramatically due to reduced risk appetite and they were then held in check by more prudent regulations like Glass-Steagall. In fact, it wasn't until the early '60s that NYSE volume recovered to where it was in 1929.
Basel III and Dodd-Frank are a much milder form of Glass-Steagall. Given the historical context- that the last time we had an 80-year crash it became illegal to offer an adjustable rate mortgage and a commercial banker would have gone to jail for trying to offer a savings account that paid 4.5%, things could be a lot worse.
So no, a shrinking financial industry isn't unexpected, increased regulations aren't unreasonable at least in a historical context, and banks have been preparing for this for three years.
I think we're going to see two more years of 10-15%/year layoffs on the scale of 2008-2011 and then the general atmosphere for a typical front-office or back-office employee improving (though we'll still see some reductions in employment due to attrition and milder layoffs for another five years.)
Work hard, play hard.
CIBC would like to
CIBC would like to disagree
CIBC generated the strongest beat against consensus that we have seen this quarter and Q3 earnings represent a significant rebound from the disappointing second quarter,” John Aiken, a Barclays Capital analyst, said today in a note. “While definitely feeling the impacts of the market slow-down, CIBC’s wholesale operations have shown remarkable resiliency in earnings.”
Earnings from investment banking rose almost fivefold from a year ago, offsetting slower growth in consumer lending. Higher fees from advising on takeovers and financings, as well as merchant banking gains, increased results for the business.
IVY for Life
futuretrader1999 wrote: CIBC
CIBC would like to disagree
CIBC generated the strongest beat against consensus that we have seen this quarter and Q3 earnings represent a significant rebound from the disappointing second quarter,” John Aiken, a Barclays Capital analyst, said today in a note. “While definitely feeling the impacts of the market slow-down, CIBC’s wholesale operations have shown remarkable resiliency in earnings.”
Earnings from investment banking rose almost fivefold from a year ago, offsetting slower growth in consumer lending. Higher fees from advising on takeovers and financings, as well as merchant banking gains, increased results for the business.
Canadian banks are doing perfectly fine; financings are a much larger source of their revenue due to the size of the energy/mining industries relative to the whole economy. Also as soon as a few pipelines/other shipping channels are built, Canada will begin to de-link their economy from the U.S. (stagnant energy demand) and begin sending all that sweet sweet oil to China for a much higher price (as opposed to keeping it stuck in the middle of the US at a $20 discount).
Given crap quality reports
Given crap quality reports like this, I'd actually say that consulting faces a bleak future.
deal volume in the current
deal volume in the current volatile and uncertain climate in the traditionally slowest month of the year is low?
Thanks McK, you really add value.
lololol consultants thanks for the stating the obvious now go back to bullshitting with your 2x2 matrix and your porters gay forces.
I think this is a really
I think this is a really great read.
I've spoken to a few people in the industry and who deal with the industry (buy side) and have been told over and over again the changes going on are not short term, have a good purpose, but are ultimately out of our hands.
I'd definitely like to say though that I hope as this happens, more of our best and brightest in our country go towards jobs in technology/engineering so we can continue to be the worlds center of innovation in the future
What do they say about PE?
What do they say about PE?
Oreos wrote: Someone is upset
As a former entry-level MBB
leveredarb wrote: deal volume
One of those lights, slightly brighter than the rest, will be my wingtip passing over.
@ Nutry Nowadays the best
dazedmonk wrote: @
2x2Matrix wrote: leveredarb
2x2Matrix wrote: Last I