Big banks head for a hard, less-profitable future

Stiffer competition and more regulations mean global financial institutions have to make tough choices to survive.

By Bruce Kennedy May 2, 2013 9:56AM

Images: Bank Vault (© Radius Images/Jupiterimages)Is the party over for the current version of big banks, the ones known as "too big to fail"? That's the conclusion of a new report by Boston Consulting Group called "Survival of the Fittest: Global Capital Markets 2013."

The report says the days of after-tax return on equity (ROE) at levels of 15% to 20% are gone as banks face more competition and growing regulatory restraints. And that means the big financial institutions have to review and revamp their operating models if they plan to achieve even ROEs of just 12%, which the report says is the minimum investors require.

Looking at a sample of 28 banks, BCG says overall industry revenue rose around 2% last year compared with declines of 13% in 2011 and 23% in 2010.

"The capital markets and investment banking (CMIB) industry is in the midst of a multiyear transformation that necessitates tough strategic choices," Philippe Morel, a BCG senior partner and the report's co-author, said in a press statement.

"Although the market for its services will remain vital, the value that banks will be able to capture will continue to shrink," he added. "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."

The report says banks are "making rapid progress" with the new regulatory requirements and many have reached the Basel III goals created to make sure global banks have enough capital to get through economic downturns. But that compliance, it says, "is being achieved at the expense of ROE. And the impact of regulation varies by asset class."

The report also points to six business models the CMIB industry will have to embrace to succeed, as the banking industry shakes itself out:

  • Powerhouses: The largest capital markets players, with dominant share in one or more asset classes.

  • Haute couture: Institutions that focus on sophisticated products for hedge funds, private banks and sovereign wealth funds.

  • Relationship experts: This group works with local and very specific information to establish long-term ties to its clients, who are usually corporate or small to midsize financial institutions.

  • Advisory specialists: As the name implies, they "provide premium advice to their clients’ top management, particularly in M&A and capital structuring."

  • Hedge funds: This model needs both "scale to develop market depth -- and adequate capital to absorb market and credit risk. They must possess sufficient agility in the back office and in (information technology) infrastructure to take on new products and asset classes within short time frames."

  • Utility providers: Being outside the core CMIB businesses, this group works with investment banks to reduce costs via info tech, operational and possibly accounting services.

But Boston Consulting Group warns that these business models aren't interchangeable.

"A relationship expert cannot suddenly decide to become a powerhouse any more than haute couture players can suddenly become hedge funds," said 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."

More on moneyNOW

May 2, 2013 10:19AM
The best way to stick it to the TBTF banks is to get out of debt, and stay out of debt.
May 2, 2013 10:47AM
Wait until the Fed takes away the punch bowl, then the real misery and hurt will begin.

"If something cannot go on forever, it will stop,-Stein's Law

May 2, 2013 1:00PM

Banks were originally created to take deposits from individuals and lend that money out to individuals for car/house loans or for starting a business. Now banks invest in derivatives, credit default swaps, and other complex financial instruments and have decreased the amount of lending to individuals hoping to start a small business. They use to pay 1-3% on savings and lend out that money at 4-10% making them a healthy profit. Now you are lucky to get 0.1% on savings and they are charging more for lending (unless you are a large business). Banks are supposed to help local communities and individuals
May 2, 2013 1:25PM
Actually, the BEST way to deal with TBTF big banks is to use all of their services that offer rewards and incentives, quality for them but pay everything off before the cycle dates. There won't be big banks very soon. As Europe fails from zero activity (can't lend a reduced rate if no one qualifies for credit because they aren't working); our own banks will implode from shoveling all those mortgage-backed-securities garbage in and degrading the housing market so badly that no one can get out from under them. Keep believing you are making money in the markets, fools... it won't spend in the end (which is nearer than you think).
May 2, 2013 11:47AM
Cry me a river for the banks.All the billions they got.Give me a break.
May 2, 2013 11:09AM
Don't feel sorry for the banks.  They have benefited from "free" money from the Fed, low capital requirements, easy regulatory environment and fat profits for years.  Other businesses would enjoy a 12-15% ROE, not feel sorry for themselves.  Banks gouge consumers in fees, while being stingy about providing credit - the only "recovery" has been their profits!
May 2, 2013 1:30PM
The to big to fail mantra ? LOL Republicans like to believe that its ok ? The joke is on them ! True capitalism has no such thing as to big to fail ! What we have here with the feds pumping 85 BILLION a month is socialized wall street republicans ! << All you useless POS cannot understand that ? Than you truly do not know what true capitalism is ... That's a fact ! Now kill the QE program from the feds and lets start doing real capitalism on wall street! The peoples deposits are and need int rates to go up so Americans can get money for their money ! This free money to only banks on wall street is a joke ! The credit card on wall street is toast ! To all the so called investors ! Its time to use your own money ! For all your risky investments ! Oh ya no more bailouts for anything or any companies on wall street! NONE....Its time for true capitalism , fail or profit one or the other with your OWN MONEY.... Not the tax payers .... Thats true capitalism all you republicans ... < Wait til the mid term elections ! Republicans will lose the house .
May 2, 2013 1:31PM

"this is good news for liberals. those evil greedy bankets wont profit as much."


I'm still scratching my head over the thought that bankers are "liberals". By nature they are Republicans and extremely conservative. Just because they gave campaign money at the office doesn't make them party favorites. You might remember once you sober up that the Gramm Leach Bliley Act that gave banks omnipotent unregulated power to collude and be corrupt was written by THREE Republicans and passed in a Republican-majority Congress.

May 2, 2013 12:52PM
When banks can borrow money from the fed at .025% a year then lend it out at between 3-10% how can they not make money? Instead of giving banks billions and telling them to lend it out (which they didn't instead they paid themselves bonuses) they should have given loans directly to the american public(say $10.000 per person). I would be happy to borrow money from the government at 8x-12x the interest that banks pay (2-3%)
May 2, 2013 2:38PM

Banks pay almost nothing for deposits and can buy government debt or loan the money out for mortgages, etc with very little risk. If they're having a hard time now while robbing the retired what's going to happen when they have to again pay for deposits? I think banks have outlived their usefulness.


May 2, 2013 3:26PM


May 2, 2013 3:25PM
the big banks are approaching record earnings. who is kidding who. this is one of the great scams of all time. the 8 or 9 largest banks now control close to 80% of all us deposits. i wanted to open a checking account at a large bank because it is in my building. it required a deposit of 75,000 or 50,000 and be a veteran to get free checking. my guess is that a lot of people do not have that much cash. i am a veteran and had 50,000 to deposit. if the institutions want to gamble with my money, they should not have implicit or explicit guarantees from the taxpayers. the country was doing just fine under glass steagall.  tell boston consulting group not to worry. who is going to compete with b of a, chase, wells fargo and citibank. they have bled people dry. that is the problem
May 2, 2013 2:46PM
I hope they all go broke. They and their political cronies (from both parties) are the biggest cause of this country's current financial problems.
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