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.
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."
"If something cannot go on forever, it will stop,-Stein's Law
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
"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.
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.
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More than 70 percent of the Class of 2012 took out loans. Oh, and they're seeing high unemployment, too.
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