Retrenchment views

Big boys gain as investment banking shrinks

Gary Cohn sees only two big post-crisis winners in investment banking. The president of Goldman Sachs claims that his firm and JPMorgan are going forward, while other big international banks are retrenching, according to remarks reported by The Financial Times on April 4. Anshu Jain, co-chief executive of Deutsche Bank, disagrees. In March, he told an investor conference that his bank was flying high after industry consolidation.

Cohn exaggerates, but he is definitely onto something. Despite many complaints about excessive size in banks, the investment banking industry is becoming more concentrated. It's happening even while some firms, including Deutsche and Barclays, are shedding assets and withdrawing from certain regions to juice up returns and please regulators. Deutsche may be able to overcome this handicap, but the unencumbered behemoths seem to have a fairly clear path ahead.

Scale is paying off in the primary business. First-quarter data on fees received in global capital markets and advisory work, published by Thomson Reuters, showed that nine of the top 10 firms gained market share over the same period a year ago or against the whole of 2012. Only Credit Suisse fell back. Cohn's top two were in third and second place, behind Bank of America Merrill Lynch (BAML).

But scale matters even more in secondary trading, where the bulge bracket players make almost three-quarters of their revenue. The biggest business by far is FICC, fixed income, currencies and commodities products. In that, the top five banks' portion of revenue has risen from 31 per cent in 2008 to 46 per cent in 2012, according to Deutsche Bank research.

Cohn may have been suffering a memory lapse, or perhaps he had his reasons not to put BAML and Citigroup on the list of winners. In any case, his timing was strange. Investment banks typically make as much as a third of their annual revenue during the first quarter, and this year trading volumes are down. Both consultancy Tricumen and interdealer broker Icap's chief executive Michael Spencer have warned of depressed volumes. Whether the industry has two winners, four or six, their triumphs could well come with smaller prizes.