Shakeout in global investment banking, as 40,000 heads roll

Another 40,000 job cuts needed for sustainable economics, less than 10 global players will survive says Roland Berger study

Global investment banks have improved their performance over the past few months, but structural earnings problems persist. According to the new 'Investment Banking Outlook' published by Germany-based Roland Berger Strategy Consultants, investment banks generated solid third quarter revenues of about 60 billion euros, up sharply compared to the depressed third quarter of 2011. The report says full year 2012 revenues are expected to grow by about 10% to 250 billion euros, though downside risks due to the sovereign debt crisis persist.

Return on equity (ROE) could bounce back to 11%. The bad news is that around 40,000 investment banking jobs are expected to be cut in the next two years – compared to mid-2011. The Roland Berger study says Only 5-10 investment banks with a global footprint will survive over the next three to five years. Most of the jobs are expected to be cut in the developed markets; players in emerging markets will continue hiring, building on the successful growth of the last two years.

 

Revenues up, but more revamps on cards

Global investment banking revenues seen growing by 10% in 2012, but might post low double-digit industry ROEs

Investment banking headcount has fallen by 15,000 since middle of last year; another 25,000 cuts announced

Medium-term outlook still challenged: Another 40,000 job cuts required to restore sustainable economics

More radical restructuring, product line exits and increased consolidation seen: less than 10 global players to remain

Growth opportunities concentrated in emerging markets – but few banks truly prepared

"This is more a stabilisation than a turnaround," said Markus Boehme, Senior Partner at Roland Berger Strategy Consultants. "Banks shouldn't rely on further growth in the near term, but rather focus on creating higher profits out of a flat revenue pool."

Restructuring programs to maintain profitability

The industry has stepped up restructuring programs, reducing headcount by about 15,000 since mid-2011 and announcing another 25,000 job cuts. According to the study, these cuts will take a year or two to fully translate into improved profits. A further 40,000 jobs in the global investment banking industry could be on the line in the next few years.

"Restructuring will need to move from tactical reductions to more radical redesign and refocusing," adds Boehme. "Most efforts have been focused on increasing productivity with very little capacity exiting, but we are now seeing a change."

Consolidation process is accelerating

About 15 to 20% of industry capacity could be absorbed in accelerating restructuring and consolidation processes. "We expect fewer than ten global players to remain," forecasts Boehme, "but capacity exits will come from all ranks of players and take different forms."

While some players might exit product lines, others might scale back their international footprint or change their business model altogether and enter partnerships with other players. This would mean that smaller players would have to reinvent themselves as distributors and benefit from larger players' scale. Similarly, large players could create backline scale effects by pooling less differentiating functions.

Growth in emerging markets

While winners can grow in this consolidation process, the study predicts that revenue pool growth will be concentrated mostly in emerging markets, particularly in Asia. Although key countries have cooled off recently, Roland Berger experts convey a cautiously optimistic outlook for emerging markets over the medium term. "Emerging markets have been growing constantly over the past few years and even as some are leveling off a bit, they still have lot of structural growth potential left," says Wilfried Aulbur, Managing Partner at Roland Berger Strategy Consultants India.

By 2016, emerging markets could create more than EUR 30 billion in added revenue. Most of this additional growth will require solid presence of bankers on the ground, since global banks are expanding their local footprints and have to compete with local and regional banks that are strengthening their product capabilities.