Investment banks face opportunities, risk

Investment banks will need to reinvent their business model as disruptive trends continue to pressure the bottom line, according to an industry report from a global consulting concern.

While economic reforms in China offer promise, intense competition and the presence of China's big banks will limit the potential windfall for investment banks, said Philippe Morel, a senior partner at the Boston Consulting Group (BCG).

BCG unveiled its report Global Capital Markets 2015: Adapting to Digital Advances on Monday in New York, predicting that investment banks' returns on equity - a key measure of the industry's profitability - will remain below 10 percent unless a major industry restructuring occurs, as new regulations, rising legal costs and stagnant revenue growth take a toll.

As China begins to unwind government ownership and domination of the country's economy, there will be opportunities for investment banks.

"The question is how much will be available to the investment banks. There is already intense competition for business in China, and certainly the Chinese banks will benefit, as well they should," Morel said.

The heated competition in China now means "many (investment) banks are losing money with the hope they can get some of that back in the future. I don't know how long that can continue," Morel said.

The BCG report said the cost of litigation more than doubled from 2013 to 2014. Morel cited settlements for mortgage-backed securities and other misdeeds stemming from the 2008 financial crisis in the United States, the Libor (London interbank offered rate) scandal and increased costs from complying with new regulations and capital standards for the sharp rise.

The BCG report contained three main recommendations for investment banks: explore more partnerships to reduce costs and over capacity in the future; identify sectors to specialize in instead of offering a wide array of services; and embrace digital technology, which offers both disruption and opportunity.

Boston Consulting described digital as more than electronic trading; it includes big data, a shift to the cloud (computers and software that operate on the Internet), social, local and mobile, ubiquitous connectivity, improved computing power and cognitive computing.

"The information advantage that investment banks have traditionally enjoyed is being eroded at the very moment when information technology is entering a new evolutionary phase," the report said.

Digital advances are pushing the flow of information away from banks and into new channels, allowing data to be created and controlled by nonbank entities.

"Some CMIB firms see the handwriting on the wall and are implementing measures to stay ahead of the curve. Other firms are adapting too slowly, if at all," the BCG report said.

In addition, BCG said financial technology startups that at first may appear to be a helper to the industry could turn out to be a challenger down the road.

"About 21 percent of the financial technology startups are targeting the capital markets/investment banking sector," noted Will Rhode, BCG's global head of capital markets research.

paulwelitzkin@chinadailyusa.com