Top 5 Investment Banking Trends in 2018 - SG Analytics...6 Top 5 Investment Banking Trends in 2018:...

Solve. Synergise. Surpass.

Top 5Investment BankingTrends in 2018

www.sganalytics.com August 2017 | INSIGHTS PAPER

SG Analytics Corporate Finance and Valuation

http://sganalytics.com/?utm_medium=content_marketing&utm_source=ebook


ForewordThe investment banking industry remains under immense pressure amid plummeting profits, regulatory roadblocks, high costs and shrinking trading commissions.

The inescapable reality can be seen in the stagnant profit levels for many years now. Globally, the return on equity (ROE) in 2015 stood at around 10%. Top investment bankers, who used to hunt elephants, have been reporting declining revenues, without any recovery in sight. For instance, the ramifications of Brexit were evident as top banks in the US reported a significant drop in revenue.

The macro environment has been hugely challenging for investment firms saddled with high operating costs. With sluggish economic growth and persistently dropping interest rates, the industry is likely to remain challenged by cyclical and structural factors. The capital requirements for banks (including hunters, midfielders and boutiques) have continued to increase. The latest wave of regulations like MiFID II and PSD2 will constrain the top-line growth and dent the overall earnings of banks. Apart from rising operational costs and stringent regulations, the FinTech is also affecting the industry’s mainstream revenues. Financial institutions are losing much of their sheen while competing with traders who come armed with technology.

Additionally, in the face of adversity, banks are also taking a long, hard look at the investment banking landscape what was once a money-minting business. A slew of liquidity concerns across major asset classes are crimping the performance of banks and financial institutions. However, the prevailing business models in the industry cannot compensate the significant losses suffered by banks due to high employee attrition rates, resulting in workforce imbalance. In fact, the efforts of banks to rebalance compensation by cutting salary bonuses have backfired.

Banking experts no longer attach much importance to trading commissions owing to the volatile market scenario. Clearly, the challenges for investment banks are only growing as their clients are increasingly unbundling their business decisions based on the quickly changing market scenario.

Summary – by looking simplistically, we get a true picture of the industry by assessing the various challenges, as we wouldn’t want to trivialize the impact of challenges. Our observations reveal the five broad challenges faced by the investment banking industry:

• Aligning workforce with business objectives

• Structuring and executing technological reformation, adopting a strategic approach

• Reducing costs

• Renovating business models for boosting trading commissions

• Meeting customer demands and tracking their behavior

Trends

01 05Digitization – From Disrupted to Disrupter

The New Accent of Reducing Costs02 10

Boosting Trading Commissions03 15

Customer Centricity04 20

Workforce of the Future05 25

Getting to Grip

Investment banks require a fundamental change to deliver a sustained performance from their core businesses. Investment banks must focus on being transparent in their risk disclosures.

Investment banks (of all sizes) will need massive restructuring and strategic reorientation to cope with the upcoming regulations. And to tap into rapidly growing trade flows, banks must rejig their businesses in order to cater to product demands and service expectations of customers. In order to ensure banks are well equipped to compete, we have covered the broader aspects of the delivery model, with necessary insights to understand the complexities of the proposed reforms.

Solve

Although countering risk management and compliance challenges are immediate priorities, banks must rethink about effective governance, reporting structures and decision-making capabilities. These actions would provide an opportunity for banks to review their loopholes. Clearly, it’s not easy for banks to adapt to the transition phase; thus, there is a need to put in place a broad-level strategic response and mitigation plan.

Synergise

We’re not just talking about “how-to’s”. Certainly, investment banks will thrive going forward. Moreover, as banks mobilize on different fronts like regulatory, technology, cost reduction and trading commissions, they will serve the interests of costumers with a strategic narrative. Industry players will soon make a radical shift in strategy and decision-making, leading to a future in which banks can walk down the ‘profitability path’.

Surpass

An Industry Ripe for Change – Investment Banks’ Golden Age

5Top 5 Investment Banking Trends in 2018:Digitization – From Disrupted to Disrupter

Digitization – From Disrupted to DisrupterDigitize or risk losing market share to competitors

TREND #1


It’s no secret that investment banks (of all sizes) are under pressure to prune costs to cope with stringent regulations. This has resulted in banks jettisoning their business functions and trading desks. But the tough days for the CMIB industry is not over yet; investment banks can uncover new revenue streams by bolstering their innovative technology investments.

Investment banks can collaborate with technology service providers to standardize their back office functions, freeing up significant capital for reinvestment. For instance, USD4 billion of annual savings is estimated to be generated from trade processing.

Top 5 Investment Banking Trends in 2018:Digitization – From Disrupted to Disrupter 6


Hunting Elephants with the New Digital AgendaThe industry is changing at a rapid pace, and technology is imperative for banks to proactively deal with changes

Investment banks (of all sizes) can use front office and back office technologies in an innovative manner, which will provide them a competitive edge.

Investment banks can establish customer portals to aggregate information and services across business functions. These dynamic portals would enable clients to access asset prices and execute against counterparties. Additionally, clients would be able to consolidate price and provide research guidance from multiple sources, while having a unified view of transactions.

Investment banking data has been traditionally aggregated by sell-side firms and has been opaque to clients. Banks can leverage their peer-to-peer digital model to facilitate easier and faster collection, aggregation and sharing of transaction data. This would boost data transparency, thus reducing the need for intermediation, which will contribute to market fragmentation.

Investment banks can leverage their cloud solutions with advanced analytics and complex-event processing technologies to enable real-time analytics. These solutions will help banks disrupt real-time compliance monitoring and collateral optimization, including supervision of changes in the value and quality of collaterals.

Creating Space for Digital InnovationInvestment firms, who have to grapple with stringent regulations, are witnessing a sharp drop in revenues amid a tougher capital regime. In addition, banks face an uphill struggle to transform their operations for aligning with technological obligations. An in-depth understanding of business challenges is essential to carry out the technological reforms. Banks can enhance their state-of-the-art systems and databases by working closely with trading floors, sales and middle office operations.

Banks can conduct a Strategic Technology Roadmap (STR) analysis that must involve a detailed view of existing infrastructure, benchmark against alternative solutions, and implement the near-perfect technology into the overall strategy including short, mid and long-term goals.

Investment banks must understand the entire value chain by analyzing key operational processes, process pain points of clients and assessing ROIs to be effective decision-makers. Additionally, banks must keep themselves abreast of new technologies for effectively positioning their business for the future. It is imperative for banks to make technology a management priority by making it an integral part of the board-level strategic planning process.



Defining Success by Overcoming the Fire Drill

Rewrite the success path using right catalysts of business and a more auditable environment

JP Morgan launched a predictive recommendation engine for identifying potential clients which sell or issue equity. Given the initial success rate of this engine, the company has rolled out this technology to its other business functions. The digital revolution in the investment banking industry will effectively mean that the long-standing barriers to entry will crumble. With technology – the huge balance sheets will taper off, price transparency will increase, and new sales channels will open up unimaginable opportunities for investment banks.


The New Accent of Reducing CostsSize of the Prize

TREND #2

Investment banking revenue on an average, was down 16% (2015-2016) year-over-year due to depreciation in fixed income, equities, debt capital markets, currencies and commodities. Additionally, new players like FinTech startups and innovative boutique firms are driving the value chain disintermediation utilizing dynamic information platforms. The regulatory initiatives are aimed at increasing risk capital buffers and squeezing revenue pools of banks, thus making it crucial for them to aggressively reduce costs.

The average cost-to-income ratio of the investment banking industry stood at 68% in 2016, up from 65% in 2015. The effective governance, leadership and culture are the performance anatomy for reducing costs.

Top 5 Investment Banking Trends in 2018:The New Accent of Reducing Costs 11


Countering Macro Volatility by Aggressively Reducing CostsInvestment banks must be mindful about the cost-resizing exercise before transitioning to performance management and cost-reduction techniques.

The fundamental shift from fixing accountability for cost and income into decision-making across all business functions of the organization is of paramount importance for reducing costs

Banks can adhere to the following steps to boost cost-base transparency, reallocate capital and optimize ROIs:

Banks should create better visibility and insights into spending by comparing how much it would cost to establish a business function outside the organization with how much it would cost, if executed internally. The enhanced transparency will help banks identify cost drivers and develop key metrics, including cost-to-serve factors.

It is vital for investment banks (of all sizes) to build an end-to-end governance model for driving accountability for various business function owners. The governance model is important for banks to shift from unproductive to productive and profitable spending.

Banks will ultimately need to rethink about their legacy IT systems that support their business to identify, eliminate and prevent unproductive IT expenses. Certainly, banks in this manner can switch to productive IT systems such as Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS) for trimming costs. For instance, banks can implement Robotics Process Automation (RPA) to automate routine tasks like reconciliation.


Trade Ahead with a Strategic MovementRemain razor sharp in seeking sustained cost efficiency with a strategic cost reduction technique by merging swaths of back office and middle office functions.

Any cost reduction initiative in investment banking space should be seen as a journey that begins with a common dream – effective leadership can help companies turn into industry mavens. It is clear that banks should focus on possibilities of a cost reduction model, rather than focusing on historical benchmarks.

• Banks must churn out a top-down mandate that enables companies counter operating silos, and enforce a ‘business-first’ motive rather than product orientation.

• A clear understanding of cost drivers is crucial prior to implementation of targeted cost reduction initiatives concerning departmental operating budgets.

• Reassessment of in-house priorities and services for customers will help banks make a case of custom development based on costs and feasible operating outlay.

• Strategic plan to segregate costs and savings will help banks analyze revenue streams based on the performance indicators of cost-reduction initiatives.

• Measurement of the impact of cost savings is only possible through reinvestment outcomes. Investment banks must reinvest to drive growth, innovation and talent pools through transformation programs.



Cost is Not Just About Numbers…Leaders who realize that the growth and profitability lie beyond cost reduction will rise to the elite upper level of investment banking success

The boom years of the investment banking industry saw the attractive supernormal ROIs create a huge demand for building numerous businesses. However, this has resulted in a fragmented industry landscape; banks must start thinking about aggressively scaling down costs in order to retain their competitive advantage. One thing is crystal clear: investment banks can build a better cost reduction ecosystem by transforming operating models aligned with precise organizational requirements. Investment banks that are ready to adapt to the market pressures with an eye on the future, will surely thrive in the long run.



Boosting Trading CommissionsMake the Most – It’s Golden Age

TREND #3

Top 5 Investment Banking Trends in 2018:Boosting Trading Commissions 16

Commoditization of trading services and market shifts, fueled by technological advancements has resulted in rapid shrinking of trading commissions. The deregulation has heralded the termination of fixed brokerage commission rates; low-cost passive fund managers have dealt with market share of active asset managers; electronic trading has led to low commission; MiFID II has unbundled research from trading commissions – prompting investment banks to evolve their business models.

Investment firms are trimming their trading activities due to shrinking commissions: Result – 40 banks announced 68,000 job cuts in 2012, Deutsche Bank downsized equities in Latin America in 2014, and Standard Chartered shut its global equities in 2015

16


Bring Back the Green Shoots with Increasing CommissionsInvestment banks can redefine their value propositions by transforming their business models with the ubiquitous nature of digital technology.

Banks can reach a much wider audience at a faster pace, while still leveraging their existing trade capabilities.

Banks can optimize digital platforms to match buyer expectations by fulfilling their investment needs, including funds, asset classes and trading or advisory/management services.

Investment firms can adopt automation technologies like robo-advisory capabilities to provide investment management services within a short span of time. Such automation platforms can help investment banks boost trading commissions by leveraging algorithms to trade on the basis of customers’ risk appetite, past investment styles, and financial goals.

Banks can also adopt the trade mimicking (investment automation) technique, which enables customers to select portfolio managers in accordance with specific requirements. Blackrock and Vanguard have recently partnered with investment automation service providers to boost their trading commissions.

Banks can use a proper blend of digital tools and channels for enabling self-directed investment modules. These financial institutions can also increase trading commissions by availing online trading platforms that offer tailored research content with a mix of human advisors for self-operating customers.


Creating the Right Strategies to Drive ValueSince trading commissions keep shrinking, investment banks and brokerages should focus on innovative solutions and excel in the trading section. Besides streamlining costs, banks can also leverage their digital platforms to provide dynamic trading options to customers, fuel automation, and build a customer-centric business.

It is also important for banks to reshape their organizational structure and culture in accordance with the target business model. Delayering across the entire firm will ensure shorter hierarchical lines. Organizational effectiveness will help banks boost trading commissions – thus enabling them to develop a lean structure for producers and non-producers in coverage sales. To develop the digital ecosystem in the organization, it is necessary for banks to attract and retain technology talent – thus increasing the demand for aligning compensation with emerging roles and responsibilities of the workforce.



Mastering the Art of Seeing Beyond the Illusion

A leadership team completely aware of business objectives and transformational drivers will epitomize the target culture coupled with a sense of urgency. The digital adoption will ultimately pave the way for long-term success in trading commissions – leading to an evolution with pace and agility.

Needless to say, the organizational transformation does not happen overnight. Investment banks must decide on their vision and explore value propositions that will boost trading commissions to fund their business journey.


Customer CentricityRedrawing the Future of Industry

TREND #4

Top 5 Investment Banking Trends in 2018:Customer Centricity 21

The trust of customers in investment banks is gradually eroding. Customers have recently claimed that investment firms have willfully misled mortgage security investors. In fact, some have also claimed that banks have continuously sidelined the interests of clients. Besides all the challenges, banks also face rising customer expectations as they expect tailored solutions, coherence across channels, self-directed experience, and intuitive solutions. Simplifying the market scenario, customers today want banks to go beyond service quality to strengthen their business value.

The industry’s inability to meet customer demand has hurt the overall offerings and revenues of investment banks. US deals fell to 170 in 2015 from 275 in 2014. Globally, the number of deals dropped to 310 from 417, with revenues down by USD85 billion within a span of one year


Sweating the DetailsIncreasing customer demands are just around the corner in the investment banking industryInvestment banks that are ready to improve customer experience around the world will see disruptive potential from all undercurrents in the evolving markets. A better understanding of client’s segmentation and profitable propositions will significantly help boutique and mid-sized banks realize the balance of trade. At the same time, banks must create cross-selling opportunities and offer tailored solutions to ensure that they are being adequately rewarded. Banks can adhere to the following steps to drive a customer-centric journey.

• Banks must offer tailored research solutions based on the client assessment accorded by following questions:

1. What is the relationship between the client’s valuation and its innovation potential?

2. What relevant information and methodologies must a firm prioritize with regard to the appraisal of the client’s innovation potential?

3. Which information do customers use as inputs for business sustainability?

• Investment banks must track real-time corporate-client cash flows and market data for embedding the same into credit and equity research to better serve their clients.

• Since the sales unit of any investment bank is instrumental in defining customer satisfaction, banks must power sales division with advanced analytics for monitoring the resources allocated to clients. The sales unit of firms can leverage analytics to offer customized directions to clients including functions like capital, leverage, liquidity, trading and access to research analysts.

• Banks must adopt a high-tech, robust and real-time client profitability measure to drive effective client discussions for deciding the best course of action. This can be carried out by simplifying certain factors including buy-in from internal stakeholders, interpretation of outputs and data reliability.


Sharpening the Double- Edged Sword for Double Benefits

Investment banking players need to track their client behavior and satisfaction much more rigorously.

Banks must deploy a set of tools to acknowledge the success rate of their uniqueness in being client-centric. Building on the rich experience of numerous investment firms in the industry, we offer the following recommendations for banks to track customer satisfaction:

• Gathering inputs from a wide range of clients and potential clients to understand the level of experience they desire. Apart from the analysis of clients, banks must rate themselves to strategize a customer-centric business model.

• Besides the preliminary assessment results, banks must also divulge precise reasons for any unfavorable inputs. This will help banks gain a deeper view of customer satisfaction issues. And to do so, banks can systematically link client satisfaction with their operational initiatives.

• Banks will need to transform their operating models to implement client-centric strategies. Investment banks (of all sizes) can develop robust governance structure from the top to drive operational transformation and foster value-oriented employee behavior.

• In order to win and retain customers, banks must develop the personas of target audience. Banks can analyze their strategic lines of business to determine the most satisfied clients and build clear personas. Having identified this pool of satisfied clients, firms can keep adding to the list of potential drivers to retain and strengthen relationship with new clients.


Building the Book for a Home RunWhen banks reduce negative customer experiences, they gain increased efficiency, productivity, and profitability in the operational phase

Meeting the lofty customer expectations not only serves as a foundation for successful customer retention, but also enhances the overall operations of investment banks. In fact, improved customer satisfaction will help banks lessen their workload, foster stricter processes, and result in fewer customer queries. We believe that cultivating robust customer experience strategies will stand investment banks in good stead for the future.



Workforce of the FutureRebuilding Lego – Brick by Brick

TREND #5

Top 5 Investment Banking Trends in 2018:Work Force of the Future 26

The relentless desire to create differentiators in investment banking space has been transforming the skills that banks leveraged to deliver their services. Given the current industry scenario, most banks depend on an aging workforce, who will retire soon. Around 60-65% of employees are over 40 years old. Hence, the millennials are the upcoming generation who would take up responsibilities of a bank. This is triggering an urgent need for banks to retain the knowledge of the older generation. Additionally, the desire to choose investment banking as a career path is waning among the new generation of millennials. At the same time, the combined forces of regulatory changes and technology are standardizing the front office, thus creating an urgency for technological skill sets.

Staff costs continue to represent approximately 60% of operating expenditure across the investment banking industry. Investment banks will need to reorganize their operating models and restructure their human capital programs.

26


Making Change HappenInvestment banks must assess the core skills and evolving roles of the workforce to align career goals of employees with business requirements. Investment banks must adopt a clear-defined strategy involving adequate compensation to retain talent. However, there are a few banks that have implemented strategic decisions on specialized markets and services. Investment banks can adhere to the following steps:

• Answering the following broader questions will help banks assess the skill requirements for building the workforce of the future:

1. Which skills are critical, and which assignments can be delegated?

2. How can the talent management unit help investment banks develop workforce skills and agility?

• Banks must design dedicated assignments in a dynamic manner, which provide adequate exposure to stakeholders. Building a road map by aligning the skill sets of the workforce with business objectives will help investment banks create a rewarding experience for the millennial generation.

• Investment banks will also need to mirror the flexibility and agility offered across different industries to employees, which will help develop a work culture based on purposeful thinking and optimism.

• Work-life balance and innovative work environment will help banks foster employee benefits through the provision of flexible working and appropriate time offs.

• Integration of digital toolsets and intermediaries for managers to administer the extended workforce

• Strategic recruitment of innovative IT staff, including those who can develop artificial intelligence (AI), as automation will play a crucial role in investment banking space. There will be a need for newer skill sets to maintain and monitor new technologies. If the technology is not used properly, the regulatory movement will outweigh all benefits.

• Investment banks can focus on workforce scenario planning as it can be a powerful tool to strengthen the funding proposal for staff training and mission-based skill development programs.


Making Change StickInvestment banks are striving to emulate their horizontal organizational structure for encapsulating a dynamic work environment backed by collaboration and innovation. Here are some innovative practices investment banks can adopt to manage talent on a whole new dimension:

• Enable right cultural shifts by embedding behavioral change in managers

• Organize work into bite-size projects for employees, who want to experience a diversified professional experience

• Facilitating training and career advancement by turning the talent management unit into efficient coordinators

• Work aggressively and increase their involvement with third-party innovators for drawing osmosis-like working practices into organizations

• Innovate ways to incentivize ambitious employees by offering opportunities in rapidly growing markets, helping banks flatten their organizational structure

• Motivating workforce with a strategic approach that makes employees’ work stint impactful. Enabling cloud-based financial models for collaboration of analysts can be a bright work practice


Unleashing Productivity

Investment banks can shape the industry landscape by capturing diverse skill sets for adapting to evolving roles – workforce of the future.

It is imperative for banks to ensure competitive compensation for the workforce in their bid to retain talent. Building and sustaining increased customer advocacy hinge on enthusiasm and trust of employees. Ultimately, investment banks must explore bold solutions to retain the brightest talent. Understanding the most critical elements of employee engagement can help investment firms decide on employee compensation. Companies who cannot adapt to the changing employee behavior will find themselves replaced by their competitors.


As the industry enters a new era, investment banks will need to create a dynamic environment for fostering work-life balance, innovation and challenging opportunities for the workforce.

At SG Analytics, we know that our business does not operate in silos. Our ability to synergize research and analytics has delivered immense opportunities to our clients in the pharmaceuticals & life sciences sector.

For more information

Contact us Visit us

We are led by a highly motivated team of internationally experienced professionals, which has catapulted us among the top India-based research and analytics vendors, thanks to our unremitting focus on client commitment, consistent quality and a vibrant internal team culture. Our global delivery center in Pune reflects our ability to integrate and work with divergent cultures. We hire talent with a strong educational background from top-tier universities. We also have fulltime analysts from countries such as Germany, Switzerland, France, China, and others. This allows us to understand our clients better and their individual requirements, irrespective of their nationality and the country of origin.

Acknowledgement

About SG AnalyticsCorporate Finance and Valuation

The author wishes to thank Devi Prasad Swain, Dustin Lichey and Suhrid Barua for their editorial support, as well as Satish Shinde and Vineeth CL for creative designing.

Our Corporate Finance and Valuation support services help clients maximize value and grow their market share and reduce their operating costs.

As global businesses seek to source more deals and increase their win rate, we assist them in the data gathering activities, analysis and research process. At SG Analytics, we advise clients by providing them support, financial modeling and sector research to reduce turnaround time while ensuring high quality and cost advantages.

Our Corporate Finance and Valuation support includes:• Investment Banking Support• Valuation Support• Business Information Services (Library Services)• Services for Private Equity and Venture Capital

Service Delivery MethodologyWe are dedicated to delivering tailored solutions for our global clients. Our team of vastly experienced analysts is well versed in providing valuable insight to our clients. At SG Analytics, we have worked on hundreds of deals for international clients over the years that enable us to understand the client needs.

About the Author

Steve heads the Investment Banking & Valuation team at SG Analytics. He has over 8 years experience in offshore investment banking and private equity support. Before joining SG Analytics, he was associated with UBS. He has rich experience in managing multiple client engagements including mid-market and boutique investment banks across the US, Europe and the Middle East.

Associate Vice President Investment Banking & Valuation

Steve Salvius


http://sganalytics.com/contact-us/?utm_medium=content_marketing&utm_source=ebook


Top 5 Investment Banking Trends in 2018 - SG Analytics...6 Top 5 Investment Banking Trends in 2018:...

Documents

Transcript of Top 5 Investment Banking Trends in 2018 - SG Analytics...6 Top 5 Investment Banking Trends in 2018:...