Do you really want to be working for a business that's a 'loss leader'? And are UBS's aspirations actually more realistic than BarCap's?

We are in a time of transition. What worked in the past may not work in the future and what seemed totally realistic in the past may not be possible after all.

With this in mind, some businesses are going down the pan. And given the uncertainties, BarCap and UBS's revenue projections are being treated with scepticism, but UBS may be the more sensible of the two.

Pan-wards

Firstly, thanks to Basel 2.5 (effective 2011), Basel 3.0 (staggered implementation from 2015), and the Dodd Frank Act and its related limits on leverage and risk, some activities of investment banks will not be viable .

Brad Hintz of Bernstein Research says banks will continue to operate these non-viable areas as loss leaders. They will include:

"Repo, preferreds, money markets, matched book repo, medium term notes, block trading of equities and certain investment grade credit trading desks.

Hintz also points out that returns in both FICC (fixed income currencies and commodities sales and trading) and equities trading have been bolstered artificially over the past decade.

FICC have fallen margins fell 30%, but have been sustained by increased leverage, securitized products, offshore expansion and prop trading. And returns on equities trading have gone from 20% to less than 10%, making the business viable only if subsidized by underwriting activities.

Source: Bernstein Research

Source: Bernstein Research

Do you really want to be working for a loss leader? And if you don't, where does this leave in terms of viable professions in investment banking? The answer appears to be: ECM, M&A, electronic trading, technology, and anything to do with regulatory interpretation and the effort to make OTC derivatives centrally traded and settled. All else is in for a squeeze.

Revenue delusions: UBS vs. Barcap

Given the new reality, banks with plans to ramp up revenues are being treated with understandable distrust.

Take BarCap. Morgan Stanley analysts think it will only achieve 40% of its revenue targets. Alphaville cites UBS analysts who think it will 74%.

And what about UBS, which has been hiring avidly in an effort to deliver CHF8bn of FICC revenues by 2012, despite only having reached this previously in 2004 and 2006 (before blowing up spectacularly in 2007, 2008, and 2009?)?

UBS looks crazy. But according to Nomura analysts, it is actually perfectly sane. They say:

...We believe that [FICC] targets look reasonable by past standards given that UBS

historically pre-crisis had a more stable and vanilla business mix that could return as

natural client market share is recaptured through heavy investment in new personnel.

And they produce the chart below to back this up.

Source: Nomura

And yet, the past is no real indicator of the future. Particularly when the regulatory landscape is changing, dramatically.