The banking team at J.P. Morgan has produced another lengthy report on the state of the industry, giving job seekers a look at potential opportunities based on which sectors are growing and which ones to avoid. Here is a brief summary of that 232-page report.
1. Revenues are stagnating. FICC is still crucial. M&A is declining.
FICC businesses remain the primary driver of banking revenues, with a 51 percent share of the total. However, FICC revenues are forecast to decline 2 percent over the next two years. Equities are forecast to increase 2 percent. IBD revenues will decline the most: a 6 percent drop is forecast.
2. Banks have an innovation problem.
Remember the years after 2000, when the creation of new products drove growth? Following the crash, innovation has died. Revenues are suffering.
“We see no real innovation within the industry to create new products which will drive the growth story in IB revenues,” says J.P. Morgan.
3. Emerging markets growth is insufficient to drive overall revenue growth and EM overcapacity is developing.
Emerging markets (BRIC countries and the MENA region and South Africa) are growing, say J.P. Morgan’s analysts. But they’re still small.
J.P. Morgan estimates that IBD revenues across emerging markets were $7.6 billion between 2009 and 2011, versus $39.8 billion for North America and Europe.
“We do not expect any near term closure of the gap between relative levels of activities in the markets, and therefore we do not believe that IBs EM Growth strategies will be sufficient,” says J.P. Morgan. “Given the size of the revenue wallet, we do not expect EM to be a material driver of IB revenue wallet over the next five to seven years and see over-capacity building in the region,” the analysts say.
Translated: EM revenue growth will be no panacea for slower growth in developed markets and layoffs in emerging markets may become necessary.
4. The banking industry of the future will be a lot like 2005 and 2006.
There will be no real growth for the next two years in a low GDP environment. 2005-2006 should be seen as a normalized revenue world.
5. There will be massive short-term growth in structured credit.
There will, however, be massive growth in structured credit and fair growth in equity derivatives.
Structured credit revenues recently have been hammered by risk-related losses, says J.P. Morgan. This is changing: “Q1 '12 has seen material improvement in the credit market environment.” Revenues will rise as credit spreads come in, inventories are marked up and trades are monetized.
6. You ought to work for a Tier 1 bank, or a boutique.
With lower salaries and less in the way of deferred compensation, J.P. Morgan thinks Tier 1 banks will be able to manage their cost base better. Equally, Tier 1 FICC players will have the advantage of the big revenues generated by their FICC businesses, which operate at comparatively high margins.
“We believe the winning model in a more polarized IB environment should be Tier I institutional players and boutiques with a high profitability model with Tier 2 agency players in the middle,” say J.P. Morgan’s analysts.
7. If you work in FICC, it must be for a large bank.
As FICC moves to electronic trading programs and becomes more execution-only focused, big players with heavy technological investment in FICC platforms will be the beneficiaries.
“These platform builds in our view are high barriers to entry due to the heavy technological investments involved which will likely only be supported by large-scale FICC revenue players generating c.$10bn+ (i.e. Tier 1 players). Tier 2 IBs generating about $5 billion will struggle to compete in our view,” says J.P. Morgan.
Tier 1 players will also need to commit capital to their FICC businesses, and Tier 2 players could lose out because of an unwillingness to do so. Tier 1 FICC IBs are considered to be Goldman Sachs, Deutsche, Citi, BofA and BarCap. Tier 2s such as UBS and Credit Suisse are already restructuring. J.P. Morgan suggests that Morgan Stanley may need to follow them.
The table below indicates which banks fall into each category and how market share will (probably be allocated by 2013). Anything in Tier 2 Institutional is probably to be avoided.
8. Barclays is going to be a bigger investment bank than Morgan Stanley, and so is HSBC.
We were surprised by this.
9. U.S. investment bankers should be paid more.
Presented without further comment: