Don't pop open those champagne bottles just yet, but if these experts are right, the climate for investment banking jobs in the U.S. is about to get a lot brighter and that is something worth celebrating.
According to Morgan Stanley and Oliver Wyman's annual report on the state of the investment banking industry, the U.S. market is now more attractive than Europe and even Asia.
They estimate the U.S. market is now 8 percent more profitable than either Europe or Asia, due to four primary factors:
- The higher cost of maintaining businesses across countries in Europe and Asia
- Higher post-trade costs in Europe and Asia
- Faster economic growth in the U.S. than Europe
- The concentration of U.S. market share in top firms.
They also point out that U.S. banks have already cleared off their balance sheets and are therefore in a strong position to expand.
The Morgan Stanley/Oliver Wyman report says, “This presents the U.S. banks with an enviable problem: whether to double down and reap the rewards of gaining further market share in the attractive U.S. market, or whether to use the strong home base to sustain market share gains abroad.”
By comparison, the report says, “The European banks face the opposite issue: at a disadvantage globally and with more difficulty taking share in the U.S., European wholesale banks will be under more competitive pressure in the coming years, particularly in non-European markets.”
Major U.S. banks such as J.P. Morgan, Goldman Sachs, Citi, Bank of America and Canadian banks with a large U.S. presence such as RBC will be well-positioned to take advantage of European banks’ withdrawal from the U.S. market.
Other predictions in the Morgan Stanley/Oliver Wyman Report
1. 2012 is going to be a good year for FICC. They think there will be 5 percent to 10 percent revenue growth in FICC and that the biggest growth will come in commodities where revenues might increase 10 percent to 15 percent.
2. It will be an OK year for IBD and equities, but good for DCM. 2012 has not started well for investment banks. First quarter investment banking fees were down 30 percent year on year according to Dealogic. However, MS/OW think equities and IBD revenues will rise 5 percent 10 percent globally this year. The biggest growth is expected to be in debt capital markets (DCM).
3. This is the year in which serious business exits will become unavoidable; there will be more layoffs in Europe. Several banks have already exited several businesses; however, they predict that this is only the start of the matter: 2012 will be the year in which “banks cannot just shrink at the margin to reach adequate returns on capital. Firms now have to choose where they may have comparative advantage and then invest in scale to win in these markets, or exit.” In practice, they say this means the removal of another 7.5 percent of industry capacity – and more if the hoped for cyclical recover isn’t forthcoming. In total, MS/OW think 8 percent to 12 percent of additional headcount needs to come out of European wholesale banking. Business by business, they predict banks will pull out of:
- Advisory and research – in markets where they can’t make enough money to justify the high costs involved
- Illiquid trading – where they don’t have the risk appetite (thereby benefiting those that do)
- Flow trading – where they don’t have scale and market share
- Emerging markets – where capital and funding constraints force a focus on business at home. Large firms will pull out of marginal emerging markets. Small firms will pull out of large G7 hubs.