Two new reports on the state of the investment banking industry have appeared at once: one from the analysts at Morgan Stanley, which is a follow-up to their previous report with Oliver Wyman; another from Tricumen, a banking analysis firm.
Fundamentally, both say the same things: banks are engaged in a war of attrition, the banking landscape is changing and some banks – in some business areas – will not wither and die.
This being the case, what are the indicators that your job will expire within the next few years?
1. You’re working in a marginal business with limited market share
The chart below, from Tricumen, shows where each bank derives its revenues, and banks’ relative strength by business area.
In sales and trading, analysts at Morgan Stanley are exponents of the ‘flow monster’ theory of the future: only banks with strong distribution, operational scale and excellent technology will make strong enough returns in the new reality. Applying this supposition to Tricumen’s chart below, you might want to avoid most fixed income trading desks at SocGen (and to a lesser extent BNP Paribas), credit trading at Morgan Stanley, and cash equities at Barclays (and maybe even JPMorgan, although Morgan Stanley thinks US banks’ needs to withdraw from entire business areas will be mitigated by their double digit returns).
2. You’re working in the sales and trading business of a European bank
Morgan Stanley and Oliver Wyman think European banks will prove most prone to complete extrication from entire business areas. On the other hand, they think most US banks will endure because US banks already making double digit returns from both fixed income and equities sales and trading businesses,
US banks like Goldman Sachs, JPMorgan, Bank of America and Citi are all being buoyed by, ”the profitability of the US markets and the continued importance of US dollars as the functional global currency of trade.” As European banks selectively pull out of sales and trading, U.S. banks will benefit further.
Morgan Stanley fails to mention its own, struggling, fixed income business. However, its analysts suggest that parts of Barclays look a bit iffy: Barclays could improve its ROE by getting out of both structured credit and Asian equities and IBD and by focusing on its ‘core FICC franchise.’
3. You’re working in the FICC business of a bank positioned in the bottom left corner of the chart below
The (Morgan Stanley) chart below compares the revenues earned by each bank in FICC with the return on average equity earned by that investment bank as a whole. Again, it doesn’t look good for SocGen’s FICC business. Nor does it look too good for FICC professionals Credit Suisse.
4. You are working in equities for any of the banks in the right-hand circle in the chart below, Citigroup excepted
In the chart below, the top players in the equities market are located on the left. The bottom players are located on the right, and have a ring around them. You would not want to be in this ringed group. “In equities, we think that only the top four or five players have adequate returns, given tough competition, a high cost base and falling volumes (equity revenues have fallen by a 10% CAGR in the three years to 2012),” say Morgan Stanley’s analysts.
Citigroup is an exception here, however. Despite being a bit player (and despite having hired quite crazily in equities in London and having nothing to show for it), Morgan Stanley thinks that Citi continues to make double digit returns from its equities business, which is therefore sustainable.
Source: Morgan Stanley
5. You are not working in commodities or DCM
Commodities and debt capital markets (DCM) jobs both look like good solid bets for the moment. Commodities teams are holding up well, says Tricumen: commodities headcount has actually increased recently (Standard Chartered seems to have been hiring, for example).
Thanks to disintermediation, DCM is also looking pretty hot. Morgan Stanley estimates that 20% of European lending now takes place through the bond markets, up from 15% in 2008. It thinks this trend will continue, and that disintermediation will benefit banks with low funding costs and strong credit ratings (JPMorgan, Deutsche Bank and Barclays).
There may still be time to position yourself accordingly.