For investment banks it was a no-brainer: why keep on expensive, veteran salesman and traders in the fixed income sector – which is becoming increasingly less profitable – when wet-behind-the-ears junior bankers will do the same job for a fraction of the price?
Well, quite simply, because your clients will eventually get annoyed and look for better quality of service elsewhere. Investment banks’ tendency to oust industry veterans in favour of younger sales staff with little or no experience is coming back to bite, according to a new report on the fixed income market by Greenwich Associates.
“In the past, institutional investors could rely on the ideas and advice of veteran sales people who often had decades of experience,” says the report. “In the wake of dealer cost cuts and lower pay, headcount turnover has disrupted many of those relationships, and the replacement sales contacts are often young professionals not too far removed from university.”
Over the next year, as banks deal with a host of new regulations and changes to the market, this lack of experience will be felt even more acutely by the banks, it says.
Deutsche Bank is still the number one fixed income player, with 10% of the market, it says. This hasn’t worked in the banks’ favour, with an over-reliance on fixed income revenues pushing it to a €1.15bn loss for the final quarter of 2013. Co-CEO Anshu Jain said: 2014 will be a continuation of some of the trends we have seen . . . Items like litigation, impairments, the operating environment, all of those will remain challenging”.
Barclays, JPMorgan and Citi make up the remainder of the top five, according to interviews the consultancy conducted with 4,000 fixed income investors.
The report highlights an industry in flux, with investment banks experimenting with size and commitment to the sector in order to remain competitive, but not overly-reliant fixed income revenues – the so-called ‘goldilocks moment’. The big global players have become less dominant, with the market share of the top three dealers shrinking from 29.3% in 2012 to 28.4% last year.
“The narrowing of focus by the biggest dealers will free up market share that will be captured by banks looking to expand their presence. The result will be a narrowing of the divide between the traditional ‘Bulge Bracket’ and the rest of the market, and a decrease in concentration in some products and geographic markets,” said Greenwich Associates consultant, Frank Feenstra.
Wells Fargo, Nomura, Jefferies and RBC Capital Markets are all good bets in the U.S. market, while BNP Paribas and HSBC have been increasing market share in Europe, it says. In Asia, local players like ICICI Securities, ICBC and Axis Bank all have an opportunity to compete with global firms.