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Future-proof your finance career, by McKinsey & Co and Morgan Stanley

Will 2017 be a better year for your finance career than 2016 has been? If you work in sales and trading, the answer would seem to be yes. Most banks are crowing about their strong performance in fixed income sales and trading in the final quarter, and Credit Suisse said today that equities trading should also be strong next year as markets rise under Trump.

Nonetheless, it won't be plain sailing. Political and economic uncertainties continue to beleaguer banks' dealmakers and most banks - like Credit Suisse - are still in the process of cutting costs. In separate notes on the outlook for the banking industry next year, both Morgan Stanley and McKinsey & Co. stress that cost cutting has only just begun.

"Every bank in the world has a cost programme of one sort or another under way, highlighting that more needs to be done," says Morgan Stanley. The faster banks cut costs in the front office, the faster costs rise in the middle and back office. As Credit Suisse noted today, regulatory costs rose 80% in three years from 2012.

The upshot is that 2017, and 2018 and - likely- 2019, will be years of ongoing cost cutting. Morgan Stanley says banks now need to focus more heavily on "in-footprint" cost-reductions: they've already cut businesses and relocated staff, now it's all about making remaining businesses more efficient. This can take years. McKinsey, on the other hand, says banks need to stop "tinkering around the edges" and embrace "fundamental transformation" - mere operational efficiencies alone won't compensate for slow revenue growth, regulation and increased digitization.

Whether you think the next five years are about operational efficiencies or continued wholesale closure of business lines and regional offices (or both), the change in finance isn't over. Based upon Morgan Stanley and McKinsey's reports, here are your survival strategies.

1. Be ready to work for a non-bank that's selling services into a bank

As banks move into a new era of cost-cutting, both Morgan Stanley and McKinsey predict they'll start looking at outsourcing operations functions to third party firms that provide services across the industry. SocGen has already begun doing this by outsourcing its securities processing back office to Accenture Post-Trade Processing (APTP). UBS CEO Sergio Ermotti said in July that banks need to reduce their structural cost base by 'converging' some of their operations. 

This is unlikely to happen soon - Morgan Stanley notes that creating utilities and spinning out costs to suppliers requires a five to seven year investment horizon. It is going to happen though, and if you get in now, you'll be well positioned for the future. By 2025, a lot of banking jobs won't actually be in banks.

McKinsey echoes this: banks will platform, it says. Instead of having everything under one roof, McKinsey predicts banks will evolve into platforms for "data and digital analytics and processes" that will be linked to fintech and industry utilities.

2. Get to know the key Fintech firms 

Some of the non-banks selling services into banks will be Fintech firms. Banks need to digitize, says McKinsey. They're already teaming up with big Fintech firms and this can only continue.

Helpfully, rival strategy consulting firm firm Roland Berger has produced its own report on Fintech firms. It lists the key firms by sector as follows.

Roland Berger's guide to top Fintech firms:

Most promising Fintechs

Source: Roland Berger

3. Avoid European banks, work on Wall Street

This has been a theme throughout 2015 and 2016 and it looks set to continue. Credit Suisse explained today that it's cutting costs in Europe and investing in the U.S.: irrespective of whether the eurozone breaks up (as predicted by Bain & Co.). Basically, the Americas are where the growth is.

This is set to create problems for all banks. Morgan Stanley says U.S. banks will be faced with the question of whether to double down on their attractive home market or to push into international markets. Meanwhile, smaller European banks will be forced to retrench and focus on building greater breadth and depth closer to home.

As shown in the chart below, McKinsey is predicting that cost cutting at banks in the Eurozone will reach $21bn and that headcount will fall by 45,000 between 2016 and 2020. This compares to cuts of just $12bn and 30,000 respectively in the U.S.


Mckinsey Europe

Source: McKinsey & Co.

Matters are made worse in Europe by banks' ongoing struggle to generate returns. As the chart below from McKinsey shows, returns in Europe have long been below those at banks elsewhere. This situation risks becoming worse if Basel IV proposals relating to the models used to calculate operational and credit risk come into force. McKinsey notes that European banks are more reliant on their internal model approaches than U.S. banks because they typically house lower-margin and lower risk assets. The rules are being fiercely contested, but if enacted, European banks will lose the most. Banks in Europe also stand to lose from IFRS 9, a new accounting standard being introduced in 2018. This will compel them to use expected loss provisioning rather than incurred loss provisioning.

Avoid europe

Source: McKinsey & Co.

4. Work with data

We're in the age of the quant. Banks are already using quants in far more functions than before and they're going to be even more widely dispersed across the organization in future.

As banks change, analytics need to be, "at the center of every meaningful decision," says McKinsey. They will therefore need data scientists and data translators, who convert analytical outputs into products that can be used by customers.

5. Work to automate the regulatory functions

As Credit Suisse noted today, regulatory investment has plateaued at a high level. Although banks have further regulatory-related investments to come as they deal with MiFID II, Basel IV and IFRS 9, the future is likely to involve cost cutting and automation in regulatory-related functions.

McKinsey notes that risk and compliance staff now account for between 5% and 10% of employees at U.S. banks and 3% to 5% at European banks. The emphasis now is on "efficiency gains" in this area. The compliance hiring boom is likely over.

6. Work in ETFs or M&A 

Exchange traded funds have been the growth story of the decade, and this isn't about to change in the next few years. Similarly, M&A divisions can generate strong returns with minimal risk - as witnessed by Credit Suisse's claim to have generated returns of 15% to 20% in its Americas investment banking business this year.

Banks without "room on the balance sheet" need to focus on their advisory and asset management capabilities, says McKinsey. Exchange traded funds are a balance sheet plus because they provide returns to the customer and provide fee income, but don't require the bank to hold asset management style deposits which have a negative effect under low and negative interest rates.

7. Work in asset allocation

Banks are paring back their balance sheets. Just look at the chart below.

As risk weighted assets are cut, banks being forced to allocate their assets more effectively. A new generation of "asset allocation" specialists is key to the way banks operate in an asset constrained world.

Morgan Stanley RWA

Source: Morgan Stanley 

8. Ride the reflation trade in equities 

Although fixed income trading revenues have increased at double digit percentage rates since Trump's election, Morgan Stanley doesn't think it will last. It's still predicting a 3% to 5% decline in fixed income revenues in the coming years, driven by tougher regulation, while it things equities and investment banking revenues will rise. In particular, it thinks the "reflation trade" will drive growth in equities revenues in 2017 on the back of a dismal year in 2016.

9. Avoid marginal players in marginal markets 

Lastly, if you want to stay working in finance you need to steer clear of marginal players in marginal markets. In banking parlance, "optionality" is no longer affordable. "Banks have kept their options open too long, particularly in the cross-border setting," says Morgan Stanley. If banks want to increase their returns on equity (they do), they'll need to focus on their key regions and markets and manage their costs. They need to "rightsize to the revenue potential" and "create operational gearing" which isn't necessarily related to scale, Morgan Stanley adds.

Basically, if you work in the fixed income division of a minor player in Asia, beware.


Photo credit: ཇོ་མོ་གླང་མ། by Daniel Griffin is licensed under CC BY 2.0.

AUTHORSarah Butcher Global Editor

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