Investment banks: Growth not all accounted for

For the past years, the investment banking industry is getting back its former glory. Presently, banks are getting the grind out of every dollar. However, the latest wet of quarterly results provided a corrective reality of the challenges of operating in a world of stunted growth with only 2 out of 14 big banks posted a double-digit increase in revenues.

There is little to show that growth will ride to the rescue any time soon and this realisation is forcing investment banks to be more diverse on how they can increase their profitability. Although this method is already a widely accepted approach for some banks, there is basically a limitation on as far as it can go.

Back then, investment banks were at the peak of perpetual double-digit growth. From the early 1990s until 2007, the global stock of debt loans and equity had an increased average annual rate of 8 % which according to analysts back then could double in size in about once every 10 years.

However, global economic uncertainty and tighter financial regulation ultimately mean that the growth rate in financial stock has slowed to that less than 2 %. Following the premature relief rally in 209, the investment banking industry has shifted into reverse.

Over the past four quarters, revenues of the largest investment banks are down by more than 1/5 as compared to figures in 2009. Revenues from fixed income (the traditional engine room of investment banks) sprawled by 1/3 over the past few years. Moreover, the first half of this year reveals revenues of fix income falling as high as 9 %.

There were already telling signs of growth in the first half with revenues from equities and investment banking rising approximately 1/5, although much of that was a rebound from a low base. The only aspect of the business that has been growing steadily is ironically debt capital markets.

As recently as 2011, a good number of investment banks believe that they could shoulder on the growth despite the gloomy predisposition of the markets. The ‘securisation’ market is speculated to reopen, which is a delivered effort by the European banks would force companies to turn to capital markets and investment banks would start providing drastic new solutions to the pension crisis, with China predicted to be the recipient of a softer landing and the Eurozone crisis would blow over.

The possibility of this unfamiliar zero-growth future is forcing banks to take unconventional action for relief. The first and most obvious of these is the focus of banks on the profitability of their business rather than top-line growth. European banks in particular have been forced to pull back from their convenient but unprofitable global outposts to focus more on their core business.

Second, every investment bank has cut back costs which led to laying off thousands of staff and still found the process remarkably stubborn. Costs across the industry over the past four quarters are basically the same as they were four years ago. The costs have drastically fallen about 8 % from their peak in 2011, possibly because banks have laid off approximately 15 % of their front-office staff.

Third, after years of not having to worry about efficiency, investment banks are tumbling over themselves to improve the productivity of their systems and retained employees. In other words, they have taken all the necessary steps for a much more disciplined approach in management and are doing all that they can to take advantage of what’s left of their available resources.

Finally, banks are trying to get the most out of the growth by stealing market share from their weaker competitors. Although revenues from fixed income dropped in the first half, statistics show that two largest players in the said market have increased their respective market shares just as close to their ceiling limit.

This subsequently means that for the apparent future, growth will be a function of shuffling revenues from different banks while trying to keep a ruthless rein in costs. Eventually, real growth is expected to return even if it will be as unlikely as strong as it was before. After all, companies and governments constantly need capital and savers need returns respectively.