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Warning: there could soon be just three global investment banks left standing

Photo by erika.tricroche

If you thought the current round of redundancies form investment banks was bad, unfortunately the future may be more of a dystopia for the industry as the vast majority are forced to pull out of entire countries or business lines to cope with shrinking revenues.

A few thousand redundancies here or there is unlikely to cut it in the long run, and the first bank to blink and radically restructure its business model will prompt others to do the same, suggests a rather bleak report on Bloomberg this morning.

“There’s too much politics and too little economics going on. They want to keep certain businesses for as long as possible,” said Lutz Roehmeyer, from Landesbank Berlin Investment.

New strategies

There are, of course, already signs of this happening, with the proliferation of new strategy documents among key players emerging. Last year, UBS produced one, although the unattractive business areas where the deepest cuts would occur were still relatively niche – FICC macro directional, trading, FICC asset securitization, FICC complex structured products and credit.

Similarly, Morgan Stanley indicated that it would exit certain fixed income areas that were considered “nice to haves”, but “not necessary”, but these could be structured credit and subprime securitisation.

They need to go further.

Incredibly deep cuts may be needed

“Some banks need to come out and say we need 30% to 50% fewer people,” said Steve Hussey, a London-based financial-institutions analyst at AllianceBernstein. “The hit has to be more severe than 1,000 people here and there. Second- or third-tier players have to get out of certain businesses and focus on niches - either products or geographies.”

Deutsche Bank is in the middle of a 100-day strategy review to be published in September. While €3bn of cost cuts have already been identified across the group, the investment bank has felt most of the pain, with 1,500 job losses already announced and more likely in a division that employs 32,000 people. It’s also likely to review its compensation costs (downwards) in this division, but wholesale business or country exits are unlikely.

Meanwhile, Nomura is likely to speed up its cost-cutting overseas following the departure of its CEO last month.

RBS has, of course, gone further than most, with plans to sell or close its cash equities, equity capital markets and mergers advisory business, but this was largely because of governmental pressure to downsize.

'Premier League' syndrome versus survival of the fittest

There’s one reason why the bigger banks may hold off stopping the universal banking model – “Premier League syndrome”. As analysts at Berenberg noted recently, all investment banks judge themselves on their positions on the league tables and, when they drop down, will invest as necessary to haul themselves back up.

Still, with cost-income ratios hanging stubbornly between 60-80% in most investment banks, not all of them can afford to hire.

“As investment banks strip their businesses in the face of a poor economy, poor revenue and higher regulatory capital, it’s the survival of the very, very fittest,” said Kevin Burrowes, UK head of financial services at PricewaterhouseCoopers. “We could see just three to five global investment banks.”

Clearly, the question you should be asking right now is what your bank's key strengths are and whether they match your skills and experience. If not, which bank does?

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AUTHORPaul Clarke

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