Laurent Chemla, Principal Consultant, Adsatis
The second half of 2016 suggested that the outlook for the investment banking industry was positive, with the U.S banks leading the way as FICC revenues began to recover. Many commentators are suggesting that the golden days of banking are over and that the combination of digital disruption and the modern regulatory burdens mean that investment banking is an industry in decline. We have a more optimistic outlook – there’s no doubt that the industry will need to reinvent itself, but the industry has historically been good at this.
There is a growing realisation that some clear and new thinking is required to come up with the right business models to ensure future success, and that implementation needs to happen quickly. This is no longer a time for incremental improvements.
We’ve identified the five key themes which we see IB’s focusing on for 2017. These are based on the day-to-day project-based interactions we have with our investment banking clients, in addition to the regular contact with their clients (investment managers and corporate entities) and other organisations that operate in the markets (technology providers, exchanges and regulators).
Improving revenues The outlook picked up through H2 2016, and this will continue, with previously out of fashion FICC businesses driving revenue.
Cost reduction Cuts have been significant and there’s more to come. There is still plenty of scope to improve process efficiency, increase automation, and reduce duplication across both BAU and Change.
Offshoring and nearshoring This trend is on the increase again, with IB’s looking to move support and delivery of more complex functions to offshore and nearshore teams.
Cost/income ratios These are still stubbornly high in the IB departments of leading banks, but the numbers will improve in the next 12 months to better than the ‘rest of the bank’ ratios.
European Banks Had a tough year in 2016 but will narrow the gap on US banks in 2017.
Strategy Organisations need to identify what their real strengths are and play to them. Hard decisions will need to be made around which businesses they really have competitive advantage in, and should continue to invest in, and which ones will always deliver sub-optimal returns.
Unintended Consequences Some unwanted side effects of regulation are already becoming all too apparent, including the impact on capital requirements leading to significantly reduced market liquidity, constrained lending, and potential disincentives to hedge portfolios. Many more will surface as new regulation takes effect, and we are yet to see the real impact of structural reforms and regulation designed to improve transparency.
Roll-back Politicians and regulators will wake up to the fact that misplaced regulation will be a huge drag on the global economy, and will cause serious damage to the effectiveness of financial markets.
No first mover advantage It is now clear that being an ‘early mover’ is not necessarily advantageous, and that it’s probably better to wait for guidelines/regulations to evolve and for others to learn the lessons.
Relationships The client relationship will change, moving from a ‘product push’ to a ‘partnership of equals’. Investment management firms will increasingly seek out direct investment opportunities, and an increasing share of the business will not be channelled through traditional dealer/client channels. Banks will respond to client demands for a new type of service by further upskilling sales teams and becoming more focused on meeting clients’ needs.
Rationalisation Client strategies will become more focused and resources will be directed towards a smaller universe of clients. Tier 1 banks will focus on the largest players in the market, which will leave plenty of scope for Tier 2 and Tier 3 banks to concentrate their efforts on the next level down and to flourish.
Measurement Banks will get more scientific about how they assess their performance with their clients. Until now it’s largely been about revenues and returns, but what about the client perspective? 2017 will bring assessment and understanding of this to the fore, and banks will seek ways to measure how client centric they are.
Relationship management Expect more investment to ensure that CRM technology is user friendly, that it’s utilised, and that cultural change is driven through. Cross selling and Client collaboration will become the norm. Ensuring effective relationship management will come into focus even more.
ePlatforms Front-to-back execution and fully-integrated cross product capability will become absolutely critical. The buy side will drive changes and platform aggregation.
Data management Data management is now ‘coming of age’ and is finally being recognised as both a driver of business opportunity and a core operational function. Greater ambition in this area in 2017 will see improved management and processes.
Big data/data science The sales pitch in this area is compelling, meaning IBs will embrace data-driven concepts. Data quality is going to become even more important to avoid ‘gigo’ (‘garbage in, gospel out’).
CDO function This will become more strategic and require CDO organisations that can combine process and control, with business vision and enablement. Data governance and data knowledge management will move from theory to practice, and this will be driven by the business, not by technology.
Rationalisation/streamlined architecture Legacy estates with large technical debt makes it hard to improve process efficiency and to meet regulatory requirements for consolidated and consistent processes. Technology rationalisation and streamlining process will become even more critical in 2017, IBs will commit to doing this and understand that they have to see it through.
New technology The pace of change will continue to accelerate; fintech, regtech, AI/RPA and cloud services will all feature significantly in 2017.
Commitment to change Investment will be required to adapt and survive. Change delivery will improve – there will be more scrutiny, more accountability, better communication and more agility in 2017.