Investment banking might be at the point of a consolidation phase that exceeds any it has seen before and could finally transform it, after data and analysts reveal to Euromoney that the scale and speed of consolidation in the industry and certain markets is faster than most people realise.
Capital has always been thrown at any opportunity in investment banking, but the punitive high cost of entry, stemming from regulatory capital requirements, and disappointing poor returns for equity investors has meant this is now changing.
Credit Suisse, for example, was forced to refine its strategy in investment banking after poor results for the third quarter last year and is targeting a reduction of approximately 50% of pro-forma Basel III risk-weighted assets in fixed income by 2014 – thereby reducing fixed income’s share of the group’s risk-weighted assets from approximately 55% to 39%.
In the fixed income, currency and commodities (FICC) division, Credit Suisse decided in November to scale down or exit long-dated unsecured trading in global rates, emerging markets and commodities, and to scale down securitized products and exit from CMBS origination.
 |
In January 2012, Euromoney obtained an internal memo that showed senior management changes at Nomura, which only confirmed the firm’s continued difficulties in making a return on its bold investment in the international fixed income and equities markets. Earnings released in November for the second quarter of Nomura’s financial year showed falling revenues leading to losses in its wholesale division and a new determination to reduce costs.
“If you go down the list of banks now cutting back, it’s RBS, UBS, Credit Suisse, BNP, Société Générale, Credit Agricole, Nomura and in the US there’s a question mark over Bank of America Merrill Lynch," says Matt Spick, analyst at Deutsche Bank. "That’s eight sizeable firms. In the past, you would occasionally see the number eight or nine bank in the investment banking revenue league tables forced to cut back and its share would be partially redistributed among the top firms. Now we’re seeing something we’ve never seen before: eight of the top fifteen banks in the league tables all cutting back at the same time. And you have to ask where is their share going to go? It’s not likely to go to banks 15 to 20. It’s going to go to the top five or six.”
For years, the pattern in investment banking has been for the leading firms to win markets share and, periodically, for aspiring players to chip away at their position. When spreads in fixed income and rates widened after the financial crisis of 2008 and 2009, firms like Nomura and UBS spent heavily to build up in fixed income.
Their efforts don’t appear to have worked. Increased capital charges in fixed income make it far more costly for any banks to renew their assault.
Spick put some numbers together on this in a 2012 outlook report on the investment banking industry. This research shows that the fixed income business is already consolidating rapidly.
In 2007, the concentration of markets share of the top-five firms in FICC sales and trading was 25.6%. In the first three months of 2011, it had risen to 48.5% and that concentration looks set to increase.
Competition authorities in the US and EU tend to analyze and index market-share concentration by summing the squares of the shares of the top participants.
Industries with Herfindahl Hirschman scores of 1,500 tend to reach oligopolistic pricing and the chance of superior returns. Investment banking is fragmented.
Spick suggests that in 2007 its concentration index score was around 530. In 2011 it hit 700.
“Where could it go? Maybe to 1,200,” says Spick. “This process is accelerating, especially in FICC.”
For the full story, check out the in-depth feature on the final transformation of investment banking in the February edition of Euromoney magazine.