Return on equity (ROE) for key investment banks has seen a drop from 20% in 2006 to below 8% in 2014, making it important for firms to implement changes that can help them return to low double-digit profitability and offset impacts of higher costs, control failures and increasing competition, according to a report by EY.
The report, titled Transforming investment banks 2015, finds that aggregate costs for major investment banks surged 25% to $185bn in 2014 from $148bn in 2005, driven by regulatory constraints, litigation, fines and trading losses due to control failures.
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EY Banking & Capital Markets global lead analyst, director Steven Lewis said: "Investment banks have found themselves in protect-and-survive mode for the past several years, making incremental changes to fix issues around profitability, productivity, culture, controls and trust. These piecemeal reforms have done little to rebuild the industry, and only a comprehensive, transformative approach will help investment banks thrive again."
According to estimates by EY, a legal entity costs a bank up to $600,000 per year.
The report says that simplifying business, rebalancing focus across portfolios, exiting businesses that are non-core or low performance, and legal entity rationalization could help banks reap significant savings.
EY Americas Capital Markets operations leader Roy Choudhury remarked: "To deal with a challenging ROE environment, investment banks will need to reassess their customer, product and service profitability, factoring in a range of market and regulatory constraints. Cost-optimization in Capital Markets – Operations likely will be an area of heightened focus for banks, and firms are in the early stages of assessing utility-type solutions to improve cost efficiency in securities operations.
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By GlobalData"Taken together, these changes will help enhance efficiency, productivity and profitability."
EY also finds that clients are now spreading business across various firms to get the best price and manage risk more effectively.
This has led to competition intensifying, with boutiques advising on 22% of global M&A deals in 2014, as against 16% in 2007.
To cope up in this competitive landscape, EY says banks need to identify their core clients and their needs, upgrade systems to monitor client satisfaction, and improve client experience, upgrade and integrate legacy systems, and increase investment in enhancing data.
According to EY, banks also need to implement salary model optimisation, operating model efficiency and supply chain enhancements to free up staff expenses to reinvest in technology.
