So what will the New Year bring for investment banks?
Obviously, they've been in downsizing mode. Banks slashed jobs as macro concerns squashed the early year bump in core advisory and deal business. Amid this loss of demand, new regulations will likely have an outsized effect.
Breakingviews notes that these regulations "will halve average expected return on equity (ROE) across global investment banks in 2012 to 8.3 percent, according to analysts at JPMorgan, well below the 13 percent needed to cover their cost of equity. To reach that required return, banks have to shrink further. Even factoring in further headcount reductions of up to 20 percent and a 5 percent cut in non-compensation costs, returns would still be too low. To reach a 13 percent ROE, banks will have to slash pay too--by a hefty 23 percent per head on average."
The biggest losers may be the non-bulge bracket players that will struggle to ride out the storms. We have not seen any massive failures lately--in this context, MF Global does not count--though that is quite possible going forward. UBS perhaps came the closest to shutting down its investment bank. In August, it announced it would slash 3,500 jobs, about half of which were in investment banking, and would refocus on wealth management, where it perceived higher returns. Smaller banks and boutiques will remain under similar pressure.
With that said, the deal will hopefully improve, lifting all ships enough to survive until the next boom sets in.
For more:
- here's the article
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