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Focus for Success The High Performing Investment Bank Full Report
Focus for SuccessThe High PerformingInvestment BankFull Report
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Introduction 3
The Anatomy of High Performance 4
The Future: A Reforming Industry 7 An industry under pressure 7 Characteristics of the reforming industry 9
Understanding How to Build High Performance 11 Business models to stay ahead in turbulent times 11 – Flow Monster 12– Regional Champion 13 – Product Specialist 14 – Primary Markets Powerhouse 15 – Risk Master 16Building a strategy 17
Conclusion 19
Contents
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Introduction
This has resulted in a period of intense transformation for the industry, in which the leading financial institutions are contending with a litany of pressures as they battle to serve their clients in a profitable and sustainable fashion. In light of this challenging and volatile environment, Accenture has conducted a study aimed at identifying the characteristics and attributes of high performance to help banks understand what they need to do to be successful both through this time of change and in the future.
As part of this, we have conducted detailed financial analysis of recent performance, assessed the reforms facing the industry, and evaluated what banks will need to do to be successful in the future. This performance analysis has identified two distinct categories of high performers, two ‘scale winners’ and a smaller cluster of ‘focused winners’. This shows there have been multiple routes to high performance and that success is not necessarily dependent on scale. The results have also highlighted the importance of stability, both in terms of culture and strategic focus, in generating sustainable performance.
While these findings provide some important lessons, it is clear that the world of investment banking is fundamentally changing. Banks are facing a unprecedented array of pressures, which result in a significant squeeze on profitability and an increasingly complex marketplace, all under heightened competition. Clearly, re-building a long-term strategy during this time of change and uncertainty is challenging. To assist with this process, this study outlines five business models for the future, which will help banks firstly to frame a strategic planning exercise, and secondly to better understand the choices they need to make and the consequences of these choices. Further, the models highlight the capabilities required to be successful, and how these vary for different markets.
Now is the time for banks to change their approach. They must face up to a more constrained environment and, as a result, can no longer attempt to offer all things to all people. Instead, they must take a more focused approach to building an advantage in those markets in which they can feasibly compete and which remain relevant to their clients.
This is not an easy time to be running an investment bank, and the idea that an investment bank could be high performing is seen by many as a distant dream. The industry was facing significant challenges before the 2008 financial crisis struck but as the sovereign debt crisis gathers pace, the challenges and rate of change seem to be accelerating.
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Accenture’s High Performance Business Research programme defines high performance as sustained outperformance against peer set across a number of financial metrics. This programme has analysed more than 6,000 companies over nine years, across all industries, to identify the differentiating factors that constitute high performance.
As well as reflecting on broader historical trends in the industry, we have tailored this research for investment banking to conduct detailed financial analysis of recent performance. For this, we have assessed the 18 leading banks (selected based on size and public availability of data) across six dimensions: profitability, efficiency, stability, growth, capital strength and risk. These dimensions provide a balanced view of core business performance, assessing the banks through the lens of their shareholders.
Our analysis covers the last three full financial years, reviewing just the investment banking unit in the case of universal banks. This period has been an extraordinary time for the industry – from crisis to recovery to turbulence again – but the ability to deal with adversity provides telling performance lessons. Each dimension has been equally weighted and has been assessed through a number of industry specific financial metrics. (see figure 1)
These have been scored based on relative performance against the peer set, and consolidated to give each bank an overall performance score. These overall scores are plotted against average annual revenues over the period to map the results and identify similar characteristics between the banks. (see figure 2)
The Anatomy of High Performance
Performance at the top of the investment banking industry is inherently volatile and has always been so. Over the past decade eleven different banks have recorded investment banking revenues that placed them in the top five of the industry, which highlights the challenge of sustaining a leading position. The rise and fall of Lehman Brothers, and further back, Drexel Burnham Lambert and Salomon Brothers, further demonstrates this point, and interim results for 2011 again suggest this volatility in evidence.
Figure 1High Performance Metrics for Investment Banking
Profitability 1 year, 3 year Return on allocated Equity 1 year, 3 year Return on Assets (IB unit)
Efficiency 1 year, 3 year Cost/Income Ratio 1 year, 3 year Productivity Ratio (Revenue/Headcount)
Stability
1 year, 3 year Total Return to Shareholders 5 year Median Outperformance (Profitability) 5 year Median Outperformance (Efficiency) 5 year Median Outperformance (Revenue Growth)
Growth Revenue Growth (1 year, 4 year CAGR) Consensus Analyst Outlook (3 year average) Competitive Market Ranking (1 year)
Capital Strength Core Tier 1 Capital Ratio (3 year average) Leverage Ratio (3 year average) Liquidity Ratio (3 year average)
Risk VaR (annual average, 3 year period) VaR Volatility (annual, 3 year period) 1 year, 3 year Risk-Weighting
Source: Accenture Research
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Figure 1High Performance Metrics for Investment Banking
Figure 2Performance Analysis
Sources: Company Reports, Bloomberg, Dealogic, Euromoney, Accenture Research
Standard Chartered
Santander
JP Morgan
Goldman SachsRBC
CitiRBS
HSBC
BAML
Deutsche BankCredit Suisse
Crédit Agricole
3.0
2.5
2.0
1.5
1.0
Focused Winners Scale Winners
Nomura
Société Générale
UBS
Morgan Stanley
BNP Paribas
Barclays Capital
Average Annual Revenues 2008 – 2010 ($bn)
Perf
orm
ance
Sco
re
0.5
-2 3 8 13 18 23 28 33
High performance in investment banking todayOur results show there are multiple routes to success. Both large players (who have mastered a diversified offering) and much smaller investment banking units have generated high performance. Success is not dependent on scale alone, as is demonstrated by the strong results shown by the cluster of ‘focused winners’, such as
Standard Chartered and Royal Bank of Canada, that have emerged in our assessment. Their success, most notably through high profitability, efficiency and stability, is based on their strategic focus on certain markets and capabilities.
The results also highlight a very clustered middle ground. While all metrics have been normalised for the effect of size, the strong correlation between overall performance and scale demonstrates the
difficulty these players are having in attempting to compete directly with the largest banks. With revenues in some cases a half or a third of those at the largest banks, taking them on in the scale battle is clearly challenging. Rather than concentrating on heading along the x-axis, banks should think strategically about how to head up the y-axis, as the results show that there are alternative routes to success.
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Performance anatomyThe balance of scores across each of the performance dimensions varies across the banks. However, a number of notable patterns have emerged. In particular, the results show that profitability, stability, capital strength and a mastering of risk differentiate the winners. Counter to analysts’ perceptions, our analysis shows that growth does not constitute a critical element of performance. Some of the banks that scored highly on overall performance were able to do so despite coming in the bottom quartile for growth, while some of the leading performers for growth were not amongst our overall high performers. Clearly, whilst growth numbers grab the headlines each quarter, they are not necessarily the key performance indicator over the longer term.
Achieving stability has however been shown to be a key marker of high performance. Interestingly, in a reflection of the market conditions, only three banks managed to generate positive total returns to shareholders (TRS) over the entirety of the period. Further analysis has shown that success of the top performers in this category highlights the necessity of building a loyal client base, a dependable pool of talent, and a consistent culture to help an organisation move towards high performance.
Not unexpectedly in these troubled times, capital strength has also been a key driver of high performance. The ability of banks to effectively distribute capital to profitable areas, to absorb losses and to provide a strong base for long-term, consistent performance is a clear competitive advantage. Measuring capital strength through the three pillars of capital adequacy — core tier 1 capital, leverage and liquidity — the research shows that banks that recapitalised or have a large retail depositor base score highly, and that the ‘scale winners’ have demonstrated good control over leverage.
The results should provide grounds for optimism. High performance must be built from a sustainable base, both in terms of capital and culture, but while scale can deliver high performance, it is only one path. Product and service differentiation remain key attributes, and banks must appreciate their inherent strengths and relative positioning to use this to break out of the middle ground. All this must be done with a recognition of how the game is changing as the industry reforms, to ensure that the choices banks make appropriately address the challenges they face.
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Increasing Expectations
+Unprecedented Market Pressures
+Long-term Global Shifts
Regulatory Client Shareholder
Economic Political Technological
Consumer Corporate Geo-Political
If high performance has historically been achieved through multiple routes, which of these remain viable as the industry reforms? Many banks are struggling to ensure they can tackle the immediate twin concerns of regulatory compliance and cost cutting. However, as they seek to achieve high performance, banks need to move beyond this minimum and address all of the pressures. The challenge is a significant one, but it is not insurmountable, and to the right we set out a framework that allows executives to consider the full array of pressures they are facing and understand the key characteristics that will shape the industry as it reforms. (see figure 3)
The Future: A Reforming Industry
“ This is certainly the most comprehensive reform since the 1930s.”
(Ben Bernanke on financial regulation, Chairman of the Federal Reserve, June 2011)
Figure 3Pressures Facing The Investment Banking Industry
Source: Accenture Research
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An industry under pressure
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Long-term global shifts prove impossible to ignore Any attempt to think about how to strategically respond to future developments needs to account for the long-term global trends. These can be categorised as shifts in consumer behaviour, largely propagated by substantial demographic shifts, a recalibration of the corporate landscape, notably through the rise of the emerging markets corporation as a global player, and, broader still, geo-political trends that will recast the international climate in which business is conducted.
Market pressures are unprecedented in their severity The macro factors that have a particularly intense effect on the investment banking industry are also strained:
Economic conditions are fraught with uncertainty with a sovereign debt crisis in western economies, disparity in growth rates between different regions, and volatility in world commodities markets. These are combining to hamper trading revenues and dampen appetites in primary markets.
The political climate is testing, with anti-banking sentiment evident in a number of influential financial centres. A range of potential taxes and levies on financial activities are being considered and the unpredictable decision making process, periodically hijacked for electoral point scoring, undermines any certainty about future developments.
Technological change necessitates attention, as banks face up to an increasingly monopolistic infrastructure environment, while attempting to keep pace with an accelerating rate of innovation and the consequent skills shortages in key areas such as latency development.
Expectations are increasingThe first thing to recognise is that the expectations placed on investment banks are increasing in both their number and their stringency:
Regulators are demanding they swiftly comply with strict new capital and liquidity regimes, interpret the minutiae of derivatives reform on both sides of the Atlantic, and produce an array of data reports to prove their financial health.
Shareholders are requiring banks to reduce cost bases, increase transparency and improve the integrity of their corporate governance. However, they also continue to expect to achieve the kind of supernormal returns that are required of an industry with such inherent volatility.
Clients want their bank to be a source of simple, unbiased advice, whilst providing a truly relevant, high-value service.
“ If [investment banks] want to do proprietary trading, then they shouldn’t be banks.”
Paul Volcker, (Interview with WSJ, May 4, 2011)
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A widespread squeeze on traditional sources of profitabilityMany sources of the spectacular profits that banks enjoyed up to 2007 have been the direct target of national and international regulators, squeezing banks already suffering from continued economic malaise:
Increased capital constraints that banks face will radically alter the strategic decision making process. The Basel III accord underpins this new focus on capital but the headline percentages mask the scale of the change. As well as raising the required ratio, this agreement recalibrates the calculations, meaning, in dollar terms, the capital held on balance sheets will increase sharply. This is before accounting for various national add-ons, additional requirements for G-SIFIs (Global Systemically Important Financial Institutions), or the impact of sovereign debt write downs. This will have two important effects. Firstly, banks will need to be more
efficient in their capital allocation. Secondly, certain asset classes and products types will struggle to generate returns that exceed their cost of capital. Under these changes, banks should use return on risk-weighted assets as the central measure of a business line’s performance.
Accelerated product commoditisation is also transforming large parts of the investment banking business. Whilst products and processes have always commoditised, technology developments are significantly accelerating the pace of commoditisation. This will be further accelerated in the immediate future for certain derivatives products following a number of regulatory mandates, which will result in previously attractive margins in the most liquid derivatives (e.g. Interest Rate Swaps) collapsing at precisely the same time that huge investment is required in the technology required to trade them. This is likely to lead to both a standardisation of buy-side requirements, as clients are unwilling to pay the price of specialisation,
Increased Capital Constraints Intense Regulatory Oversight
Accelerated Product Commoditisation Significant Regulatory Arbitrage
Reduced Proprietary Risk Taking
Heightened Competition
Integrated Global Marketplace
Source: Accenture Research
Figure 4Characteristics of a Reforming Industry
Characteristics of the reforming industry
and the emergence of significant market infrastructure opportunities.
Leading investment banks will also have to contend with reduced proprietary risk taking. Reliance on principal activities as a source of revenues differs between institutions, and remains somewhat opaque, but whatever final form the ‘Volcker rule’ takes it will significantly curtail profitability. The stipulations are likely to be intricate and complex, but many banks have reacted by simply divesting funds and dismantling once prized proprietary trading positions. As risk taking shifts to the buy-side, investment banks are likely to focus efforts to take on risk through providing risk management solutions to clients or managing their own exposure on a sophisticated, intra-day basis.
seven distinct but interwoven characteristics emerge, all of which banks will need to respond to as they build, and hone, their future strategy. (see figure 4)
When considered in total it is clear that these pressures are intense. From a considered appreciation of the cumulative impact of the pressures outlined below,
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The marketplace in which investment banks operate is becoming increasingly complexInvestment banking is complicated, encompassing a range of complimentary but fundamentally different activities designed to serve a broad array of clients across the world. However recent developments, coupled with long-term trends, are rapidly increasing this complexity.
The intense regulatory oversight in the world’s most important financial jurisdictions is increasing the cost of compliance, both in terms of financial levies and the commitment of specialist personnel. Given the mandate regulators now possess, leading banks need to actively manage these relationships and heighten cross functional co-ordination. This should allow them to reduce time-consuming, arduous and potentially expensive periods of censure. It will be costly and culturally difficult, but this transformation should be prioritised, especially given the increasing trend of posting regulatory staff inside the world’s largest financial institutions on a semi-permanent basis.
Whilst regulatory oversight is universally intensifying, there is, and will continue to be, significant regulatory arbitrage. While the expectation is that global regulation on financial markets will align, over the next three to five years a number of transformative regulatory agenda will be still in train, creating, at least in the short term, an imbalanced competitive global marketplace. Such imbalance can be caused by the slightest difference in technicalities. In order to grasp these geographically specific opportunities banks will need to be aware of regional developments and organisationally flexible enough to respond. This could lead to an increasing prevalence of jurisdictionally segregated businesses.
The reason why global competitive imbalances are so important is that banks are operating in a more integrated global marketplace. It no longer suffices to run a series of discrete operations from various localities and claim a global footprint. Rather banks must operate a unified, sophisticated business that grants clients access to opportunities regardless of
locality. This means a proliferation of 24-hour trading capabilities and the geographic dispersal of senior leadership teams. Whether assisting existing clients to enter new markets, or acquiring new clients, banks should position themselves to benefit from this global integration.
Heightened competition from both traditional and non-traditional sourcesThis globalised market will be intensely competitive, even more so than in the past. For one thing, investment banks’ increased reliance on their client base to generate revenues means competition will be fiercest in those business lines, such as prime services, where a relationship is clearly defined. Another key feature is the emergence of a new type of competition. This comes in the form of both the evolution of regional banks, in burgeoning
centres such as Brazil, into global players, and the fundamental challenge presented by rapidly institutionalising buy-side operations and increasingly consolidated infrastructure players. These “new” entrants threaten to undermine the primacy of the investment bank by recalibrating the industry value chain. In a worst case scenario, such a move could lead to a fragmentation of the industry as the traditional investment banks are disintermediated. (see figure 5)
In short, there is a lot for banks to face up to. The industry is reforming, and despite being overloaded with the immediate, and not insignificant, distractions of cost cutting and regulatory compliance, banks must understand all of these changes as they look to re-establish their market presence and competitive position.
Risk taking is shifting to buy-side institutions, accelerated by a series of high-profile spin-outs and divestments
Buy-Side Participants
Vertical integration is allowing exchanges and clearing houses to use economies of scale and regulatory change to challenge the traditional brokerage model
Expertise in clearing, settlement and collateral management is moving to specialist providers
Market Utilities
Smaller specialist brokers are winning business due to specialist provision, a need for diversified sources of liquidity and a relative lack of regulatory scrutiny
Broking Firms and Liquidity Providers
Investment Banks
Primary Markets
Operations and IT Functions
Secondary Markets
M&AEquities
FICC
ECM
DCM
Advisory
Market Infrastructure
Advisory firms are increasing in prevalence due to shifts in senior talent and an ability to take long-term strategic bets
Specialist and Boutique Advisory Firms
Source: Accenture Research
Figure 5Industry Value Chain
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Understanding How to Build High Performance
As banks face up to this uncertain environment, developing an effective strategy is challenging. However, market dislocation will bring opportunities for those able to look beyond the short-term concerns. The first step in this journey is a detailed evaluation of the portfolio of business lines in which the bank operates. As outlined above, sluggish growth, reduced profitability and increasing constraints on capital mean that many business lines will struggle to generate returns greater than their cost of capital. This calls for banks to justify the areas in which they operate and concentrate on those in which they can feasibly compete.
This will necessitate a change in mindset for banks historically used to playing in all markets, to taking risks, enamoured by novel, complex products and, at times putting the interests of the client second. The “strategic tourism” that many were guilty of is no longer sustainable. Importantly, banks must put their clients’ agenda at the centre of this exercise, to ensure relevance in an intensely competitive market. They must then diligently focus on sustaining a competitive advantage in their chosen markets and patiently develop the supporting capabilities required to win.
Based on our research and our experience with leading investment banks, we have identified five distinct business models that
can support a bank on its way to high performance, each representing a different discipline of investment banking. These models detail the management choices that banks need to make and the consequences of these decisions, which, when effectively co-ordinated, generate positive feedback loops.1 An understanding of these features and how they interact is crucial to developing a competitive advantage. Additionally, Accenture’s in depth ‘Scales of Mastery’ outline the basic, competitive and market leading characteristics of each of the features of the models across all functions of an investment bank, which helps to build a detailed understanding of how to develop winning proposition.
Figure 5Industry Value Chain
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Business models to stay ahead in turbulent times
1 This framework is adapted from ‘From Strategy to Business Models and to Tactics’, Casadesus-Masanell and Ricart, pub. IESE Business School Working Paper, Nov. 2009
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HighVolume
TightSpreads
Investment inLatency
Developers
Powerful andEfficient
Infrastructure
Directional Information
IndustrialisedOperations
Extensive MarketConnectivity
AccurateResearch Content
Crossingof Orders
Retentionof Spreads
Reputation asMarket Maker
Strong ClientRelationships
Sales TeamReputation
Position ManagementCapability
Rule BasedExecution
AccuratePricing
Effective PositionManagement
Proven Abilityto Execute with
Low LatencyAutomatedProcesses
ReducedHeadcount Costs
TalentDevelopment
Pre-requisite to operate in the market
High and EffectiveTechnologyInvestment
HighProfits
Key
Core Business Flow
Performance Differentiator
Choice
Outcome
Consequence
Flow MonsterBased around a highly commoditised product set, (e.g. cash equities, FX), the Flow Monster model relies on processing huge trade volumes at extremely tight spreads. The model is focused on serving sophisticated institutional clients, operating in highly developed capital markets, and is premised on three elements: efficient technology to reliably and rapidly process millions of trades per second, highly competitive pricing, and strong sales relationships to attract client business.
Technology developments and a range of regulatory proposals are rapidly
increasing the pace of commoditisation, pushing more products towards the flow model, at a faster rate. In particular, this is a process that is likely to be accelerated for certain OTC derivatives, as they standardise following reform to become centrally cleared and exchange-traded. This provides opportunities for Flow Monsters to broaden the product set. While the model appears simple in terms of the small number of choices, long term, patient investment is necessary to build the market-leading capabilities required.
A critical mass of volume is crucial to make the model work, both to support the high
annual investment costs under a latency driven, technology ‘arms race’, and to provide the directional information that traders so desire, which, amongst other benefits, enables accurate pricing.
This need for critical mass however, alongside rising capital constraints challenging returns on equity, means that we see only three to five players being able to survive in each flow market. This consolidation will play into the hands of market leaders but will force those outside this bracket to make strategic call as to whether they will be able to survive.
Figure 6Flow Monster Model
Source: Accenture Research
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Regional ChampionAs banks look to concentrate on serving a loyal client base, the Regional Champion model is gaining increasing attention. The model is based on effectively cross-selling risk management and financing solutions to existing corporate clients, which given the nature of sticky long-term relationships and low price sensitivities, creates a sustainable and profitable franchise.
Whilst a simple model to execute, a strong foundation of existing corporate relationships, based around a core banking proposition or primary markets advisory, is a pre-requisite. Clients value service quality but as the volumes vary from client to
client, banks must employ intelligent segmentation to ensure an appropriate level of service. As corporates tend to have lower price sensitivity and a lower frequency of trading, banks are able to charge wide, profitable spreads, but segmentation is again important here to ensure appropriate pricing, especially given rising transparency.
Banks will need to assist clients with new derivative trading requirements (e.g. posting collateral and margin calls) and pricing may also need to take into account the increasing cost to serve as regulatory and compliance costs rise. Adopters of the
model should focus on deepening penetration within their existing client base and, where appropriate, reinvesting profits in providing balance sheet for lending, a service corporate clients value highly.
WideSpreads
TargetedServiceDelivery
High Service Quality
Effective Cross-Sell
EffectiveInformation
ManagementSystems
Appropriate Costto Serve
Low PriceSensitivity
Risk Management(Secondary Markets)
Existing Long Term,Sticky Relationships
Financing
Lending
Balance SheetCommitment
Core BankingProposition
Primary MarketsRelationship(e.g. NOMAD)
Pre-requisite to enable cross-sell
TargetedTechnologyInvestment
HighprofitsHigh
Profits
Key
Core Business Flow
Performance Differentiator
Choice
Outcome
Consequence
Figure 7Regional Champion Model
Source: Accenture Research
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Product SpecialistWith the consolidation in the Flow Monster model restricting its viability to a few large players, more banks will need to focus on developing product specialisms to differentiate themselves and establish a clear market identity.
Product specialisms can vary from cornering a particular type of debt instrument or regional interest rate solution, to being known for an ability to structure highly exotic trades or execute bespoke currency pairs. Traditionally served in a single jurisdiction, the model is comparably simple in a complex
environment of intense regulation and rising globalisation. Furthermore, global regulatory discrepancies have and will continue to create opportunities for geographic niche plays.
Successful adoption of the model requires investment in specialist capabilities, including quantitative developers and bespoke technology to develop differentiated products. With low barriers to entry, the model is arguably the easiest to enter, frequently leading to a large number of market participants and rapidly eroding competitive advantage. Similarly,
in an environment where intellectual property cannot be patented, the ability to continually innovate, to redefine client needs and sustain differentiation, is crucial to success. Banks must also face up to the challenge of the increasing pace of commoditisation, which will mean that as the products that underpin their specialism mature and become flow-based, a clear strategic choice, as to whether they can continue supporting the product, is required.
TalentDevelopment
SpecialistTechnology
Development
Investment inProduct Specific
Capabilities Bespoke or NicheOffering
DetailedAnalytics
Deep MarketKnowledge
Insightful ResearchContent
Strong Reputation
High QualityMarket Provision
Cost-EfficientMarket Provision
Proven Abilityto Execute
High Market Share
CompetitivePricing
SpecialistInfrastructure
InnovativeProduct
DevelopmentHigh
Profits
Key
Core Business Flow
Performance Differentiator
Choice
Outcome
Consequence
Figure 8Product Specialist Model
Source: Accenture Research
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The Primary Markets Powerhouse model is built around the competence to advise or structure profitable but infrequent issuances or deals. The model relies on specialist talent, with deep sector-specific expertise and strong relationships, and a strong brand. This centrality of brand acts as a considerable barrier to entry, given the significant time it takes to develop. The model is made attractive by its low capital intensity and, in an increasingly integrated global marketplace, will provide opportunities for banks to transfer capabilities to new geographies and new clients.
Primary Markets PowerhouseGiven the extremely high cost of failure for issuances and deals, clients tend to lack price sensitivity, allowing banks to charge high fees. The ability to execute or effectively distribute an issuance is rightly seen as critical, but a safety-first approach works to the advantage of incumbent, established players, reinforcing the need for a strong brand.
Large players can differentiate through the ability to provide financing alongside M&A transactions, which can be an efficient allocation of capital due to the profitability of the model. However, there remains plenty of room for boutique
houses, given the premium placed on specialist advice and strong relationships. Banks looking to differentiate are investing in effective information management systems to create deep client insights and offer targeted service delivery.
The fact that this is a non capital-intensive and a low price-sensitive market means that the model will continue to attract competition, but only banks that take, or have taken, the time to develop strong brands will be able to win.
Competitive advantagefor larger players
RenownedTalent
BalanceSheet
Provision
High Fees
TargetedTechnologyInvestment
TargetedService Delivery
Proven Abilityto Execute
Low PriceSensitivity
Specialist Capabilities(M&A, ECM, DCM, Geographic)
Low Technology Costs
Effective InformationManagement Systems
Deep Client Insight
Aligned Objectives
Long-Term, StickyRelationships
High Levels of Trustat a Senior Level
Deep Sector-SpecificKnowledge
Strong Brand
Book-BuildingFinancing Distributing Pricing
HighProfits
Key
Core Business Flow
Performance Differentiator
Choice
Outcome
Consequence
Figure 9Primary Markets Powerhouse Model
Source: Accenture Research
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Risk MasterTaking on and managing risk has always been, and will remain, core to investment banking. However, the ability for banks to do so is clearly challenged by regulation. Reforms designed to restrict proprietary trading (e.g. the ‘Volcker rule’) are likely to curb a bank’s ability to take on risk to a discrete set of more limited forms, notably hedging and market-making. Increasing regulatory oversight will also force banks to demonstrate more effective risk control, causing compliance costs to rise.
Successfully taking on risk requires effective control, management and commitment. But commitment requires
confidence, which must come from leadership, and clear communication of the risk strategies and appetite of the bank. Additionally, the ability to commit is dependent on organisational flexibility, to back executives’ decisions with sufficient speed to market, a challenge for publically-listed banks when competing with more nimble private firms.
Risk Masters must also understand how to maximise their risk mitigation strategies and control unwanted risk. The model calls for informed supervisory committees that have the power to both control and quickly pursue risks based on reliable information.
This requires investment in powerful technology to process complex exposure calculations at high speeds, and to make available the right information at the right time. Most of all, a culture of effective risk control must be spread throughout the organisation, to ensure continual awareness and management of risks taken.
The model is the most complex, and takes the most time to adopt of the five we have outlined but risk mastery has been shown, and is likely to remain, a key performance differentiator.
Dependanton regulatory
allowances
Confidence toTake on Risk
SufficientCommitment
EffectiveControl
EffectiveManagement
Powerful andEfficient Systems
Investment inRisk Management
Capabilities
Clear and EfficientProcess andStructures
Influential andInformed
SupervisoryCommittees
SustainableRevenues
Hedging AlgorithmicExecution Market-Making Client Flow
FacilitationEffective Position
Management
Readily AvailableManagement Information
Ability toEnter Markets
MarketConditions
ShareholderAppetite
Understandingof Risk
OrganisationalFlexibility
Ability to ReactQuickly
Accurate and RapidValuations
Maximised Risk Mitigation Strategies
HighProfits
Key
Core Business Flow
Performance Differentiator
Choice
Outcome
Consequence
Figure 10Risk Master Model
Source: Accenture Research
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High performance in the new era will require a disciplined approach. The business models outlined in this paper are not prescriptive, rather an articulation of what constitutes high performance in different disciplines of investment banking. They are designed to help a bank to frame its strategic planning as it looks to respond to the industry changes. This necessitates a series of decisive steps, for a bank to understand its clients and proposition to the wider marketplace, to select the appropriate model(s) to fit this, and to adequately focus on the chosen model(s) so that they can build the supporting capabilities required to develop a winning competitive advantage.
First, the bank must select the appropriate business model(s). To do this, it must recognise how current business lines apply to the models and then rationalise its
portfolio to fit to the model(s) in which it can feasibly be successful. An understanding of the relevance to its clients must be central to this exercise. Capital consumption will also be a critical input and as such the bank must assess capital consumption, alongside achievable profitability measured by return on risk-weighted assets, by business line. The challenge of this task should not be underestimated. Scaling back from, or exiting, current business lines is likely to be necessary, but bold and decisive action is called for with such limited resources, backed up by disciplined focus on chosen strategies.
Second, it must focus on building a competitive advantage in its chosen model(s). Understanding current capabilities against those described in the models will help to balance investment decisions, and to ensure that spend and
effort are appropriately targeted. Then, the bank must assess it competence against each of the features of the model and diligently focus on building the market leading capabilities required to develop a winning proposition.
The models should not be considered mutually exclusive, or incompatible, but they address fundamentally different markets. It is possible for a bank to be successful in one, or a combination, of models but the interplay between each will be different for each institution, and a bank must understand how its strengths can provide links to other models if it is to pursue more than one. What is clear is that they must address each model independently, understanding the varying capabilities, and investment requirements for each.
Building a strategy
Flow Monster Regional Champion Product Specialist Primary Markets Powerhouse
Risk Master
Talent Sales teams and latency developers
Sector-specific relationship managers
Quantitative developers Industry experts Complex risk analysts
Technology Efficient, scalable and robust trade processing
MI systems Tailored infrastructure Industrialisation of process
Risk management systems
Pricing Tight spreads Appropriate, wide spreads
Competitive pricing High fees Accurate valuation
Execution Low latency provision and efficient straight-through processing
Ability to execute in multiple markets to serve client needs
Innovative development of bespoke products
Price, book-build, distribute and provide specialist advice
Commitment and understanding of risk
Client Service Highly efficient and reliable execution
High quality but appropriate level of service
Innovation and access to niche markets
High quality, trust based
Ability to take on risk to facilitate clients’ needs
Client Relationships
Sales team led Based on a core banking proposition, lending or advisory
Product-led model Long-term relationships built on trust
N/A
Figure 11Key Capabilities Matrix
Source: Accenture Research
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“ Exiting and downsizing businesses which are not value added to our client franchise... this strategy plays to our strengths and is focused firmly on the needs of our clients.”
(Sergio Ermotti, UBS Group CEO, Investor Presentation, November 2011)
Although many of these capabilities are ubiquitous across the models, the focus of investment varies, meaning that capabilities are rarely transferable. For instance, Flow Monsters and Product Specialists both call for investment in talent, but whilst the former relies on latency developers and sales teams, the latter depends on quantitative analysts and industry research experts. (see figure 11)
The varying investment requirements must also be taken into account. Each model varies in complexity (the number
Com
plex
ity (#
of c
hoic
es)
Time to adopt (# of consequences)
Size of bubble = relative investment required
Regional Champion
Product Specialist
Risk Master
Flow Monster
Primary MarketsPowerhouse
Source: Accenture Research
Figure 12Investment Considerations
of choices, reflecting the management co-ordination and organisation alignment required), time to adopt (the number of consequences, reflecting the time taken for the effects of the choices to resonate through the model), and monetary investment. (see figure 12)
Given the constraints banks face, only careful selection and adequate focus on the model(s) appropriate to them will ensure they are not caught in the clustered mid-market.
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19
ConclusionA volatile, shifting world of regulatory and economic pressures is driving drastic changes in the investment banking industry.
Banks need to abandon the mindset of playing in all markets that characterised strategies prior to the 2008 financial crisis and realise that the reforming industry, despite its tighter margins, capital constraints and regulatory oversight, can provide opportunities amidst the dislocation.
Critical to maximising the available opportunities however, is a more focused and disciplined approach to identifying the markets in which to operate, ensuring a deeper alignment with client needs, and continually building and re-building on existing strengths.
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Accenture Experts
Bob Gach Managing Director, Global Capital [email protected] +1 917 452 5952
Dean Jayson Senior Executive, Capital [email protected] +44 207 844 8295
James Sproule Head of Capital Markets Research [email protected] +44 207 844 3387
Oliver Knight Capital Markets [email protected] +44 203 335 2667
Christopher Hook Capital Markets [email protected] +44 203 335 1373
