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Global Capital Markets 2016 Global Capital Markets 2016 The Value Migration The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients from the private, public, and not-for- profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep in sight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable compet itive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 85 offices in 48 countries. For more information, please visit bcg.com. Founded in 2001, Expand Research is transforming the way the world’s financial markets make business and technology decisions by providing timely decision support and research services on business and technology strategies to leading financial institutions globally. In July 2011, Expand became an independent subsidiary of The Boston Consulting Group. It has offices in London, New York, and Singapore. Global Capital Markets 2016 THE VALUE MIGRATION PHILIPPE MOREL CHARLES TESCHNER WILL RHODE SHUBH SAUMYA ANDRE VEISSID CARSTEN GUBELT MICHAEL STRAUSS GWENHAËL LE BOULAY LAILA WORRELL May 2016 | The Boston Consulting Group CONTENTS 3 INTRODUCTION 5 OVERVIEW: KEY MARKET DEVELOPMENTS Revenues Balance Sheets Costs 10 VALUE SHIFTS IN THE ECOSYSTEM Secular Trends Industry Convergence 15 BUSINESS MODEL TRANSFORMATION The Six Pillars The Journey 19 APPENDIX 21 FOR FURTHER READING 22 NOTE TO THE READER 2 | The Value Migration INTRODUCTION nfavorable economic conditions, escalating capital Urequirements, and stubbornly high costs continue to depress the performance of many investment banks. Their collective 6% ROE in 2015 capped off five years of dismal revenue results. Yet the same cannot be said for the capital markets industry as a whole—the ecosystem that includes buy-side firms, sell-side firms, in- formation service providers, and exchanges. Indeed, even as regula- tion forces investment banks to retrench and hinders their ability to compete, other players remain unaffected and will even, in some cases, benefit. Over the next five years, revenues in the capital mar- kets industry will grow by an estimated 12%, increasing to $661 billion from $593 billion in 2015. The asset base of buy-side entities is expected to reach around $100 trillion by 2020, up from an estimated $74 trillion in assets un- der management (AuM) in 2014. If this transpires, the buy side will generate nearly $300 billion in fees by 2020, constituting 45% of the overall capital markets revenue pool (assuming favorable market con- ditions and current fee structures). However, investment banks, on the sell side, are expected to generate just over $205 billion by 2020, a de- crease to 31% of the total revenue pool from 53% in 2006. Information service providers and exchanges are poised to benefit. They will profit from increased demand for technology solutions and greater access to market information and analytics. Growth in elec- tronic exchange trading and the use of central clearing will mean that their share of the capital markets revenue pool will grow to 19%, rep- resenting an estimated $125 billion, by 2020—an impressive rise from 8% in 2006. Yet even as competition intensifies, opportunities for investment banks will continue to arise. Some larger or niche players will be able to absorb market share from those that are retrenching. Others will require a change in mindset and approach to explore alternative reve- nue opportunities beyond their traditional roles as capital raisers and market makers. Such players might consider leveraging internal data and technology systems to diversify revenues and enhance their mar- ket positions. They should build on their already mature sourcing strategies to push to the next level of operational and process efficien- cies. Opportunities include leveraging utility models for nondifferenti- ating business processes and driving factory-like efficiency in the back office through end-to-end process redesign. These players should also leverage their remaining positions of strength across the value chain. The Boston Consulting Group | 3 In particular, it is imperative that they help their clients achieve suc- cess, not only by offering high-quality products but also by providing valuable information, such as research, benchmarks, market prices, and other intellectual property. Yet they should avoid giving away this information in the hope of generating revenues through alternative channels, such as trading. Indeed, the industry as a whole is moving away from implicit charging and so-called soft-dollar arrangements. Investment banks must keep pace and consider charging explicit fees for the services that they now provide in addition to the products they supply. Moreover, the role of capital itself is changing. Escalating capital costs, occurring simultaneously with the growth of buy-side assets and reve- nues, indicate that the industry is moving toward leveraging bench- marks and other index products aimed at passive investors. Both the ability to discover liquidity and the demand for risk transformation services are becoming less dependent on capital. If investment banks are to compete, they must recognize their ability to generate revenues as information companies. Ultimately, investment banks will need to be the right size, develop the right model, and take the right approach to return to consistent profitability. Dealers must learn to compete within the critical sectors of the new capital-markets ecosystem—data and financial technology. How they fit themselves into increasingly electronic, standardized, and transparent markets will be crucial. They are losing the battle so far, but that does not mean they will lose the war. This report, BCG’s fifth annual study of the global investment banking business, emphasizes the challenges that investment banks face and examines the consequences of new and diverse players in the overall capital markets ecosystem invading their territory. Tradi- tional revenue streams are migrating to these entities, and it is still unknown whether—or when—this trend will reverse. Either way, the investment banking industry has entered a highly dynamic, largely unpredictable era. It is time for players of all stripes to assess their current strengths and weaknesses and to plan for the future. 4 | The Value Migration OVERVIEW KEY MARKET DEVELOPMENTS evenues declined in 2015 for the reflecting a further decline in credit, Rglobal investment banking industry as commodities, and structured products. trading in fixed income, currencies, and FICC profitability has fallen from 70% commodities (FICC) businesses continued to ($59 billion) to 44% ($26 billion) of the act as a drag on performance. Economic total profit pool over the past three years. uncertainty, monetary policy change, and Continued pressure on dealers’ ability to further implementation of bank regulations warehouse assets drove down revenues in were the driving factors behind the negative credit, commodities, and securitized change in market sentiment during the products by between 20% and 25% YOY. second half of the year. Foreign exchange (FX) and rates have been bright spots, benefiting from volatili- ty related to changes in central-bank Revenues policy. Event-driven volatility in FX—spe- Global investment banking revenues declined cifically with regard to the Swiss franc, the to $228 billion in 2015, down 5% from $239 Russian ruble, and the Chinese renminbi billion in 2014 and 16% from $271 billion in —has also presented dealers with an 2010. (See Exhibit 1.) Total revenue was low- opportunity to reprice larger transactions, er last year than at any point since 2009, as widening spreads to regain ground on the prospect of central-bank tightening in de- their loss-leading businesses in smaller- veloped markets was swamped by a severe ticket, highly electronic, major currency downturn in emerging markets. As we pre- pairs. The introduction of mandatory dicted in last year’s Capital Markets report, derivatives clearing under the European investment banking ROE fell to a 6% post- Market Infrastructure Regulation has crisis low (excluding fines and litigation costs) been a precursor to wider market change as revenues were dragged down by relatively in the region. As we have seen in the US, weak performance in secondary trading and trading venues and alternative liquidity by high business costs overall. (See Global providers will likely emerge to challenge Capital Markets 2015: Adapting to Digital investment banks and reduce margins. Advances, BCG report, May 2015.) Generally speaking, the regulatory burden has fallen hardest on FICC, dramatically Some specifics are as follows: slowing a traditional driver of revenues. • FICC revenues fell by 8% year over year • Equities revenues, driven by stock market (YOY), from $117 billion to $107 billion, volatility, rose by 3%, to $62 billion. Cash The Boston Consulting Group | 5 Exhibit 1 | Investment Banking Revenues Are at Their Lowest Levels Since the Financial Crisis Revenues ($billions) 300 271 –5% 257 –7% 246 235 239 228 212 216 200 182 53 43 61 53 100 101 85 0 2010 2011 2012 2013 2014 2015 2016E 2017E 2017E (bear market) (bull market) Primary Equity sales and trading FICC sales and trading Advisory Cash equities
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