Banks will struggle with profitability in 2020, survey shows

DEC 9, 20157:18 PM

[NEW YORK] Global investment banks face five years of cost-cutting as tighter regulations limit profits and trading revenue fails to bounce back, according to a survey of analysts covering the industry.

The firms on average will earn a 9 per cent return on equity in 2020, still short of their cost of equity, according to the survey of 147 analysts and portfolio managers conducted by Institutional Investor and Broadridge Financial Solutions Inc, which handles trade processing and investor communications for banks and other companies. 61 per cent of the respondents expect regulatory pressure to increase over the next five years and 9 per cent predict a decline.

While fixed-income trading revenue will halt a multiyear decline, it will increase only 0.2 per cent per year through 2020, according to the survey. Several banks have acknowledged doubts about how quickly that business will bounce back after revenue fell by more than half since 2009. Firms from Morgan Stanley to Deutsche Bank AG have announced job cuts and capital reductions in recent months.

"The trading businesses remain the problem child, and every week you end up with more evidence of that," Brad Hintz, a former equity research analyst who helped design the survey, said in a phone interview. "You have the strategy of the banks of last man standing: 'We're in better shape than everyone else, we'll wait everyone else out.' Well, it's already been a long time."

MERGER OUTLOOK

The analysts were more bullish on mergers and acquisitions, which may set a record this year. The survey estimated revenue from that business will climb 4.9 per cent a year through 2020.

US firms are expected to produce the best profitability, averaging a 10 per cent return on equity in 2020, according to the survey. The expectation is 9.1 per cent for European firms and 7.7 per cent in Asia.

Returns that continue to fall short of investor demands will drive firms to undertake new efforts to cut costs, the survey found. A potential strategy, once dismissed as too cumbersome, is setting up firms known as utilities to handle processing and reporting duties for a number of banks, eliminating duplicate expenses.

"We're definitely seeing a real change in appetite in terms of industry utilities," Vijay Mayadas, senior vice president of corporate strategy at Broadridge, said in an interview.

"Given the pressures a lot of the industry is facing, the conclusion of those conversations is much more along the lines of, 'Well, the reward is probably worth the risk."'

TECH INVESTMENTS

Analysts in the survey rated adoption of new technology for back-office activities as a potential source of the biggest cost savings, and 54 per cent said banks haven't invested enough in tech to improve efficiency. Deutsche Bank co-CEO John Cryan echoed those sentiments as he described changes to his firm's support and controls units at an investor conference Tuesday.

"Throwing people at the solution is never the answer, and sadly, unfortunately, it means taking people out of the equation and replacing them with computers," Mr Cryan said. "But it's the only way we'll be able successfully to control the cost of the business that we write."

The online survey of research analysts and portfolio managers at sell-side and buy-side firms was conducted from June to September.

BLOOMBER
G