Investment banks ditch
the diet and look to expand: study
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[March 18, 2017]
By Anjuli Davies
LONDON (Reuters) - After several years of
restructuring and regulatory pressure, investment banks have reached a
turning point after Donald Trump became American president and can look
to grow again, according to a study published on Friday.
"The world has turned upside down post the U.S. elections," said the
joint annual study by Morgan Stanley and management consultants Oliver
"This is the first year since we've been producing this paper that we're
looking to see a significant shift to the positive in terms of revenue
growth, operational leverage and return on equity," said Magdalena
Stoklosa, head of European financials research at Morgan Stanley.
Globally, investment banks have been on an "intensive diet" since 2011
and have shrunk their balance sheets on aggregate by a third, according
to the analysis produced in the 7th edition of the "Blue Paper".
With the global economy appearing to be on a stable footing, the Federal
Reserve raising interest rates and political rhetoric pointing to a
pause on new banking regulation, growth beckons for an industry reshaped
by the global financial crisis.
In three years' time, return on equity could reach 13 to 14 percent
across the industry from 10 to 11 percent currently, the study said.
Regulatory costs are expected to peak in 2017 and decline by as much as
40 percent by the end of 2020.
However, European banks, lagging in their restructuring programs, are
expected to continue to underperform their rivals on the other side of
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Lower Manhattan including the financial district is pictured from
the Manhattan borough of New York, U.S. June 1, 2016. REUTERS/Carlo
U.S. banks could see return on equity rising to 15 percent from 11 percent
currently, from a combination of revenue growth and removing costs over the next
European banks are forecast to improve their return on equity to 11.5 percent
from 7.5 percent currently, with 75 percent of that uptick driven by cost
cutting and only 25 percent by revenue growth.
U.S. banks are sitting on $83 billion of excess capital, which could be used to
invest in profitable business lines or paid out in share buybacks or dividends,
whilst European banks have a mere $1 billion of excess capital to play with.
Fixed income, currencies and commodities revenues, which faced the brunt of
regulation, are forecast to grow 2 percent over the next five years to $119
billion after shrinking to $109 billion from $140 billion over the previous
"Unlocking excess capital and collateral turns secular headwinds to tailwinds,
powering a sustainable inflection in the global FICC pool for the first time in
a decade," the study said.
"Our bull case "Dares to Dream". If the US administrationís tax reform, fiscal
stimulus, and deregulation agenda is achieved, we would expect much stronger
revenue growth and more capital release," the study said.
(Reporting by Anjuli Davies; Editing by Keith Weir)
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