At last, a counterweight to the incessant doom: analysts at Bernstein Research have issued what amounts to an optimistic and maybe even reassuring note on the investment banking industry.
While everyone else is predicting secular decline and tens of thousands of redundancies, Bernstein's analysts have seen some more auspicious signs. They say that senior managers in investment bankers are fearful that the current bad times might simply be a cyclical low point, that things could bounce back, that even banks with small fixed income currency and commodities (FICC) franchises (eg. Credit Suisse) may be ok. Moreover, Bernstein thinks investment banking is a long term growth industry, suggesting your career could even be long term safe.
Here's the detail:
1. We're in a period of attrition and change, the outcome of which will be positive
"Many banks are convinced that the combined actions of market participants, reallocating capital,resizing trading units and reengineering execution technology will improve the economics of the trading business over time and this could provide potential opportunities," says Bernstein. "Essentially, the massive trading franchises of the banks—currently operating at low ROEs—are being viewed by management teams as an option. As weaker firms exit and liquidity is pulled from the market, market pricing may improve, new markets standards and products may be introduced, and profitability may be restored."
2. Investment banking is a growth industry
"The long-term revenue growth outlook for Wall Street's institutional business remains relatively good," says Bernstein.
Its analysts point out that aggregate revenues (from advisory, underwriting and trading businesses) are closely correlated with the growth in financial assets. Moreover, financial assets grow more rapidly than GDP. On this basis, they expect revenue growth across investment banking to average 6-8% over the coming five years.
3. Some areas will grow faster than others
Expanding and maturing capital markets in Asia are one growth opportunity. Disintermediation (the use of bond financing instead of loans in Europe) are another and represent a significant growth opportunity for debt capital markets bankers and bond traders.
Fixed income trading technology is a third growth area (and should therefore provide some secure jobs). Bernstein expects trading technology budgets to increase by 5-10% all the way to 2016, regardless of interest rates.
4. There will not be other UBS-style exits from the FICC business
'We expect wholesale exits from trading to prove more the exception rather than the rule, because exiting a major trading business is a risky proposition for a bank's overall value proposition,' say Bernstein's analysts. They point out that cutting back on fixed income distribution weakens DCM, which weakens relationships with financial sponsors (private equity funds), which weakens the chances of winning high margin financial sponsor M&A deals. Pulling out is a bad move.
5. Credit Suisse FICC bankers may be safer than suggested
Credit Suisse's reorganisation and promotion of fixed income trader Gael de Boissard as head of the investment bank has been treated with some skepticism. Credit Suisse is a smaller player in fixed income and is up against tough Swiss capital rules. Can it really sustain a FICC business?
Bernstein offers some reassurance for concerned Credit Suisse fixed income professionals. It notes that: 'Credit Suisse has a leading DMA, algorithmic trading execution suite in institutional equities; it is possible Credit Suisse's technology could be parlayed into portions of its fixed income business over time.'
Credit Suisse is not abandoning FICC, Bernstein points out: it's merely trimming the business and focusing on areas like FX and electronic global rates that aren't too demanding in terms of balance sheet. It's also growing in commodities and in emerging markets (Asia and BRIC countries) which offer higher margins.
6. Morgan Stanley's FICC bankers are safe - hopefully
Similarly, 2013 may not be the death of Morgan Stanley's poor performing FICC professionals. Bernstein points out that Morgan Stanley's strategy is to, 'actively mitigate risk-weighted assets by running down securitized products and credit inventories—two segments that receive harsher treatment under under Basel III."
At the same time, Bernstein says Morgan Stanley aspires to increase its FICC market share by 30%, thereby making it more than a mere bit-player. However, "It remains to be seen whether this can actually be accomplished while simultaneously shrinking the balance sheet," say Bernstein analysts doubtfully.
Everything you need to know about market shares in M&A, ECM, DCM, FICC, and equities trading
Finally, Bernstein's analysts have produced the following excellent table on the evolution of market shares by business area (click to render this more decipherable). They point out that there are only two banks with strong shares in both equities and FICC sales and trading: Goldman Sachs and JPMorgan. For all Bernstein's optimism about trading businesses at weaker banks, Goldman and JPMorgan may yet prove the places to be. "Those banks with large combined market positions in both equities and fixed income will have the option of sharing technology between trading units," it says.