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Top 10 Challenges
for Investment Banks 2011
Top 10 Challenges
for Investment Banks 2011
Top 10 Challenges
for Investment Banks
2011
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ecome high-performance businesses
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Top 10 Challenges
for Investment Banks 2011
With leverage no longer an easy option
to drive returns on equity, and
proprietary trading now seen as risky by
both regulators and shareholders alike,
investment banks are faced with the
difficult task of identifying new ways to
propel their returns on equity back to
something close to pre-crisis levels. In
such an uncertain operating
environment, assessing risk, making the
most of existing revenues, and
capitalising on new opportunities have
never been more important.
Introduction
Navigating Through
Uncertainty
Focusing on the future:
Investment banks are increasingly operating in a volatile,
resource constrained and highly regulated environment.
Rigorous focus on strategic and operational priorities
provides the key to high performance.
The world economy is emerging from its
most severe recession in over 50 years.
And the mid-term prognosis is still far
from rosy. Recoveries from credit-
induced recessions take time. Often
twice as long, in fact, as recoveries from
recessions sparked by interest rates
hiked to contain inflation.
Signs of real structural strength are in
short supply. In the US, although
recovery is underway, underlying
fundamentals remain relatively weak.
The government’s stimulus package has
not delivered as significant a boost as
had been hoped. Meanwhile, in Europe,
the likelihood of any sustained
recovery from the worst downturn in 30
years remains at best uncertain. For
the moment, bank lending continues to
be constrained by new regulation such
as Basel III, as much as by now cautious
bankers – just when it is needed most.
While banks managed to dramatically
improve productivity over the past two
years, a new wave of banking
innovation and revenue generation has
yet to arrive. The most encouraging
signs of growth are in the emerging
markets – highlighted by the IMF for
their exciting catch-up growth
potential. In many of these markets,
escalating levels of wealth point to
accelerating demand for financial
services and products – an exciting
opportunity for investment banks,
provided they can tailor their offerings
to suit local requirements.
Introduction: Navigating Through uncertainty
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Source: IMF, World Economic Outlook Database, April 2010
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US
Emerging & Developing economies
EU
Figure 1: Real GDP Growth (% growth
year-on-year)
Introduction: Navigating Through Uncertainty
No surprise that investment banks are
still scrambling to adjust to the realities
of this ‘new normal’. In a straitened
operating environment where the only
certainty is increased regulation,
pre-crisis returns on equity (RoE) of,
on average, 20 percent look extremely
optimistic.
As banks seek to identify (and exploit)
every revenue opportunity, they need
to ensure a rigorous focus on strategic
and operational priorities. If they do
not, they risk undertaking a series of
broad-based transformations that
achieve little – other than squandering
precious resources and dulling
competitive edge.
To help achieve the focus that we
believe is essential to high
performance, Accenture has developed
a list of the top ten challenges facing
investment banks today. Although
these may not apply to all with equal
weight, each represents a major
concern (and source of opportunity)
for the industry going into 2011
and beyond.
Fundamental macro trends
As they face up to the challenges that
lie ahead, investment banks need to
keep the following six macro trends
front of mind. Each of them, we
believe, will play a crucial role in
shaping the future operating
environment:
1.Demographic challenges
Widely reported, most developed
economies are struggling to come to
terms with seismic demographic
challenges. To varying degrees, these
a
re set to transform the way people
live and work. Life cycle savings
and ageing populations point to the
need to save in developed economies,
making asset management an
increasingly vital source of revenue
growth for investment banks.
2.Emerging markets growth
Economies experiencing rapid growth,
combined with little well established
competition, offer exciting
opportunities for investment
banks. But the risks, and operational
challenges, of expansion into these
new geographies are still being
potentially underestimated.
3.Technology commoditisation
Technology has repeatedly
demonstrated its ability to
commoditise banking offerings –
particularly in non-relationship based,
low value added areas. With
commoditisation increasingly
dominating ‘flow’ businesses, clear-
sighted strategic decision-making is
vital. Banks must either make the
substantial investments in straight-
through processing capabilities
needed to achieve economies of scale,
or concentrate on areas such as
advisory, that cannot be
commoditised.
4. Ultimate value to investors
I
nvestment banks have to concentrate
on services and offerings where they
deliver value to their clients, not just
margins to themselves. This makes it
essential for banks to develop deep,
real-time insights into the risk/reward
b
alance of their products and services.
5. Re-evaluation of capital
S
avings deposits may be the most
desired form of capital, undemanding
and sticky, but those attributes also
make it rare and likely to become rarer.
Investors have many more choices on
where to place their capital and the
amount placed in savings has been one
of the slowest growing of all areas for
over a decade. With this in mind,
investment banks need to re-evaluate
capital’s importance in any service of
product and charge accordingly.
6. Resource constraints
Mounting resource constraints point to
gradually rising input costs becoming a
universal backdrop to all business and
banking activity. With oil approaching
peak output, and basic commodity costs
responding to wide demands of
emerging markets, a reordering of
economic priorities looks to be the likely
result. Sustainability is now on the
agenda (as a serious business issue)
across all business sectors and
investment banks must overcome their
institutional cynicism and follow suit
(as well as capitalise on the
opportunities presented).
Investment banking – three themes
f
or the future
With these macro trends in mind, we
have divided the challenges facing
investment banks into three broad
themes:
Responding to regulation
O
f course, banks must still take risks
to achieve their targeted RoE, but
t
hey must now do so through a
complex (and still evolving)
regulatory framework. Beyond
question, responding to the post-
crisis wave of regulation presents a
major compliance challenge for all
investment banks – although new
opportunities will be created from the
market dislocation that is already
underway. From now on, robust risk
management will be a crucial
demonstration of intent to regulators,
as well as allowing banks to shape
regulation and protect shareholder
value. If one lesson can be taken
away from the crisis, it must be that
previous risk governance models were
largely inadequate to shield
investment banks from the onslaught
of systemic turmoil. Going forward,
therefore, banks must commit to
adopting and embedding a culture of
managing risk throughout the
organisation (particularly in the
front office).
Driving the client agenda
W
ith proprietary trading operations
being limited by regulators and
questioned by shareholders, the
importance of building (and
maintaining) a successful client
franchise is now critical to the
b
ottom line. So too is the need to
drive greater efficiencies from
existing revenues. From now on,
banks must focus on providing
i
ntegrated client services to attract
and retain client business, as well as
developing the deep analytical insight
needed to monitor and maximise
client returns, and undertaking
realistic assessments of the costs and
benefits of the services that they
provide. As figure 2 shows, the results
of this discipline will allow them to
pinpoint where to invest to achieve
economies of scale, and where to aim
for high-touch differentiation.
Lastly, now more than ever, by taking
sustainability seriously, they
have an opportunity to regain trust
(amongst clients and throughout
wider society), while delivering
returns to their core business through
responsible business practices.
• Banks can find new revenue through effectively
segmenting clients and determining where value is delivered
• Realistic assessment of cost and benefits of services need
to be undertaken
• Result indicates where to invest to achieve
economics of scale and where to aim for high
touch distinction
• Services may well be denied even where marginal
costs are low in order to privide distinction
• Objective is not to focus on top 20% to the exclusion of all
else, but to be aware of costs and benefits of eack client
Access to Analysts
Broker reports
Electronic Trading - Direct Market Access
Client Coverage (%)
Low Touch
High Touch
Marginal Value of Provision
Source: Accenture Research
Value of Client
Access
to Core
clients
Access to Capital &
Select Investments
Figure 2: Effective Targeting of Client Offerings
Preparing for the new normal
Whilst banks must remain resolutely
f
ocused on the many challenges
of today, they also need to keep an
eye on tomorrow. That way, they
can ensure they are positioned to
t
ake advantage of the next wave of
growth – instead of having to react
t
o it. The banks that successfully
capitalise on future strategic
opportunities will possess acute
strategic insight, be early adopters of
emerging technologies and, critically,
be able to make measured
assessments of tomorrow’s key
battlegrounds – and their chances of
success in each of them.
‘Unknown unknowns’ may be
proliferating in today’s operating
environment. But one basic fact
remains – there are still really only
three ways to make money in
investment banking: take risks, grow
revenues and control costs. This year’s
report explains why we think banks can
and should keep each of these truisms
in mind – albeit, inside a wrapper of
customer centricity, operational
flexibility and risk awareness.
Pinpointing the core challenges
In such a competitive marketplace,
investment banks must move swiftly to
plan and execute optimal responses to
the complex challenges they face. To
help them, Accenture has used its
research, industry expertise and client
insight to pinpoint and examine what
we believe to be the ten key challenges
currently confronting the industry. We
have surveyed over 2000 of our capital
markets professionals across the globe,
and over 200 senior clients, to
determine the Top 10 Challenges for
Investment Banks 2011:
Responding to regulation
1 Responding to the regulatory
tsunami
2
D
ealing with OTC derivatives reform
3 Embedding effective risk
management
Driving the client agenda
4
Refocusing on client needs
5
M
aximising client profitability
6 Taking sustainability seriously
7 Delivering valuable transformation
Preparing for the next horizon
8 Harnessing innovative technologies
9 Engaging effectively in emerging
markets
10 Picking the right battles.
In this paper, we explore each of the
Top 10 Challenges in detail. For each
one, we describe the background and
context, as well as providing specific
examples of the challenges faced by
many investment banks today and the
reasons why these will be front-of-mind
issues for 2011 and beyond. We also
provide Accenture’s perspective based
on our research, experience and
insight in the market. Finally, we show
how our proven services and solutions
have already delivered benefits to
clients, helping them to overcome these
challenges in a ‘real world’ context.
Accenture Experts
Dean Jayson
Senior Executive, London
dean.l.jayson@accenture.com
+44 20 7844 8295
+44 79 5841 4692
Ryan Westmacott
London
ryan.m.westmacott@accenture.com
+44 20 7844 5259
+44 78 1030 4031
James Sproule
London
james.r.sproule@accenture.com
+44 20 7844 3387
+44 78 6680 8366
[...]... June 2 010) N =102 (33% C-suite, 20% VP/SVP/EVP, 24% MD/Director, 24% Senior Manager/Manager) Samantha Regan New York samantha.regan@accenture.com +1 917 452 5500 +1 404 790 7378 Top 10 Challenges for Investment Banks 2011 2 Dealing with OTC Derivatives Reform Banks are seeking to develop cohesive responses to ongoing OTC derivatives reform in the US and Europe Although the combined impact of these reforms... Times, 11 August 2 010 ii Sources: Bank for International Settlements (December 2009), Quarterly Review iii Source: Accenture research iv Source: Bank of International Settlements (September 2 010) , Quarterly Review v Source: BIS, DTCC, Euromoney, Accenture research Assumes product CCP eligibility by 2013 of 90% for credit, 70% for rates, 15% for FX Top 10 Challenges for Investment Banks 2011 3 Embedding... counterparties (CCPs) indicates that this topic alone will demand strategic thinking at the C-suite level of investment banks Key challenges Strengthening the core to execute market strategy These regulatory developments place extreme and far-reaching challenges on investment banks (see figure 3) Already struggling to address wider financial sector reforms, the priority for banks must be one of determining... European Commission, it is still too early to evaluate the exact impact of this concerted effort to reform the OTC derivatives market on investment banks What is clear, however, is that the combined effect of these major reforms will significantly transform the industry landscape The challenge for investment banks is one of staying ahead of the regulatory curve as it continues to evolve The focus throughout... to 2 010, whilst average spreads felliv Challenge 2: Dealing with OTC Derivatives Reform The main challenge for investment banks is one of developing a client offering that protects existing revenue bases whilst capitalising on new market opportunities driven by this evolving regulatory landscape The first challenge that banks face, then, is to determine their strategic response Strategically, banks. .. research FTE (per year) 90 280 360 290 115 1135 Regulatory change is notoriously difficult for investment banks to implement In large part, this is because the timescales are immovable – something that banks find extremely difficult to work with In fact, the only variable that banks can change is the budget available for regulatory projects And in our experience, ‘throwing money at the problem’ is commonplace,... operations needed to address the shift of various asset classes onto exchanges and electronic trading venues for subsequent clearance and settlement of CCPs Challenge 2: Dealing with OTC Derivatives Reform Challenge 2: Dealing with OTC Derivatives Reform Figure 3: Summary of challenges facing investment banks Function Challenge Impact Front-office Systems Integrate with new market models as they evolve and... Co-ordinated effort required to leverage inflexible legacy applications Default management Will banks be forced to cover Variation Margin for clients who declare bankruptcy? Balance sheet reporting Controllers need to clearly define reporting flows for Agency vs Principal trades, as this has a direct impact on upstream business and technology processes Risk finance integration How will banks update their... by Investment Bank The scale of work involved in shaping banks market responses should not be under-estimated Accenture Research suggests up to 65 percent of industry OTC derivatives could be eligible for CCP clearing by 2013iii Given this significant scope of trades that could be eligible for CCP clearing and as greater market transparency drives compression of margins, banks must be prepared for. .. figure 1 The reality is that most investment banks continue to see risk management as a process for managing management – or worse, managing regulators This ignores the clear benefits that flow from enterprise-wide risk management cultures, both in terms of improved business decision-making and as the foundation for strategic agility and commercial success For as long as top- down approaches to risk management . OUTER
Top 10 Challenges
for Investment Banks 2011
Top 10 Challenges
for Investment Banks 2011
Top 10 Challenges
for Investment Banks
2011
Copyright © 2 010. MD/Director,
24% Senior Manager/Manager)
Top 10 Challenges
for Investment Banks 2011
Dealing with OTC
Derivatives Reform
Banks are seeking to develop cohesive
responses
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