The wave of regulation that sprung from the financial crisis has pushed investment banks further and further away from their roots. Instead they are going deeper into the “capital light” activities (which require less regulatory capital) that are being carried out with equal vigour by non-banks.
The recently unveiled strategic plans of Deutsche Bank, Credit Suisse and Barclays are a case in point - all are repositioning towards activities such as advising on mergers and acquisitions and helping clients raise finance, while turning away from more traditional activities such as lending and trading.
In a few years, the central activities of these European investment banks could be indistinguishable from those of their non-banking rivals, such as the advisory boutiques that help with deals and fundraising, some of the large asset managers, or the big four accounting firms which now boast corporate finance divisions.
Figures from consultancy Tricumen show three of the biggest advisory boutiques - Greenhill, Evercore and Lazard - have increased their M&A/advisory fees by 13 per cent since 2007, a period when the revenues of broader investment banks collapsed. So is the future of investment banking one where the banking part is optional?
Not if you believe Manolo Falco, head of Citi’s Emea corporate and investment bank. “It’s unclear if banks with that [capital light] model will make a good return,” he says. “I do think it’s a highly competitive terrain.”
He believes you have to have a sizeable market share to make the advisory business work and says that might not be achievable for all banks.
Citi is sticking with its original bet - a full service global bank spanning over 160 countries, albeit considerably shrunken from its pre-crisis tally.
Regulations which have made some areas of investment banking more expensive are a factor in deciding where to allocate resources, but it is not a simple “capital heavy, bad; capital light, good” process.
“We definitely try to focus on the most attractive areas but at the end of the day, when you’re in 55 countries in this [the Emea] region . . . you have a big business that is also focused on the cap-heavy areas,” says Mr Falco.
Other investment bankers in large US groups make the same case. While advisory is often the best business on a return-on-equity basis within investment banks, they say the capacity to earn advisory revenue often hinges on the other services a bank provides, such as lending and trading.
“Clients still need a firm that can do a global transaction, not just offer advice,” says Daniel Pinto, head of JPMorgan's corporate and investment bank. “The need for capital is not going away.”
He adds that JPMorgan is constantly “fine tuning” its offering so it can seize “the efficiencies that come with that scale, so we can continue to offer the full product suite” to clients.
Swiss bank UBS is the “capital light” poster child held up by many investors. UBS has more than halved its balance sheet since the financial crisis and its investment bank often boasts a quarterly return on equity well above 20 per cent.
The Swiss bank does retain some traditional banking activities, it just does a lot less of it than it used to.
UBS’s investment banking chief, Andrea Orcel, says he has scope to expand the business without more financial resources, by improving the productivity of both individuals and technology.
He believes limiting the investment bank’s capital imposes discipline and keeps it focused on the most profitable areas. “We are smaller but we are better,” Mr Orcel says, pointing to prime brokerage as a case where UBS has pared back its resources and makes a return on assets twice as high as some competitors. The quest for improvement continues.
“The environment around us is constantly changing,” says Mr Orcel, “so we need to adapt and find better and more effective ways to execute and deliver.”
Barclays, Deutsche Bank and Credit Suisse are all paring back capital-intensive activities though, bankers agree, none is “doing a UBS”.
Michael Reuther, who is in charge of Commerzbank’s investment bank, says the changes taking place in the investment banking world demand a more nuanced response.
“Within the new regulatory environment, investment banking is not a matter of net operating profit or market share, but a business of striking the balance between efficient resource management and continuing to provide the services and products your client franchise requires,” he says. “It is no longer a one-size-fits-all industry.”