As further downsizing and industry exits take hold across the financial industry, the investment banking segment is set for a major upset in the coming years. According to a recent Bloomberg article covering a McKinsey & Co. report entitled “After the Reckoning,” only five or six companies will remain leaders in the field, otherwise known as “bulge bracket” firms.
According to McKinsey, “there are more aspiring flow monsters than projected levels of flow can support.” This is a frightening reference to the reality that declining investment banking revenues no longer can support the forecast growth and projections that many top firms rely upon in order to justify their participation in the industry. Very few firms today are earning their cost of capital in the investment banking space, so much of the industry’s valuation is based upon future growth. This McKinsey report suggests that there simply isn’t enough growth for all of the existing firms to meet their cost of equity hurdles even in the future.
Many Firms Already Feeling the Pinch
The suggestion that firms are struggling to grow revenues will come as no surprise to industry insiders, who have been watching a successive line of investment banking firms announce staff reductions and the closing of branch offices. UBS has been a leader in slashing jobs, with 10,000 people out of work. According to The Wall Street Journal, Barclays too has become yet another bank cutting staff with a recent announcement that 15 percent of its Asian banking operation will be cut.
Some firms are exiting entire segments as they attempt to control costs. UBS will be exiting many fixed-income lines while the Royal Bank of Scotland will be shutting down cash equities, mergers advisory and equity capital markets desks this year.
It is All About Return on Equity
Banks are complex entities with several divisions that compete for shareholder investment. In order to be considered a growth division, and get support from within the bank, the group needs to at least earn the bank’s cost of capital. The McKinsey report estimates that this cost will be approximately 11.7 percent in 2017. Firms that lack sufficient scale in order to reduce overhead and administrative costs will simply fail to earn enough to cover their cost of capital, and will be forced to make the hard decision to scrap unprofitable business lines.
What Does this Mean for Investment Banking Job Seekers?
It seems that the job outlook remains weak for those seeking opportunities in the investment banking industry. With fewer large firms participating in the business, it will certainly have a negative impact on the number of available opportunities. In addition, some of the highest paying positions come from the large firms, and so many job seekers may be forced into lower paying jobs at middle market firms.
Now of course the predictions and projections could be incorrect, and perhaps there is a substantial rebound in investment banking revenues in the future. If that is the case, then the outlook may improve. But structural changes, due to technology and global trade patterns also play into the disappearance of bulge bracket firms and related jobs. As a result, while a recovery is possible, a return to the high water level is highly unlikely.