Investment Banking Shifting Focus to Lower Profile Activities

With the ongoing decline in investment banking activities worldwide, compensation in the industry is increasingly being tied to tangible financial results. While top performers in terms of commissions and fees generally did receive larger bonuses, the focus on tying compensation directly to bottom line contributions has never been stronger. While in the past those working on initial public offerings or big merger and acquisition deals would likely see the highest incentive payouts; increasingly those in less glamorous roles, such as fixed income trading or syndication are seeing their actual bottom line contributions being rewarded with industry leading bonuses.

Simon Roberts, Managing Director of Recruitment for Sheffield Hawort told Finance Asia, “Banks have begun to realize that it is the less glamorous world of trade finance, securities services and cash management that actually generates the returns and pays for the headcount. We are expecting average total compensation in 2013 for investment bankers to continue the downward trend, though crucial relationship stakeholders in both debt capital markets and M&A are likely to fare marginally better.”

These comments reflect the value that institutions are placing on relationship management in today’s market, where banks are more interested in obtaining a range of client business rather than individual transaction fees. Under this approach, those working in debt origination or corporate finance are increasingly valuable to their institutions.

Corporate Banking Fees Offer Greater Revenue Potential for Institutions

One fundamental reality facing banks today is that fees for ongoing banking services are a much larger source of potential revenues than investment banking transactions. While the margins on a single trade finance transaction might be less than what a firm sees on a major IPO deal, the reality is these daily transactions add up to a lot more top line revenue for financial institutions. And employees that can bring that recurring business to institutions are being rewarded.

Debt Capital Markets Becomes Increasingly Important

One of the few areas of investment banking that has remained resilient over the past several years has been the debt capital market desks. This reflects much of the new reality facing financial institutions: debt capital market transactions are more frequent occurrences, allowing an institution to develop a relationship that generally involves greater ancillary fee revenue. While a firm may only look at underwriters once a decade for an equity transaction, many firms regularly access debt capital markets, some as frequently as monthly. Even more important to financial institutions is that regular debt issuers, such as utilities, infrastructure firms or large industrials, have been some of the most resilient companies overall in the highly volatile economic environment of the last several years. These high quality clients are highly sought after by leading financial institutions and employees that can build relationships with these regular fee generators are increasingly being rewarded.

All of this reflects an ongoing shift from within the banking community. Many firms are reducing or exiting investment banking all together in order to focus on core banking activities. While this does leave more market share for the remaining players, even those companies are increasingly looking to traditional activities to provide a baseline of revenues and cash flow in order to sustain their higher margin, but lower frequency, high profile investment banking operations.

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