Investment banks continue to lose ground in capital markets industry

Investment banks continue to lose ground in the capital markets industry, new research finds. Their share of total revenues fell from 52% in 2006 to 39% last year, although the decline in revenues for the investment banking industry slowed somewhat last year. Profitability and return on equity however were up in the same period.

According to a new report from The Boston Consulting Group (BCG), capital markets began to stop the rot last year, following a number of years of lacklustre results. The report notes that value migration, by which revenues shift from investment banks to the wider industry, continued. While various support and enabling firms in the wider ecosystem enjoyed solid growth, investment banks saw declines, albeit slower than the years previous.

In recent years changing market dynamics have seen the total share of industry revenues fall significantly for banks, from 52% in 2006 to 39% according to Boston Consulting Group’s analysis. In 2016, the broader capital market saw steady growth last year, climbing by 5% to $656 billion, however different segments noted considerably varied levels of growth. Investment banks saw their total market share fall by 2% to 34%, while buy-side firms saw their position strengthen further, increasing 2% to 48% by the end of the year.

Sliding market share

Investment banks have seen considerable erosion of their market share over the past decades, however the study also demonstrates that the slowdown between 2015 and 2016 was not as sharp as in the four years previous. Total revenues fell 1% last year, from $228 billion to $226 billion but again, in the previous year the drop was a considerably sharper at 5%. The research attributes this stymying of the decline in revenues at investment banks to a number of different factors, including market volatility, interest rate changes, and an increase in fixed income, currencies and commodities (FICC) trading volumes following the US election result.

While revenues declined less steeply, the data compiled also revealed that the profitability of investment banking was on the rise in 2016. Operating income hit $76 billion, amounting to $10 billion increase, as income levels returned to levels last seen in 2013. Foreign exchange and rates were the segments to see the largest boost in 2016, while credit and prime services saw slight increases. Equity capital markets and equity derivatives saw minor decreases on the year previous however.

BCG’s study also showed that relative to the year previous, FICC sales and trading contributed significantly to the profit pool in 2016, at 60% and 46% respectively. Profitability from the segment hasn’t been as high since 2012, when it made up 70% of total profitability.

Return on Equity

Investment banks have managed to up their return on equity since 2015, buoyed particularly by the performance of North American banks. While risk-weighted assets saw a minor increase, up 3% from $3.8 trillion to $3.9 trillion between 2015 and 2016, return on equity (RoE) jumped 2% to 8% in the same period. However, return on equity in the industry is still considerably lower than the highest point over the past six years, standing at 12% in 2012, or more than 20% prior to 2008 – the fundamentals of the investment banking sector across the board remain considerably below pre-crisis levels.

The authors concluded that broadly, banks have both slowed their revenue losses and increased their respective profits, while non-bank players in the industry are shown to be enjoying steady revenue growth. Exchanges, venues and clearing-houses saw profits up 6%, from $36 billion to $38 billion between 2015 and 2016 – with particularly indices and benchmarks and venue execution seeing strong growth, at 11% and 10% respectively. Post-trade services saw the steepest growth in the period, up 12%.

Information providers too saw their revenues increase, jumping from $43 billion in 2015 to $45 billion in 2016. Post-trade services saw the biggest increase, up 10%, followed by venue execution, up 8%.

“The value migration has continued along many paths,” Philippe Morel, a co-author of the report and the global leader of BCG’s capital markets segment, stated, “from smaller investment banks to large universal banks, from regulated to unregulated entities, from firms with weaker digital capabilities to those that are data and tech savvy. Although a lessening of the effects of quantitative easing, along with impending deregulation, may dampen the impact of the migration, institutions must still find ways to master it and make it work to their advantage.”