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Top ten challenges for investment banks 2015 restructuring challenge 7

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Read a report from Accenture Capital Markets on executing expansion and new locations, new segments, new products.

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Top ten challenges for investment banks 2015 restructuring challenge 7

  1. 1. Executing Expansion: New Locations, new segments, new products Top Ten Challenges for Investment Banks 2015 07 ExecutingExpansion: Newlocations,newsegments, newproducts
  2. 2. 07 Executing Expansion: New locations, new segments, new products’ Following a sustained period of market turbulence, resulting in considerable downsizing and structural consolidation, consensus suggests that the pressures on the investment banking industry are easing. Whilst many new rules mandated by regulators have yet to be finalised, there is emerging certainty allowing banks to implement changes to their business models. A number of banks have focused on cost cutting and downsizing to create a “back to basics” business model; others now have the chance to rethink and in many instances redefine themselves. There has never been a better time for investment banks to plan and act on key questions surrounding their competitive positioning and key differentiators. These questions include the markets they want and need to operate in, the clients they wish to serve, the balance between their foreign and domestic operations and the most efficient method for allocating capital for maximum leverage. Fundamentally the investment banking leaders of today need to decide what type of business they wish their bank to be and why. 2
  3. 3. 3 There has never been a better time for investment banks to plan and act on key questions surrounding their competitive positioning and key differentiators. Investment banks’ short to mid-term strategic focus The key challenge for investment banking executives remains securing what is left of profits without neglecting to implement a medium to long-term strategy that will see their organisations return to growth. It’s not a matter of returning to past practices, but of strategically targeting growth in their core proposition and doing so in a clear and transparent manner: • Focusing and building on the strengths in core markets to drive profitable market share • Reducing duplication of effort across business lines by leveraging utilities • Redeploying resources to focus on profitable businesses / products, eliminating underperformers • Achieving IB growth via synergies with other growing parts of the business, such as Wealth Management or Corporate Banking • Seeking growth and designing new products by following long term structural changes in the Capital Markets industry. Figure 1: Notional Amounts Outstanding and Gross Market Value of Commodities and CDS contracts Source: BIS, Celent Notional Amounts Outstanding Gross Market Value 0 00 0 2000 10000 500 1000 4000 20000 1000 2000 6000 30000 1500 3000 8000 40000 2000 4000 10000 50000 2500 6000 500012000 60000 14000 70000 NotionalOutstanding–USDBillion NotionalOutstanding–USDBillion GrossMarketValue–USDBillion GrossMarketValue–USDBillion Jun_1998 Jun_1999 Jun_2000 Jun_2001 Jun_2002 Jun_2003 Jun_2004 Jun_2005 Jun_2006 Jun_2007 Jun_2008 Jun_2009 Jun_2010 Jun_2011 Jun_2012 Dec_2004 Dec_2005 Dec_2006 Dec_2007 Dec_2008 Dec_2009 Dec_2010 Dec_2011 Dec_2012 Credit Default SwapsCommodities
  4. 4. 4 In the current environment driving ROI and ROE in the face of shrinking balance sheets is a major challenge. One clear example is in Prime Brokerage, where many of the top ten players (by assets under management) are scaling back and/or raising fees for clients who don’t meet certain profitability metrics. Redeployment of scarce growth capital means changing the business mix. Previously the prevailing thinking was that “bigger is better”, with little consideration for profit margins. In the current environment driving ROI and ROE in the face of shrinking balance sheets is a major challenge. One clear example is in Prime Brokerage, where many of the top ten players (by assets under management) are scaling back and/or raising fees for clients who don’t meet certain profitability metrics. This has two impacts: capital that would otherwise be used in lower margin businessesis redeployed, and higher profitability offsets lower revenues. As the graphs in Figures 1 and 2 demonstrate, the crisis prompted a flight from opaque, overly engineered and illiquid securities and the resultant return to the ‘“safety”’ of simple flow business is now starting. Accompanied by industry consolidation from a client, portfolio, and businesses perspective, this trend has forced banks to strategically re-align and focus on the core business offerings where each sees the opportunity to compete. Figure 3: Number of ETD contracts traded worldwide (bn) Number of trades (Bn) Average value of trades (Thousand USD – weighted by trading value) Figure 2: Number and value of Equities trades 2008-2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: World Federation of Exchanges (WFE) Source: World Federation of Exchanges (WFE) 0 5 10 15 20 25 30 Total Americas Asia Pacific EMEA Equity Interest Rate Currency Commodity Other CAGR +14% -15% +2% Total–ThousandUSD 5.1 2008 2009 2010 2011 2012 2013 2014 6.2 7.1 6.5 6.1 6.1 5.1 5.6 5.2 5.8 5.7 5.2 4.6 0 1 2 3 4 5 6 7 8 1st half of year 2nd half of year 14.2 2008 2009 2010 2011 2012 2013 2014 8.3 8.7 8.2 8.4 8.9 8.4 7.9 8.17.9 8.1 0 0 5 10 15 20 25 30 35 40 2 4 6 8 10 12 14 16 1st half of year 2nd half of year Totalbyregion–ThousandUSD 9.5 6.8
  5. 5. 5 The choices banks were forced to make during this severe market correction fortuitously allowed them to rediscover themselves and define a new strategic direction. Six years on we are witnessing a renewed interest in more sophisticated products and capabilities, illustrated by the uptick in equity derivatives markets (see Fig. 3). The difference this time is the client-centric, transparent and measured approach being adopted. Responding to opportunity – never let a “good crisis” go to waste Every great crisis creates opportunities. As such, banks must now begin to address how to use market share opportunities created by the post-crisis environment. Adapting to the new market mentality, investment banks need to go beyond excellence in their core businesses and create leaner operating structures. This introverted view results in organisations reaching their equilibrium in the markets in which they operate and provides only a marginal incremental profit – growth will only be achieved through innovation and expansion of the product base. Improved product offerings can unlock profit and growth capacity in domestic markets as well as open the door to international markets. More sophisticated products (that maintain the necessary degree of transparency) can provide a mechanism to attract both local and international sophisticated, multi-banked clients. Banks who execute this successfully become trustworthy and reliable partners that provide access to a set of investments and sophisticated financing solutions in new locations. Partnerships with disruptive technologies providing these innovative financing solutions – including crowd funding platforms and electronic trading venues – also represent potential opportunities. Combined services covering modern client needs can support banks’ efforts to better serving corporate client needs and stop the increasing attrition. Before 2007 financial institutions used MA activity to add new products and services. Conversely, subsequent years have seen consolidation in areas where volumes have decreased. Going forward, the focus will differ from institution to institution. For the larger players, further consolidation, and for the smaller players, strategic and complementary “tuck-in” as opposed to “bolt-on” acquisitions may still be beneficial. However it is through partnerships and joint ventures that most will access success. The benefits of these relationships include faster time-to-market and lower entry costs versus building from scratch. To this end, the recent announcement of Evercore Partners, a boutique U.S. investment bank, acquiring the remaining 40% of ISI Group they did not already own, is a good example of smaller players trying to exploit opportunities to build distribution and broaden their product offerings. A strategic approach is needed to execute this new wave of expansion. The fundamental shift in the banking paradigm clearly indicates that a new set of products, locations and segments, tailored to each institution’s individual characteristics and long term vision, will drive the growth for the years to come. It is through partnerships and joint ventures that most will access success. The benefits of these relationships include faster time-to-market and lower entry costs versus building from scratch.
  6. 6. About Accenture Accenture is a global management consulting, technology services and outsourcing company, with more than 305,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com. Accenture Experts To discuss any of the ideas presented in this paper please contact: Omar Santissi Managing Director Capital Markets, Milan omar.santissi@accenture.com +39 334 6459768 Burak Zatiturk Capital Markets, Istanbul burak.zatiturk@accenture.com +90 530 4173887 Chris Brodersen Capital Markets Research, New York c.brodersen@accenture.com +1 917 452 1093 Disclaimer This report has been prepared by and is distributed by Accenture. This document is for information purposes. No part of this document may be reproduced in any manner without the written permission of Accenture. While we take precautions to ensure that the source and the information we base our judgments on is reliable, we do not represent that this information is accurate or complete and it should not be relied upon as such. It is provided with the understanding that Accenture is not acting in a fiduciary capacity. Opinions expressed herein are subject to change without notice. Copyright © 2014 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.
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    May. 28, 2015

Read a report from Accenture Capital Markets on executing expansion and new locations, new segments, new products.

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