The investment banking industry is facing significant challenges, including low returns on equity, productivity crises, and eroded trust. To achieve sustainable returns of 12%-15%, banks must implement radical reforms across four key pillars: optimizing costs, transforming culture, becoming client-centric, and embracing technology. These transformations require a shift from traditional methods to more innovative, technology-driven approaches while focusing on long-term profitability and client satisfaction.

1. Transforming
investment
banks

2. 2 | Transforming investment banks
The halcyon days of investment banking are over, and 20%-plus returns on
equity (ROE) are long gone
Investment banking is an industry in turmoil:
► Weak efficiency and productivity
► Cultural crisis
► Eroded trust
► Intensifying competition
Profitability is being destroyed:
► Commoditization and move to exchange-trading
squeezing margins
► Limited scope for revenue growth, e.g., non-modelable
products restricted due to capital requirements
► Structurally higher cost base due to regulatory and
compliance change
► New competition eroding dominance across many
areas of business
Low ROEs highlight the significant challenge IBs face
Aggregate investment banking revenue and expense

3. 3 | Transforming investment banks
Major investment banks can still deliver sustainable ROE of 12%–15%, but
doing so will require radical reform
Investment banks have entered “protect
and survive” mode:
► Tactically optimizing capital, liquidity and costs
► Shifting away from capital-intensive, fixed
income trading activities, toward fee-based
advisory business lines
They are delivering tactical solutions founded
on broken models:
► Front-office pursuit of revenues coupled with strong
oversight from powerful control functions is no
longer viable
Announced changes in strategic direction for leading investment banks

4. 4 | Transforming investment banks
To deliver 12%–15% ROE, banks must focus on four pillars of
transformation
Applying the four pillars of change to deliver sustainable returns

5. 5 | Transforming investment banks
Pillar 1: optimize
Investment banks must better utilize balance sheets, radically reduce costs …
The industry is suffering a cost and productivity crisis, and traditional, short-term approaches to
cost reduction are no longer viable
Investment banking productivity and efficiency, as measured by average
profit per employee and cost-to-income FY12–14 (illustrative)

6. 6 | Transforming investment banks
Pillar 1: optimize
… and explore innovative sourcing and shoring options
Business-line and legal entities
► We estimate the carrying costs
of a single legal entity at up to
$US600,000.
Assets and collateral
► We have found that further
savings of 15%–20% of risk-
weighted assets (RWAs) can
still be made when RWA
optimization programs have
already been attempted.
Costs
► We believe banks can release
savings by reviewing and re-
engineering key processes
across the enterprise.
Sourcing and shoring
► We believe there are three key
areas where supply chains
should be reviewed: client
support services; internal support
services; and execution services.
Supply chain opportunities

7. 7 | Transforming investment banks
Pillar 2: transform culture
Weak controls and employee behavior have proven costly to investment banks
Cost of control

8. 8 | Transforming investment banks
Pillar 2: transform culture
Investment banks must incentivize behavior that will deliver value for
shareholders and clients and meet regulatory expectations
Banks must look more closely at what
is driving behavior …
► Most attempts to change culture have been
reactive “point” solutions
► Management teams must lead by example
► Individuals must be held accountable
► “Good” behaviors must be rewarded
… and reform hiring practices and
employee propositions
► Focusing on internal recognition programs,
mobility, secondments, education and
training, and time to develop innovative ideas
Top initiatives to strengthen risk culture

9. 9 | Transforming investment banks
Pillar 3: become client-centric
Investment banks must put their clients at the heart of their business …
Trust in investment banks has been eroded:
► Beyond low public trust, client trust has
suffered from high-profile reports of
investment banks ignoring conflicts of interest.
► Traditional operating models, based on
product innovation to drive the bottom line,
are inadequate.
► Banks must better identify their core clients and
their needs.
► They should improve systems to monitor
client satisfaction …
► … and enhance the client experience by
considering creating a “single shop-front.”
(1) Product innovation:
► Evolving products to support revenue-making capability
► Innovation results in lack of price transparency
► Emergence of silos to support flow vs. non-flow booking requirements
(2) Business capability:
► Capabilities emerge to optimize increased support of greater product portfolios
► The need for flow optimization drives efficiency
The traditional investment banking operating model evolved from a focus on product innovation and business capability

10. 10 | Transforming investment banks
Pillar 3: become client-centric
… and ensure future operating models are client-centric

11. 11 | Transforming investment banks
Pillar 4: be technology-led
Investment banks must transform legacy processes and embrace innovation
Today, banks are people-led businesses —
tomorrow, they will be technology-led:
► In a more commoditized, risk-averse future, cost-to-serve,
speed of execution and quality of service will be the key
performance differentiators.
► Currently, 50%–66% of costs are staff costs. This is
unsustainable.
Transition to a technology-led business will
be difficult and stretch budgets
► Banks must invest across a number of
areas — new collateral and capital
systems, client-centric solutions,
improving data, controls technology.
► But with around 75% of IT spend on systems
maintenance, they must first deal with
legacy technology.
IT investment pipeline (36-month budget horizon)

12. 12 | Transforming investment banks
The pillars of change support the path to improved and sustainable ROE
Achieving a sustainable, mid-teens ROE is possible, but it will require an
unrelenting focus on transformation across four pillars of change

13. EY | Assurance | Tax | Transactions | Advisory
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This material has been prepared for general informational purposes only and is not intended to be
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