Industry View In-Line: Outlook for Global Wholesale & Investment Banking
April 02, 2009
The global securities markets are in the midst of profound cyclical and structural change. Global wealth creation, globalization, credit intermediation, a light touch regulatory model and the intense search for yield created massive tailwinds for the industry – which have now become headwinds. This joint Morgan Stanley-Oliver Wyman research project seeks to explore the outlook, range of outcomes and implications for the leading capital market banks, although includes wider implications for a variety of financials.
2008 was the perfect storm. However, we see potential for a pre-provision/mark profit rebound in 2009, driven by constructive conditions in flow credit, rates, FX, commodities, fewer exceptionals, and a material repricing of risk; our research suggests bid/offer spreads and margins are up 50-300%. This is already feeding into 1Q numbers, although we expect more write downs from monolines, legacy assets, merchant banking and corporates to weigh on industry returns in 2009. Intense funding and capital pressures are driving a dramatic reshaping of the portfolio away from heavy users of unsecured funds and balance sheet (warehousing, non-investment grade, prop, illiquid fixed income, some prime brokerage) to core flow products. “Flow monsters” with scale, outstanding risk management and efficiency will be the beneficiaries. Some regionals, domestics and boutiques will look to capitalize on prevailing conditions. Further deleveraging remains likely: 15 of the largest banks have so far shrunk balance sheets by $3.6tn and we estimate another ~$2tn for 2009, while the politicisation of credit, regulatory risk, rise in home country bias, fragile markets and weak economies are all key risks to longer-term ROEs, which we think are likely to be subdued –at least- for the next two years. View the report
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