OUTER Top 10 Challenges for Investment Banks 2011 Top 10 Challenges for Investment Banks 2011 Top 10 Challenges for Investment Banks 2011 Copyright © 2010 Accenture All rights reserved. A ccenture, its logo, and High Performance Delivered are trademarks of Accenture. Accenture is a global management consulting, technology services and outsourcing company, with a pproximately 204,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all i ndustries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them b ecome high-performance businesses and governments. The company generated net revenues of US$21.6 billion for the fiscal year ended Aug. 31, 2010. Its home page is www.accenture.com. Top 10 Challenges for Investment Banks 2011 With leverage no longer an easy option to drive returns on equity, and proprietary trading now seen as risky by both regulators and shareholders alike, investment banks are faced with the difficult task of identifying new ways to propel their returns on equity back to something close to pre-crisis levels. In such an uncertain operating environment, assessing risk, making the most of existing revenues, and capitalising on new opportunities have never been more important. Introduction Navigating Through Uncertainty Focusing on the future: Investment banks are increasingly operating in a volatile, resource constrained and highly regulated environment. Rigorous focus on strategic and operational priorities provides the key to high performance. The world economy is emerging from its most severe recession in over 50 years. And the mid-term prognosis is still far from rosy. Recoveries from credit- induced recessions take time. Often twice as long, in fact, as recoveries from recessions sparked by interest rates hiked to contain inflation. Signs of real structural strength are in short supply. In the US, although recovery is underway, underlying fundamentals remain relatively weak. The government’s stimulus package has not delivered as significant a boost as had been hoped. Meanwhile, in Europe, the likelihood of any sustained recovery from the worst downturn in 30 years remains at best uncertain. For the moment, bank lending continues to be constrained by new regulation such as Basel III, as much as by now cautious bankers – just when it is needed most. While banks managed to dramatically improve productivity over the past two years, a new wave of banking innovation and revenue generation has yet to arrive. The most encouraging signs of growth are in the emerging markets – highlighted by the IMF for their exciting catch-up growth potential. In many of these markets, escalating levels of wealth point to accelerating demand for financial services and products – an exciting opportunity for investment banks, provided they can tailor their offerings to suit local requirements. Introduction: Navigating Through uncertainty 1 0 Source: IMF, World Economic Outlook Database, April 2010 8 6 4 2 0 -2 -4 -6 2 0 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 4 1 5 US Emerging & Developing economies EU Figure 1: Real GDP Growth (% growth year-on-year) Introduction: Navigating Through Uncertainty No surprise that investment banks are still scrambling to adjust to the realities of this ‘new normal’. In a straitened operating environment where the only certainty is increased regulation, pre-crisis returns on equity (RoE) of, on average, 20 percent look extremely optimistic. As banks seek to identify (and exploit) every revenue opportunity, they need to ensure a rigorous focus on strategic and operational priorities. If they do not, they risk undertaking a series of broad-based transformations that achieve little – other than squandering precious resources and dulling competitive edge. To help achieve the focus that we believe is essential to high performance, Accenture has developed a list of the top ten challenges facing investment banks today. Although these may not apply to all with equal weight, each represents a major concern (and source of opportunity) for the industry going into 2011 and beyond. Fundamental macro trends As they face up to the challenges that lie ahead, investment banks need to keep the following six macro trends front of mind. Each of them, we believe, will play a crucial role in shaping the future operating environment: 1.Demographic challenges Widely reported, most developed economies are struggling to come to terms with seismic demographic challenges. To varying degrees, these a re set to transform the way people live and work. Life cycle savings and ageing populations point to the need to save in developed economies, making asset management an increasingly vital source of revenue growth for investment banks. 2.Emerging markets growth Economies experiencing rapid growth, combined with little well established competition, offer exciting opportunities for investment banks. But the risks, and operational challenges, of expansion into these new geographies are still being potentially underestimated. 3.Technology commoditisation Technology has repeatedly demonstrated its ability to commoditise banking offerings – particularly in non-relationship based, low value added areas. With commoditisation increasingly dominating ‘flow’ businesses, clear- sighted strategic decision-making is vital. Banks must either make the substantial investments in straight- through processing capabilities needed to achieve economies of scale, or concentrate on areas such as advisory, that cannot be commoditised. 4. Ultimate value to investors I nvestment banks have to concentrate on services and offerings where they deliver value to their clients, not just margins to themselves. This makes it essential for banks to develop deep, real-time insights into the risk/reward b alance of their products and services. 5. Re-evaluation of capital S avings deposits may be the most desired form of capital, undemanding and sticky, but those attributes also make it rare and likely to become rarer. Investors have many more choices on where to place their capital and the amount placed in savings has been one of the slowest growing of all areas for over a decade. With this in mind, investment banks need to re-evaluate capital’s importance in any service of product and charge accordingly. 6. Resource constraints Mounting resource constraints point to gradually rising input costs becoming a universal backdrop to all business and banking activity. With oil approaching peak output, and basic commodity costs responding to wide demands of emerging markets, a reordering of economic priorities looks to be the likely result. Sustainability is now on the agenda (as a serious business issue) across all business sectors and investment banks must overcome their institutional cynicism and follow suit (as well as capitalise on the opportunities presented). Investment banking – three themes f or the future With these macro trends in mind, we have divided the challenges facing investment banks into three broad themes: Responding to regulation O f course, banks must still take risks to achieve their targeted RoE, but t hey must now do so through a complex (and still evolving) regulatory framework. Beyond question, responding to the post- crisis wave of regulation presents a major compliance challenge for all investment banks – although new opportunities will be created from the market dislocation that is already underway. From now on, robust risk management will be a crucial demonstration of intent to regulators, as well as allowing banks to shape regulation and protect shareholder value. If one lesson can be taken away from the crisis, it must be that previous risk governance models were largely inadequate to shield investment banks from the onslaught of systemic turmoil. Going forward, therefore, banks must commit to adopting and embedding a culture of managing risk throughout the organisation (particularly in the front office). Driving the client agenda W ith proprietary trading operations being limited by regulators and questioned by shareholders, the importance of building (and maintaining) a successful client franchise is now critical to the b ottom line. So too is the need to drive greater efficiencies from existing revenues. From now on, banks must focus on providing i ntegrated client services to attract and retain client business, as well as developing the deep analytical insight needed to monitor and maximise client returns, and undertaking realistic assessments of the costs and benefits of the services that they provide. As figure 2 shows, the results of this discipline will allow them to pinpoint where to invest to achieve economies of scale, and where to aim for high-touch differentiation. Lastly, now more than ever, by taking sustainability seriously, they have an opportunity to regain trust (amongst clients and throughout wider society), while delivering returns to their core business through responsible business practices. • Banks can find new revenue through effectively segmenting clients and determining where value is delivered • Realistic assessment of cost and benefits of services need to be undertaken • Result indicates where to invest to achieve economics of scale and where to aim for high touch distinction • Services may well be denied even where marginal costs are low in order to privide distinction • Objective is not to focus on top 20% to the exclusion of all else, but to be aware of costs and benefits of eack client Access to Analysts Broker reports Electronic Trading - Direct Market Access Client Coverage (%) Low Touch High Touch Marginal Value of Provision Source: Accenture Research Value of Client Access to Core clients Access to Capital & Select Investments Figure 2: Effective Targeting of Client Offerings Preparing for the new normal Whilst banks must remain resolutely f ocused on the many challenges of today, they also need to keep an eye on tomorrow. That way, they can ensure they are positioned to t ake advantage of the next wave of growth – instead of having to react t o it. The banks that successfully capitalise on future strategic opportunities will possess acute strategic insight, be early adopters of emerging technologies and, critically, be able to make measured assessments of tomorrow’s key battlegrounds – and their chances of success in each of them. ‘Unknown unknowns’ may be proliferating in today’s operating environment. But one basic fact remains – there are still really only three ways to make money in investment banking: take risks, grow revenues and control costs. This year’s report explains why we think banks can and should keep each of these truisms in mind – albeit, inside a wrapper of customer centricity, operational flexibility and risk awareness. Pinpointing the core challenges In such a competitive marketplace, investment banks must move swiftly to plan and execute optimal responses to the complex challenges they face. To help them, Accenture has used its research, industry expertise and client insight to pinpoint and examine what we believe to be the ten key challenges currently confronting the industry. We have surveyed over 2000 of our capital markets professionals across the globe, and over 200 senior clients, to determine the Top 10 Challenges for Investment Banks 2011: Responding to regulation 1 Responding to the regulatory tsunami 2 D ealing with OTC derivatives reform 3 Embedding effective risk management Driving the client agenda 4 Refocusing on client needs 5 M aximising client profitability 6 Taking sustainability seriously 7 Delivering valuable transformation Preparing for the next horizon 8 Harnessing innovative technologies 9 Engaging effectively in emerging markets 10 Picking the right battles. In this paper, we explore each of the Top 10 Challenges in detail. For each one, we describe the background and context, as well as providing specific examples of the challenges faced by many investment banks today and the reasons why these will be front-of-mind issues for 2011 and beyond. We also provide Accenture’s perspective based on our research, experience and insight in the market. Finally, we show how our proven services and solutions have already delivered benefits to clients, helping them to overcome these challenges in a ‘real world’ context. Accenture Experts Dean Jayson Senior Executive, London dean.l.jayson@accenture.com +44 20 7844 8295 +44 79 5841 4692 Ryan Westmacott London ryan.m.westmacott@accenture.com +44 20 7844 5259 +44 78 1030 4031 James Sproule London james.r.sproule@accenture.com +44 20 7844 3387 +44 78 6680 8366 [...]... June 2 010) N =102 (33% C-suite, 20% VP/SVP/EVP, 24% MD/Director, 24% Senior Manager/Manager) Samantha Regan New York samantha.regan@accenture.com +1 917 452 5500 +1 404 790 7378 Top 10 Challenges for Investment Banks 2011 2 Dealing with OTC Derivatives Reform Banks are seeking to develop cohesive responses to ongoing OTC derivatives reform in the US and Europe Although the combined impact of these reforms... Times, 11 August 2 010 ii Sources: Bank for International Settlements (December 2009), Quarterly Review iii Source: Accenture research iv Source: Bank of International Settlements (September 2 010) , Quarterly Review v Source: BIS, DTCC, Euromoney, Accenture research Assumes product CCP eligibility by 2013 of 90% for credit, 70% for rates, 15% for FX Top 10 Challenges for Investment Banks 2011 3 Embedding... counterparties (CCPs) indicates that this topic alone will demand strategic thinking at the C-suite level of investment banks Key challenges Strengthening the core to execute market strategy These regulatory developments place extreme and far-reaching challenges on investment banks (see figure 3) Already struggling to address wider financial sector reforms, the priority for banks must be one of determining... European Commission, it is still too early to evaluate the exact impact of this concerted effort to reform the OTC derivatives market on investment banks What is clear, however, is that the combined effect of these major reforms will significantly transform the industry landscape The challenge for investment banks is one of staying ahead of the regulatory curve as it continues to evolve The focus throughout... to 2 010, whilst average spreads felliv Challenge 2: Dealing with OTC Derivatives Reform The main challenge for investment banks is one of developing a client offering that protects existing revenue bases whilst capitalising on new market opportunities driven by this evolving regulatory landscape The first challenge that banks face, then, is to determine their strategic response Strategically, banks. .. research FTE (per year) 90 280 360 290 115 1135 Regulatory change is notoriously difficult for investment banks to implement In large part, this is because the timescales are immovable – something that banks find extremely difficult to work with In fact, the only variable that banks can change is the budget available for regulatory projects And in our experience, ‘throwing money at the problem’ is commonplace,... operations needed to address the shift of various asset classes onto exchanges and electronic trading venues for subsequent clearance and settlement of CCPs Challenge 2: Dealing with OTC Derivatives Reform Challenge 2: Dealing with OTC Derivatives Reform Figure 3: Summary of challenges facing investment banks Function Challenge Impact Front-office Systems Integrate with new market models as they evolve and... Co-ordinated effort required to leverage inflexible legacy applications Default management Will banks be forced to cover Variation Margin for clients who declare bankruptcy? Balance sheet reporting Controllers need to clearly define reporting flows for Agency vs Principal trades, as this has a direct impact on upstream business and technology processes Risk finance integration How will banks update their... by Investment Bank The scale of work involved in shaping banks market responses should not be under-estimated Accenture Research suggests up to 65 percent of industry OTC derivatives could be eligible for CCP clearing by 2013iii Given this significant scope of trades that could be eligible for CCP clearing and as greater market transparency drives compression of margins, banks must be prepared for. .. figure 1 The reality is that most investment banks continue to see risk management as a process for managing management – or worse, managing regulators This ignores the clear benefits that flow from enterprise-wide risk management cultures, both in terms of improved business decision-making and as the foundation for strategic agility and commercial success For as long as top- down approaches to risk management . OUTER Top 10 Challenges for Investment Banks 2011 Top 10 Challenges for Investment Banks 2011 Top 10 Challenges for Investment Banks 2011 Copyright © 2 010. MD/Director, 24% Senior Manager/Manager) Top 10 Challenges for Investment Banks 2011 Dealing with OTC Derivatives Reform Banks are seeking to develop cohesive responses