‘A clear-eyed vision is required’: Investment banking at a crossroads

  • The top 10 banks reported a return on equity of only 7 percent.
  • McKinsey outlines 8 key steps banks should take to achieve sustainable returns.

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‘A clear-eyed vision is required’: Investment banking at a crossroads

Investments banks are facing a rough time. Stagnant or falling profitability and tough regulation are forcing banks to rethink their businesses. Leaders will need to take “bold actions” in order to transition to a successful operating model, claims a new McKinsey report that outlines key initiatives to help transition investment banks.

“The traditional model of global capital markets and investment banking is no longer an option,” the report states.

The top 10 global banks struggled the most in recent years. The banks reported a combined return on equity of only seven percent, due to rising costs and declining revenues. Most of the lost revenue was in the fixed income, currency and commodities sector.


Niche or regional players actually gained share, which McKinsey attributes to simpler product sets and business models.

The consulting firm sees a new market structure emerging for investment banks over the next three to five years as economic, regulatory and technological trends play out.

Global full-service players at scale across products and services, which totaled about 10 banks before 2008, will scale back their operations. Only three to five such players will remain. Instead, we will see the rise of focused global players with scale in chosen product bundles, which will total eight to 12 banks.

National and regional commercial banks with strong corporate franchises and investment banking product factories will emerge. In addition, non-bank competitors are gaining market share in a range of product areas, from leveraged loans to boutique investment banking services. These players are not burdened by legacy technology and are able to be more agile than traditional players. Non-bank competitors are expanding into related businesses and are expected to gain more market share.

“Banks should abandon hope of a cyclical upturn and focus on structural change,” claims the report. Better utilization of technology and automation is key in this process to achieve sustainable returns.

“New technologies remain underutilized, and many banks are struggling to make fundamental changes in their operating models and embrace the potential benefits of digitization.”


With a targeted goal of a 20 percent cost reduction, the report emphasizes back office simplification, IT overhauling, migrating to public cloud infrastructure and participating in industry utilities.

The report also mentioned the cost reduction benefits of blockchain technology, including faster clearing and settlement, ledger consolidation, consolidated audit trail, reduction in systemic risk and operational improvements

There is vast potential for extracting new value by using machine learning and advanced analytics to leverage the data that banks hold. Big data analytics can improve decision making and insight generation, as well as drive predictive trade capture and improve reconciliation and root cause analysis. In some cases, using ML and analytics improved bank efficiency by up to 30 percent.

As the new normal sets in, banks will need to change their operations, organizational DNA and culture to make it through. “Across all players, a clear-eyed vision is required and a steady nerve in making the bold moves required for success,” the report concludes.

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