Over 2018 as a whole investment banking revenues inched up marginally to $151.4 billion, up from $150.9 billion the prior year, with a return to market volatility at the start of 2018 helping lift trading units
- Definition / Scope
- Market Overview
- Market Risks
- Top Market Opportunities
- Market Drivers
- Market Restraints
- Industry Challenges
- Technology Trends
- Pricing Trends
- Regulatory Trends
- Market Size and Forecast
- Market Outlook
- Technology Roadmap
- Distribution Chain Analysis
- Competitive Landscape
- Competitive Factors
- Key Market Players
- Strategic Conclusion
Definition / Scope
Investment banking is a specific division of banking related to the creation of capital for other companies, governments and other entities. Investment banks underwrite new debt and equity securities for all types of corporations, aid in the sale of securities, and help to facilitate mergers and acquisitions, reorganizations and broker trades for both institutions and private investors. Investment banks also provide guidance to issuers regarding the issue and placement of stock.
Investment banks employ investment bankers who help corporations, governments and other groups plan and manage large projects, saving their client time and money by identifying risks associated with the project before the client moves forward.
In theory, investment bankers are experts in their field who have their finger on the pulse of the current investing climate, so businesses and institutions turn to investment banks for advice on how best to plan their development, as investment bankers can tailor their recommendations to the present state of economic affairs.
Essentially, investment banks serve as middlemen between a company and investors when the company wants to issue stock or bonds. The investment bank assists with pricing financial instruments to maximize revenue and with navigating regulatory requirements.
Often, when a company holds its initial public offering (IPO), an investment bank will buy all or much of that company’s shares directly from the company. Subsequently, as a proxy for the company holding the IPO, the investment bank will sell the shares on the market. This makes things much easier for the company itself, as they effectively contract out the IPO to the investment bank.
Moreover, the investment bank stands to make a profit, as it will generally price its shares at a markup from the price it initially paid. In doing so, it also takes on a substantial amount of risk. Though experienced analysts use their expertise to accurately price the stock as best they can, the investment bank can lose money on the deal if it turns out it has overvalued the stock, as in this case it will often have to sell the stock for less than it initially paid for it.
North America was the largest region in the investment banking market in 2018, accounting for 47% market share. North America is the largest market due to large presence of corporations and economic activity. Asia Pacific was the second largest region accounting for 26% market share. Africa was the smallest largest region accounting for 1% market share. USA is the largest market due to large presence of corporations and economic activity. China and the UK were the second and third largest market respectively.
Worldwide revenue for investment banks was about $82 billion in 2017, according to Dealogic. The US is the main driver of investment banking revenue, accounting for nearly half the annual total. However, European and Asian banks also are key players within the industry. Overall, the global investment banking industry has struggled in the aftermath of the financial crisis and ensuing regulatory changes that have made it harder to profit from their traditional lines of business.
The top ten competitors in the market made up 50% of the total market share in 2018. JP Morgan was the largest competitor with 8.7% of the market, followed by Goldman Sachs, Bank of America Lynch, Morgan Stanley, Deutsche Bank and Citi Bank. Developing regions such as Asia and Middle East & Africa are offering significant growth opportunities.
Rising economic activity has turned Asian region, especially countries such as China and India into some of the most attractive markets for investment banking around the world. To capitalize on this rising trend, global players are exploiting their product expertise and large-scale platforms to enter the capital markets and investment banking markets in Asia particularly China, often through joint ventures.
There are already progressive banks like JP Morgan, Goldman sachs, Bank of America etc, so it will be challenging for the competitors as they have a greater chances of losing market shares, getting acquired or shutting shops.
Banks hold large amounts of confidential and critical data; billions of dollars of monetary transactions are recorded and saved in the banking servers. With the recent incidents of cyber-attacks and thefts, banks are increasingly faced with the challenge to counter this menace and at stake are not just the huge amounts of money but the very confidence of the general population in the banking system.
For example, in 2016 Bangladesh bank become the victim of the biggest cyber- heists of all time. Criminal managed to hack into the central bank’s security system, falsely masquerade as official banking authorities and transfer $101 million of funds from its account at the federal Reserve bank of Newyork to accounts in third countries (Srilanka and philippines).
Global slowdown in the economies of the developed world which is affecting the global banking system of the developing nations like India and China. Global economic growth is projected to soften from a downwardly revised 3 percent in 2018 to 2.9 percent in 2019 amid rising downside risks to the outlook, according to the World Bank.
International trade and manufacturing activity have softened, trade tensions remain elevated, and some large emerging markets have experienced substantial financial market pressures. Slowing external demand, rising borrowing costs, and persistent policy uncertainties are expected to weigh on the outlook for emerging market and developing economies.
Increased banking regulation since the financial crisis of 2008 and implementation of Basel III norms particularly with regards to Capital Adequacy Ratios and assigning risk weightages, Dodd Frank rules although necessary, have negative impact of banks profitability particularly the small investment banks.
Top Market Opportunities
Digital technology has already transformed how businesses interact with customers and is now revolutionising how banks serve and interact with theirs.
However, this ‘new way to bank’ not only requires a change in process, but also a change in culture from banks and customers alike and although banks can’t change customer culture overnight, they can start pushing them in the right direction. Banks are still recovering from the global banking crisis, both financially and in terms of their relationship with customers.
However, by fixing the latter, they can address the former, and new technologies are key to this. By utilizing innovative technology, banks can do more to service shareholders and customers, as the two are intertwined. In the long run all parties will benefit – but only if the customer user experience and security remain front of mind.
For many developed market investment banks seeking to meet their battered return on equity targets, emerging markets are the great opportunity. But it is not an opportunity without challenges and competition.
These economies offer the very real prospect of substantial economic growth and the consequential need for investment banking services ranging from advisory, to wealth management, to sales and trading, all taking place in markets which have yet to have investment banking margins crushed through competition and commoditisation.
- For many developing countries, foreign direct investment (FDI) has become the largest source of external finance, surpassing official development assistance, remittances, or portfolio investment flows. In 2018, more than 27% of the nearly $1.3 trillion of global FDI flows was directed to developing countries, providing much needed private capital.
- In 2018, federal reserve raised the short term interest by 2 % which has benefited investment banks make more in fees on the advisory side of their business, than on the capital venture banking side of high risk initial and secondary stock offerings.
- Government in Europe, Asia, Africa and Latin America are establishing several public investment banks focused mainly on infrastructure investment and counter-cyclical lending. One of the most interesting initiatives is in Scotland, where in 2017 First Minister Nicola Sturgeon announced plans to establish a “mission-driven” Scottish National Investment Bank. Scotland is already a global leader in the transition to a low-carbon economy and in promoting inclusive growth, and the government has recognized the need for new investment to help it achieve these goals.
- The new regulations like basel III that followed the financial crisis have changed the industry in a number of ways, making it difficult to profit from many traditional lines of business by creating onerous capital, funding, and liquidity requirements and increased costs and operational complexity. Accenture calculates that ROEs for Tier 1 investment banks could fall by a further 5 percent going forward, as more rules are put in place, and that according to senior industry professionals, up to 70 percent of banks’ variable investment budgets will be put aside this year for regulatory reform.
- Innovative technology applications such as mobile banking, smart payment have reduced the barriers to entry for challengers, resulting in a real competitive threat in developed countries like US and UK. Although in principle established banks can retaliate, their existing technology platforms, outdated and inflexible as they are, can hamper the timely incorporation of new technologies.
- The rise in Fintech companies has become the threats for banking sector. Fintech generally hinge on giving customers viable alternatives to lucrative services like foreign exchange, investment advice (‘robo advice’) and providing customers with the tools to effectively avoid taking on bad credit or falling into their overdraft. In UK Robo-advisor firms like Nutmeg, Moneyfarm and Wealthsimple, use technology to effectively replace typically expensive investment advisors, bringing down barriers to entry for people wanting to invest smaller amounts of money.
- Many investment banks are still struggling to retain top talent – and that’s despite their having introduced new measures such as faster promotions in a bid to attract employees. Increasingly, young professionals are finding themselves more drawn to alternative sectors such as technology or innovative start-ups. A recent survey showed that a mere 4% of Harvard Business School graduates wanted to work in investment banking. In the UK, just 9.6% of London School of Economics graduates applied for roles in investment banking in 2017, compared to 41% in 2012 – the lowest proportion since 2009 when banks halted graduate recruitment in the aftermath of the financial crisis.
- Maintaining international norms of Basel III is the major challenge for the banking system of different sizes in the world as banks need to hold 4.5% of risk-weighted assets in the form of their own equity as well as hold high-quality, liquid assets that would cover the bank’s cash outflows for a minimum of 30 days in the event of an emergency.
- Despite all of the headlines about banking profitability, banks and financial institutions still are not making enough return on investment, or the return on equity, that shareholders require. According to Accenture , the roe of investment bank will fall by 5 percent in coming years.
- The collective rise of the tech giants and challenger banks is placing significant pressure on traditional financial institutions. Disruptive digital savvy ‘newbies’ are designing their entire ethos around simplifying and enriching the customer experience, and anyone slow to respond could find themselves serving as another stark reminder of the pace at which customer loyalties can change. Many big banks like Barclays bank, bank of america, deutesche bank etc faced the pressure of improving customer experience.
Bank of America (BoA) solved a critical banking problem and came up with a solution which motivated clients to open new accounts called “Keep the Change”. With “Keep the Change”, BoA understood an idea many banks still struggle to value; Customer Experience (CX) has become a key differentiator – and when done right can lead to greater client satisfaction and loyalty.
There is no doubt that the increased use of technology and digital channels have made the banking industry more susceptible to cyber-attacks and have forced banks and credit unions to be in the unenviable position of playing ‘catch up’. Globally, there is a rise in cyber security incidents and several of them have been large-scale breaches, frauds and heists.
The impact of such breaches does not end with serious financial loss but, in most cases, can also potentially erode substantial brand value. In November 2016, Tesco bank was fined over £16m for failures which allowed cyber attackers to steal £2.26m from customers in a hacking incident.
Now more than ever, banks must become proactive in their handling of data protection and managing cybersecurity risks. Unfortunately, consumers want the best of both worlds — ease of use and increased protection of data and identity. This will require the banking industry to implement multi-factor authentication, secure applications, digital signatures, and other forms of security such as biometrics.
Artificial Intelligence (AI)
The AI is evolving in an unprecedented way, and the interim results of this transformation are expected to be truly impressive: according to the report, 79% of the banking sector representatives anticipate that in the next two years, technologies will advance to such an extent that artificial intelligence could work in financial organizations equally with living people as an employee and reliable advisor.
Industry experts are already estimating the benefits that large-scale introduction of AI technologies will bring to companies in the sector. For instance, Autonomous Research, a US independent analytical agency that conducts research in the field of financial technologies, offers the following estimate: in the United States alone, artificial intelligence will provide banks and financial institutions with savings of 22% until 2030, or more than $1 trillion.
Big Data Analytics
Data Analytics has become vital in the decision making processes in the Banking and Financial Services Industry. In Investment banking, volume as well as the velocity of data has become very important factors. Big Data Analytics comes into picture in cases like this when the sheer volume and size of the data is beyond the capability of traditional databases to collect.
For example, In 2017, JPMorgan Chase developed a proprietary Machine Learning algorithm called Contract Intelligence or COiN for analyzing various legal documentations and extracting important data points and clauses.
Blockchain technology lends itself to numerous applications within the investment banking industry. A short list of ways blockchain can benefit investment banking might include the following: automating back-office processes, automating regulatory compliance, significantly decreasing transaction settling time, enhanced transaction security, and reduced fraud.
For financial institutions across the globe, the benefits of cloud adoption are undeniable. Such digital transformation brings with it a new agility, enabling a fresh acceleration of company strategies.
This is because a cloud-based approach to financial services facilitates new digital workflows, enabling more effective collaboration between formerly siloed departments and other businesses or individuals with which financial organisations may work.
For equity offerings, firms pay direct fees to the underwriter as well as indirect fees via the discount of the offer price relative to the prevailing market price. Whereas direct fees for IPOs are generally fixed at seven percent, fees for follow-on offerings vary widely suggesting they are negotiable. Also, unlike IPOs, the pricing discount can be precisely negotiated (and observed) prior to the offering since the stock is traded prior to the offering.
Basel III and fixed income
Among the most wide-ranging regulations being introduced in the wake of the crisis are those by the Bank for International Settlements in Basel. The rules of Basel III have required banks to raise billions of dollars of capital in reserve, improve bank liquidity (principally through the Liquidity Coverage Ratio, which was introduced in part this year) and reduce the amount banks can leverage through the Leverage Ratio, which will be made mandatory under Basel III in 2018.
Dodd-Frank and Volcker
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in 2010, is viewed as being the most significant item of US financial regulation since the Great Depression. Its stated aim is to avoid another financial crisis like that experienced in 2007-09. Within Dodd-Frank’s 5,000-plus pages of regulation contain restrictions on many specific business areas within US investment banks, as well as the US banking sector as a whole.
Brexit Brexit is the withdrawal of the United Kingdom (UK) from the European Union (EU) on june 23, 2016. One of the biggest impacts of Brexit will probably be felt in the financial services industry and within that by investment banks as the EU’s central hub, London, will lose full access to the single European Market.
Its goal is to make it both relaxed and safer for consumers to make cross-country EU payments, requiring EU member states to adopt laws and national policies that go into line with it.The initiative has three key mechanisms.
First, it aims to allow consumers to authorize the sharing of their personal data with third-party vendors. Second, it looks to enable those third parties to perform payment transactions such as bank transfer. Lastly, it requires banks to publicly share product and customer satisfaction information, leading investment in product innovation.
Market Size and Forecast
Market size by region:
- The market size of investment banking in North America was $43.8 billion in 2018 and is expected to grow at a CAGR of 1% to reach at $45.58 billion in 2022.
- The market size of investment banking in Asia pacific was $28.09 billion in 2018 and is expected to grow at a CAGR of 4.97% to reach at $34 billion in 2022.
- The market size of investment banking in Europe was $22 billion in 2018 and is expected to grow at a CAGR of 3% to reach at approximately $25 billion in 2022.
- The market size of investment banking in Latin America was $4.6 billion in 2018 and is expected to grow at a CAGR of 1.59% to reach at $4.9 billion in 2022.
- The market size of investment banking in Africa was almost $800 million in 2018 and is expected to grow at a CAGR of 3.84% to reach at $930 million in 2022.
- Although markets globally saw some pockets of strong growth this past year, overall investment banking revenue fell to $79.7 billion, from $82.4 billion in 2017. Most regions were down as well: North America posted a 3% decline and Latin America a 24% drop, while the Middle East and Africa declined 15%, North Asia 20% and Southeast Asia 6%, according to Dealogic. Only Europe, up 2%; and Australasia, up 20%, recorded advances.
- Over 2018 as a whole investment banking revenues inched up marginally to $151.4 billion, up from $150.9 billion the prior year, with a return to market volatility at the start of 2018 helping lift trading units.
- Global M&A activity reached $2.1 trillion in the first half of 2018, a 36 percent year-over-year increase.
- Total equities revenues over the first nine months of 2018 reached $36.8 billion, a 15% increase on the prior-year period.
The investment banking market was $93.2 billion and is expected to reach a value of nearly $101.29 billion by 2022, significantly growing at a CAGR of 2.1% during the forecast period (2018-2022).
The growth in the Investment Banking market is due to increasing demand for wealth management and securities brokerage services in developing countries such as India and China. However, the market for investment banking is expected to face certain restraints from several factors such as increasing digitization and use of traditional methods.
Investment banks across the globe are moving towards businesses requiring less regulatory capital. In this regard, major investment banks from around the world such as Barclays, Deutsche Bank and Credit Suisse have announced their plans to move from traditional underwriting business to other activities such as mergers and acquisitions advisory and fundraising.
This shift is primarily due to regulatory changes that made some investment banking activities more expensive than the others. Although the regulations have restricted the range of some banks, forcing them to specialize, some investment bankers, such as Citibank and JPMorgan have continued offering a complete range of investment banking services.
Most investment banks are going full throttle on a variety of digital transformation efforts to contain costs and improve customer experience. However, many operational inefficiencies still remain, and the business models at most banks generally remain the same.
Overall, a subtle yet fundamental change appears under way in investment banking. The balance of power seems to be shifting to the buy side, especially to the large institutions. Commoditization, price competition, and growth in market clout have bolstered clients’ negotiating power.
Until recently, investment banks could count on their balance sheets, product breadth, global scale, market-making prowess, and reputation to attract clients and command price premiums. But the post-crisis economics and the rapid spread of digitization seem to have altered the competitive dynamics significantly—with many of the earlier differentiators becoming less potent.
The Asia-Pacific will occupy for more market share in following years, especially in China, also fast growing India and Southeast Asia regions.
North America, especially The United States, will still play an important role which cannot be ignored. Any changes from United States might affect the development trend of Investment Banking.
In recent years all the banks have shifted their trading desks to electronic trading. The highest performing investment banks are now using their front-office technologies in bold, innovative ways as a source of competitive advantage for the whole business. By concurrently enabling interdependent business functions, such as risk management, settlement and financial reporting, these technologies are transforming the way organizations ‘think’, ‘react’ and ‘operate’.
Investment banks are increasingly adopting cloud computing technology to build a flexible core banking system, for their improved customer experience related to loan origination, innovative products and services, and credit risk.
Cloud technologies help these banks to achieve effective collaboration with their clients through customer-centric approaches through CRM tools. Consequently, banks are able to provide value-added services to customers through product differentiation and quality-oriented services.
Distribution Chain Analysis
The global investment banking industry has experienced, and is continuing to experience, extraordinary times via volatile economic and credit conditions, but set against a backdrop of high levels of trading volumes, the introduction of new and innovative financial instrument classes and the potential for large market returns.
Privatizations and merger activity, have also provided a large amount of work also. The increasingly global nature of investments has financial exchanges throughout the world competing for capital and listings just as investment services firms are competing globally for underwriting shares, trading commissions, and other forms of revenues.
As such, some current trends and issues are shown in Table 1, which cover economic, technical infrastructure, information and risk management aspects. Most of the world’s major stock and bond markets have enjoyed robust levels of activity over the past few years, notwithstanding periods of sluggishness and of course current credit-based volatility.
Industry consolidation and convergence are blurring the worlds of banking, insurance and asset management, reducing the numbers of players competing for market dominance.
The world‟s major exchanges now compete more fiercely for capital and stock listings. At the same time, the world’s leading investment service firms compete for trading commissions, underwriting shares and other revenue streams. As individuals recognize the alarming prospect of having saved too little for their old age, an extended period of large-scale investing could well occur.
Demand is driven by economic activity that results in company mergers, acquisitions, or public financing. The profitability of an investment bank depends on its ability to accurately assess both the value of a business transaction and the readiness of the market to buy the attendant debt or equity.
Big firms have an advantage because large customer transactions require firms with substantial financial and technological resources and global networks. Small investment banks can compete by participating in syndications and operating in regional markets or specialized industries. The US industry is highly concentrated: the eight largest firms generate about two-thirds of industry revenue.
New technology plays a vital role in the banking industry. It helps in introduce innovative products according to the demands of the consumers. Technology can be used to lower down the transaction cost and improve the quality of products.
Since all the banks are offering similar products therefore differentiation is very important for future survival. Banks are trying to come with different innovative products in order to differentiate from other banks.
Size of the company
In banking industry size of the bank refer to the market shares, total assets, total number of branches etc. This is a key success factor.
Key Market Players
The Key market players are based on revenue.
- Goldman Sachs (GS)
One of the oldest banking firms founded in 1869 and headquartered in New York City, GS offers a wide range of services spread across four divisions – investment banking, institutional client services, investing and lending and investment management. Goldman Sachs reported net revenues of $32.07 billion for 2017 fiscal year, of which investment banking division contributed $7.37 billion. The revenue generated in the investment banking division was the highest among all divisions. Earnings per share were $9.01 for 2017.
- JP Morgan Chase (JPM)
One of the largest investment banks, JPM Chase reported net revenues of $99 billion for FY 2017, of which investment banking revenue contributed $34.5 billion. EPS was $6.31. “The firm has $2.53 trillion in assets and $255 billion in stockholders’ equity” and operates in 60 countries with more than 260,000 employees with a diversified set of services. Apart from investment banking, it also operates in consumer and community banking, commercial banking, asset and wealth management, and corporate.
- Barclays (BCS)
Founded in 1896, the London, UK based investment bank hit the headlines for allegations about rigging of London interbank rates and news about huge number of job cuts globally in 2013. Backed by a strong workforce of 139,600 employees globally, the 2016 annual report indicates total income of £21,451 million of which the investment banking segment contributed to £10,533 million. Overall, EPS was £-0.12. Along with investment banking, it has a strong presence in retail and commercial banking and card processing business.
- Bank of America Corporation (BAC)
Bank of America Corporation is an American multinational banking and financial services company that offers a wide array of banking services including investment banking, mortgage, trading, brokerage and card services. Operating in 40 countries across the globe with total net income of $18.23 billion in FY 2017, the investment banking division contributed $6,953 million. The overall EPS was $1.56 for 2017.
- Morgan Stanley (MS)
Founded in 1935 and headquartered in New York USA, the global firm employs 55,794 employees spread across multiple countries. It reported net revenue of $37.9 billion in FY 2017, of which the investment banking segment contributed $1.4 billion, increasing from $1.3 billion a year ago.
EPS was $3.09. Apart from the usual capital raising, M&A, corporate restructuring services, the firm also offers diversified services like prime brokerage, custodian, settlement and clearing, etc.
- Deutsche Bank (DB)
Based in Germany and listed on New York stock exchange, Deutsche Bank reported a net revenue of EUR 26.4 billion, down by 12% year-on-year. One of the largest financial services firms of Europe, DB specializes in the cross border payments, international trade financing, cash management, card services, mortgage, insurance and the usual investment banking stream. Deutsche has a global presence with operations in 71 countries.
- Citigroup (C)
Tracing its roots back to the origin of Citibank in 1812, Citi has 219,000 employees with business and operations in 160 countries as of 2016. Of the total revenues of $71.4 billion reported for 2017, contributions from investment banking rose 20% from the prior year to $5.17 billion. EPS was -$2.76. The bank has a strong presence in investment banking, investment management, private banking and card processing streams.
- Credit Suisse (DHY)
With a net income of CHF 20.9 billion and EPS of -0.41 in year 2017 (report), the Zurich Switzerland based Credit Suisse group founded in 1856 today employs over 48,000 members across the globe in over 50 countries. Apart from the regular investment banking business, it also has presence in taxation and advisory, structural lending, real estate leasing and investment research services.
- UBS Group AG (UBS)
Another Swiss investment firm founded in 1862 and headquartered in Zurich, UBS had a net profit of $1.25 billion and EPS of $0.32 in the year 2017. The firm has a strong workforce of around 60,000 employees across the globe with majority of them in US and Switzerland. The firm specializes in services to high net worth and ultra-high net worth individuals, in addition to the investment banking, private, retail and commercial banking streams.
- HSBC Holdings plc (HSBC)
Another London based financial powerhouse founded in 1865 with operation in 75 countries serving 54 million global customers through 235,000 employees, HSBC offers a wide variety of services ranging from forex, leasing, M&A, card processing, account services, investment banking and private banking. Revenue totaling $ 61.5 billion for year 2017, up 5% from the year before. EPS was $1.39.
The future of investment banking industry as a whole looks bright. Many more pure merchant banks & advisory firms could convert themselves into full service investment banks that would broaden the market & make the service delivery much more efficient. In addition, the technology & market developments shaping the capital market would also provide an added path to the growth of investment banking.
Better regulatory supervision & stricter enforcement of the code of conduct of market intermediaries would ensure better issuers come to market & existing issuers would follow enhanced standards of corporate governance. In long run, all these developments would ensure fair returns to investors, & encourage them to invest in the market. This would lead to growth for capital market in general & investment banking industry also.