The launch of the European Central Bank’s Outright Monetary Transactions generated a bounce in risk appetite and deal volumes, but experience suggests this could be short-lived until Europe’s path to economic recovery is clearer. The headlines for investment banks are still rather grim. Even in Asia, the giant market of the future, investment bankers are losing their jobs.
The industry is witnessing genuine capacity reduction, not just staff cuts, with banks such as Crédit Agricole, Royal Bank of Scotland and UniCredit all shutting or selling entire divisions. New chief executives at UBS, Barclays and Nomura are paving the way for potential strategic reviews in which many international activities may come under the microscope.
US investment banks are less constrained by funding and enjoy a healthier home market, but they are not immune from overcapacity in their global operations. And on top of lower volumes worldwide come much higher costs, above all, the costs of implementing and complying with new regulation on everything from capital to structured product prospectuses.
It is tempting to throw in the towel if margins show no sign of recovering. But away from the top tier, hiring goes on. Royal Bank of Canada has broken into the top 10 in terms of investment banking fees. Jefferies has bought a corporate brokerage and a commodities division in the past year or so. And boutiques such as Evercore, StormHarbour or Moelis (barely a boutique anymore) have been hiring big names, making acquisitions and expanding their geographic reach.
What is their secret? Of course, it helps to start from a smaller base with no legacy assets, or an unsullied home market such as Canada. But the distinguishing feature of boutique banks is teamwork. Most pool revenues across the partnership, creating an incentive structure that nips empire-building and internal feuding in the bud.
The big beasts may never be partnerships, but some of this year’s Innovation in Investment Banking award winners are learning the lessons. New management structures seek to ensure that coverage bankers guide clients through the entire suite of products, from daily balance sheet tools to market-changing deals. Rank-and-file bankers are quick to buy into this enforced solidarity when volumes are low and jobs are on the line. The real test will be whether they preserve client-led, joined-up thinking when a genuine market recovery sets in.
