Investment Banking:Syndetic Solutions to Discordant ChallengesGRANT THORNTON FINANCIAL SERVICES GROUP

USA$37.9billion

Canada$4.2billion

LatinAmerica

$2billion

Europe$18

billion2013 Investment

Banking Revenue by Region

Middle East & Africa

$1.2billion

Asia$12.3billion

Performance Related Compensation awarded in respect of performance year 2012

fell by

4%

Return on equityBefore

2008After

200820-25% 10-13%

Banks’ IT costs:

7.3%of revenues Average of

other industries:

3.7%

Total cost of misconduct for 10 major banks:

billion$100

JP M

orga

n

$5.9billion

Bank

of A

mer

ica

Mer

rill L

ynch

$5.4billion

Gol

dman

Sach

s

$4.7billion

Mor

gan

Stan

ley

$4.1billion

Citi

$3.8billion

2013: Top Fee-earning Banks

Financials

Energy & power

Industrials

High Technology

Materials

Other

Investment Banking Market Share:

Fees per Product

19%

14%

11%

8%8%

41%

2013 TotalGlobal InvestmentBanking Revenue $76 BILLION

2 INVESTMENT BANKING – SYNDETIC SOLUTIONS TO DISCORDANT CHALLENGES

JP M

orga

n

$5.9billion

Bank

of A

mer

ica

Mer

rill L

ynch

$5.4billion

Gol

dman

Sach

s

$4.7billion

Mor

gan

Stan

ley

$4.1billion

Citi

$3.8billion

2013: Top Fee-earning Banks

Financials

Energy & power

Industrials

High Technology

Materials

Other

Investment Banking Market Share:

Fees per Product

19%

14%

11%

8%8%

41%

2013 TotalGlobal InvestmentBanking Revenue $76 BILLION

INVESTMENT BANKING – SYNDETIC SOLUTIONS TO DISCORDANT CHALLENGES 3

New standards on capital, liquidity and leverage have put the investment banking sector under unprecedented pressure. This has been the catalyst for a paradigm shift in which depressed margins and interest rates will force banks to adapt their business models and pursue a revised set of objectives.

Even though some argue that the current situation is cyclical and predict a return to healthy growth, the truth is that, for many, the RoEs (Return on Equity) have halved. The decisions that banks take now will have a radical impact on their future success. Embracing a customer centric approach, adopting innovative strategies and structures, in addition to optimising the management and use of data, will form the foundations of what must be a holistic and interconnected approach to ‘whole bank’ evolution in a much changed landscape.

reported an increase on last year in the involvement of the risk function in remuneration decisions

Introduction

firms

4 INVESTMENT BANKING – SYNDETIC SOLUTIONS TO DISCORDANT CHALLENGES

Regulatory Challenges

It is commonly accepted that the under-regulation of the banking sector and its lack of transparency were two of the major contributory factors that led to the financial crisis. The natural reaction has been tougher regulation and a major revision of the operational control frameworks. The primary solutions that regulators seek to impose can be divided into four categories: higher capital and liquidity rules, structural changes that will oblige some banks to ‘ring-fence’ their retail business and infrastructural change of the market.

However, what started as a global action plan after the G20 summit in 2009, soon became a puzzle of diverging national agendas. Banking institutions face two problems, on the one hand they have to deal with the complexity of multi-jurisdictional regulation; on the other hand, the exact implementation date and the content of most of these national and international guidelines are yet to be formally determined, which causes

uncertainty. Moreover, Europe and the US have launched various supervisory bodies, which means that banks not only have additional reporting obligations but they also have to build relationships with these new organisations.

A global policy response would be the ideal solution, however, legal harmonisation is not on the agenda and does not appear a realistic option. Global players have to assume that it is not possible to respond to all aspects of the new regulation. Therefore, it will be necessary to assess the effect that different norms might have on their global, regional and national business strategies.

Despite the uncertain content and timeline of many of the new rules, banking institutions must adopt a proactive, rather than a reactive, strategy. Regulatory drivers will have an inevitable impact on the evolution of the core components of an organisation’s business and operating model.

2 ‘ Wholesale and Investment Banking Outlook – Global Banking Fractures: The Implications’ Morgan Stanley Research Global

Estimated cost of complying with regulation across

jurisdictions: 15 billion2

INVESTMENT BANKING – SYNDETIC SOLUTIONS TO DISCORDANT CHALLENGES 5

Strategy

Often, short-term revenue targets have dominated the behaviours of investment banks, long-term business strategy was a secondary priority. However, due to new regulatory demands and lower revenues, long-term, strategic models are a necessity: “The era of being all things to all people across all products anywhere in the world is behind us”.3

Only the largest and most successful institutions will maintain a truly global model. A combination of regional regulatory requirements and more competitive local markets will dictate that banks reassess their presence in non-core locations.

Regulatory considerations should inform strategies, not dictate them. Firms’ strategies must incorporate a detailed analysis of the impact of regional regulation, the cost of local market presence, as well as the ability to provide service aligned to the expectations of their customers. Only then, can they decide in which business lines and in which locations they want to remain.

Banks will need to focus in business areas and geographical regions where they can add value and remain competitive. Although making these decisions without a fully defined regulatory landscape might be challenging, the new panorama is full of opportunities.

Innovative operational strategies, particularly the avoidance of duplicated structures, are likely to define the success or failure of the business plan. One such option is to build a network with selected partners and regional specialists to access local markets without incurring large fixed costs. Regional banks may profit from these circumstances by exploiting their local market presence and knowledge, in collaboration with the brand and structure of a larger player.

3 ‘ Future of Investment banking roundtable. Evaluating Performance and Defining Optimal Strategies for the New Cycle.’ International Financing Review – Thomson Reuters page 1

“Major organisations work with more than

20 banks and use them depending on the banks’ geographical location and the type of products and

services they offer”

Cultural change must be a critical part of the new strategy adopted by banking institutions. Numerous scandals made evident that risks, responsibilities and rewards were misaligned. Even though several firms had to pay substantial corporate fines, these were regarded as “the cost of doing business”. Regulators have launched several measures to redress the situation; changes in remuneration models and increased personal accountability are amongst the new proposals. Nevertheless, the latter might not be enough to change the banking culture. The realignment of corporate values must be a core strategic component. Therefore, strong, topdown governance is essential.

6 INVESTMENT BANKING – SYNDETIC SOLUTIONS TO DISCORDANT CHALLENGES

4 ‘ Wholesale and Investment Banking Outlook – Global Banking Fractures: The Implications’ Morgan Stanley Research Global

Structure

The disjointed regulatory landscape will doubtless have a negative effect on RoEs. Taking into account the depressed economic climate and lower trade volumes, it becomes evident that banks will have to make structural changes in order to reduce their fixed cost and remain competitive.

During the ‘golden years’ of investment banking, multiple mergers and acquisitions contributed to the size and structural complexity of banks. High revenues overshadowed operational inefficiency; long-term structural reforms were never the priority of senior management. Banks simply added people, operational procedures and systems in order to handle the rapid growth. The main problems of having such complex organisational structures are that they entail a huge fixed cost and impede flexibility. It is time for organisations to find a structure that is adaptable to new realities.

There is a belief that with centralisation, comes control. However, this is not necessarily the case. Both the size of an organisation and the specific function in question must be carefully evaluated prior to any effort to centralise. Indeed, large organisations are likely to find effective centralisation difficult to achieve.

Progressive organisations will embrace the current challenges as an opportunity to initiate more radical changes to their operating structures. Significant fixed cost rests with operational processing, namely the middle and back office functions. Consolidating these functions into shared centres of excellence, managed and maintained by third parties, is becoming a more viable reality.

The ‘mutualisation solution’ is particularly poignant in the case of account on-boarding: the procedure can be sufficiently standardised to be delivered by an external party. Moreover, there are significant benefits that could be realised through consolidated data sources; nevertheless, this option remains largely unexplored.

As a precursor to any such agenda, businesses have the opportunity to optimise and standardise their operational processes. This can be achieved through targeted, low-cost operational improvement programmes and diagnostics, which would deliver medium-term cost-efficiencies.

Estimated industry savingsfrom the adoption of mutualisation

solution

1.5-3 billion4

INVESTMENT BANKING – SYNDETIC SOLUTIONS TO DISCORDANT CHALLENGES 7

Data

Years of tactical systems development have resulted in fragmented and unwieldy data structures, the consequence of which is an excess of often substandard and siloed data. Handling such volumes of information is very complex, time consuming and costly; new regulatory demands and reporting obligations add to this challenge.

Furthermore, data is an integral part of business intelligence, which, in turn, should countenance informed and effective decision-making. Moreover, with reporting frameworks constructed around the provision of management information, it is imperative that data is both accessible, accurate and informative.

Banks recognise the importance of data, nevertheless, they tend to deal with problems

related to its management as they arise, on a case by case basis. Such an approach is ineffective and is likely to further compound the problem. Adopting a unified, enterprise-wide strategy represents a more considered and sustainable solution. Nonetheless, a project of such magnitude would require a significant budget and involve several years of concerted effort, moreover board-level endorsement would be a prerequisite.

The evolution of data management and structure should be aligned to the firm’s operational goals. This strategy must be adaptable, consistently applied and deliverable. Such strategy would allow firms to benefit from flexible technology solutions and consequently, adapt to the ever-changing demands of regulators and customers.

“Banks’ IT costs equal 7.3% of their revenues,

compared to an average of 3.7% across

all other industries”5

5 ‘ Banking and Technology Snapshot – Digital Economy and Structural Change.’ Deutsche Bank Research

8 INVESTMENT BANKING – SYNDETIC SOLUTIONS TO DISCORDANT CHALLENGES

Customers

Customers have undergone an attitudinal change, this is intrinsically linked to the reputational crisis that followed the financial meltdown. The initial lack of trust was exacerbated by subsequent mis-selling scandals that left the public perception of the industry at an all-time low. Despite the raft of recent remediation programmes, a much more proactive attitude is expected in order for the industry to regain the confidence of the public.

The bonus-driven incentive model, which encouraged excessive risk-taking, was undoubtedly an intrinsic component of the failed banking regime. Sales-related incentives were at the heart of many of the recently unearthed mis-selling scandals. Conflicts of interest were prevalent, across sales and supervisory personnel, with the customer the natural casualty. Incentives based on the long-term performance of the firm are the best way to align good practice and rewards. It seems that the times of proprietary trading and complex products are over and have given way to a consumer-centric approach.

Estimated amount of

compensation for mis-sold PPI

Estimated cost of conduct

breaches over the last

5 years

Customer expectations should be at the epicentre of cultural and operational change. While more firms have acknowledged the benefits of a customer-centric strategy, the agendas of many regulators now make it a formal requirement. For instance, the FCA is encouraging businesses to focus on “good profits”; that is, making profits from selling products that are aligned to customers’ requirements. Customer centricity is now as important as financial performance.

Banks should seize this opportunity to make better use of the data they accumulate by investing in advanced client analytics; innovative segmentation techniques will be at the heart of it. These methods focus on client behaviours, profitability and future potential. Segmentation is not only ideal to create tailored products, it will enhance an organisation’s ability to cross-sell.

6 JP Morgan Global Research7 ‘ Wholesale and Investment Banking Outlook – Global Banking Fractures: The Implications’

Morgan Stanley Research Global

15 billion6

30-40billion7

INVESTMENT BANKING – SYNDETIC SOLUTIONS TO DISCORDANT CHALLENGES 9

Conclusion

The banking industry faces a period of transformation. Building a long-term strategy during this time of uncertainty and regulatory turmoil will be a significant challenge to most organisations. However, those that adopt a proactive approach will achieve a competitive advantage by playing an active role in the redefinition of the regulatory landscape.

The revision of businesses’ strategies will be a preeminent theme, particularly the reassessment of global models. Innovation and collaboration will be to the fore, with operational efficiency providing the platform for long-term and sustainable change.

Data must be managed as an asset and used to drive behaviours as well as countenancing decision-making. Central to these behaviours will be placing the customer at the heart of the business, with the return to a service-driven banking model.

There is no single solution to these challenges. However, a combination of the aforementioned key factors, allied to a proactive and holistic approach to change, will provide organisations with the foundation for success.

10 INVESTMENT BANKING – SYNDETIC SOLUTIONS TO DISCORDANT CHALLENGES

Why Grant Thornton

This is what we doAs one of the UK’s largest financial services advisory firms, we have conducted a wide range of engagements across the financial services and consulting spectrum.

We have relevant experienceWe have deep and relevant experience across the financial services sector, particularly within capital markets, banking, insurance and investment management. We already work for many of the world’s largest organisations providing a wide range of consulting and advisory services. We understand this market and the challenges facing banks today and will bring this experience to deliver the outcomes and assurance you require.

We have strong brand valuesWe pride ourselves on our independence and ‘telling it like it is’. We will provide you with robust advice and opinions, backed up by strong evidence. Where appropriate, we will make practical and workable recommendations to help you strengthen and develop your business. We always seek to work together with our clients to overcome business and IT challenges, delivering value-add solutions that provide long-term benefits.

We know how to apply the rulesFinancial institutions are facing increasing scrutiny, both internally and from the Regulators. We help our clients interpret the rules published by local Authorities. We therefore know the relevant requirements better than most; by understanding what sits behind them, we are able to take a proportionate and pragmatic view of how they should be applied.

We are credibleWe are credible and respected within the Financial Services industry, both by our clients and by the Regulators.

We have highly experienced, industry-leading experts across the sector and an excellent track record. As a result, most clients return for advice and support, knowing they will receive insightful, unbiased and valued solutions.

INVESTMENT BANKING – SYNDETIC SOLUTIONS TO DISCORDANT CHALLENGES 11

We have the capacity to deliver. With over 35,000 employees globally and over 4,500 in the UK.

We are flexible and adaptable. Our core competencies are aligned to established industry challenges. Our people are market-leading, industry experts. Our scale and reputation ensures we have access to the best talent. Our track record is proven. We count over 200 financial institutions as our clients, which is testament to our delivery capability.

Grant Thornton UK LLP @GrantThornton

© 2014 Grant Thornton UK LLP. All rights reserved.

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