Global investment banks will have to improve their deployment of people, capital and technology in order to succeed, suggests Moody’s Investors Service in a new report.
The rating agency expects the sector’s capital markets revenues to continue being supported by economic growth, whereas their trading operations are in the throes of a technological arms race, driven by fintechs.
What will separate winners and losers is individual firms’ ability to surpass their peers in how they deploy their human resources, capital, and technology, “to successfully serve clients and effectively manage risk,” the report states.
“We expect the underlying demand for the core capabilities of global investment banks to endure,” says Ana Arsov, managing director at Moody’s, in statement. “There will be a continued need for expertise in providing advice, structuring and extending financing, as well as making markets to provide liquidity and facilitate risk transfer.”
Firms in the sector aren’t all necessarily poised to thrive, and market conditions, such as high valuations and the reduction of global liquidity, are also concerns for the sector.
“If these risks materialize, they would flow through [the banks’] income statements in the form of market or credit losses or reduced client activity,” the report states. “Diversification and scale help ease margin pressure since business models and profitability of the [banks] have been markedly constrained by the post-crisis regulation. As well, these advantages provide some firms with a steady stream of investable earnings required to renew operating platforms.”
“The relationship between growth and capital markets revenue is not smooth or linear, and there are significant downside risks, placing a premium on scale, diversification and adaptable business models,” Arsov says. “The current ‘goldilocks’ period of synchronized upward growth momentum, low inflation, low interest rates, steadily rising asset prices and historically low financial market volatility will wane.”
According to Moody’s, banks that are best positioned include Bank of America Corp., Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley.
Firms such as RBC Capital Markets, HSBC, UBS, BNP Paribas and Société Générale must continue to refine their strategies, global ambitions and capital markets platforms.
Whereas several other big banks, such as Barclays plc, Credit Suisse, and Deutsche Bank, “are either subject to fundamental strategic overhauls or need to improve their execution to compete effectively,” the report states.