Daily News: April 27, 2012

Boston Consulting: Investment Banks Have to Make Hard Choices

According to a new report by The Boston Consulting Group, investment banks, beleaguered by macroeconomic uncertainty, pending capital constraints and negative publicity, will have to make hard choices on the scope of their activities – as well as place a greater emphasis on client interests – if they hope to return to pre-crisis levels of performance.

According to the report, most major firms in the industry are operating at a return on equity (ROE) of 7% to 10%, half the historical level and half of what investors will expect in the long term. A return to ROEs of 15% or higher is possible only if firms take the right steps to bolster revenues, control costs, and manage their capital and liquidity resources wisely.

The report noted that in order to climb back toward ROE levels in the mid-teens, investment banks must continue to rein in costs. This is chiefly a matter of aligning costs strategically, reworking compensation and benefits, and potentially de-layering the organization. The report specifically said that there is a clear need for greater transparency in bonus allocation and for performance to be determined on a risk-adjusted basis for the bank, factoring in qualitative performance evaluations that include criteria such as ethical standards.

“We believe that all investment banks – whether large or small, global or local, universal or niche – can regain their lost profitability and ROE despite the tall challenges they are facing,” said Philippe Morel, a BCG senior partner and coauthor of the report. “But not every player will be able to succeed, and there will be tough decisions to make in terms of clients, markets, asset classes, and product portfolios.”

The report, titled Tough Decisions and New Directions: Global Capital Markets 2012, is being released today (4/26/12).

To read the full text of The Boston Consulting Group news release click here.