Daily Management Review

Profitability of investment banks can reach 30% in the near future


Investment banks may cut costs even more with electronic trading platforms for transactions, and transfer more operations on digital platforms that are in common use. Cloud technology and artificial intelligence will create new revenue opportunities, according to McKinsey’s report (quoted by FT).

Nazir Amin
Nazir Amin
McKinsey forecasts that the transition to digital technology will help the industry to increase revenues by 4-12%, for example through better customer service and cross-selling. On the other hand, there is a risk that the digitalization would consume 6-12% of investment banks’ revenues in other segments. The report gives an example of work with derivatives: the cloud services will reduce time for calculation of prices from eight hours to 15 minutes, and the cost will not exceed $ 10.

Goldman Sachs already offers to customers a software to trade on the US corporate bond market without participation of its employees, the FT reported. The program, called Goldman Sachs Algorithm (GSA), selects prices on corporate bonds with a high rating as assigned by investor. This is a significant event in the market of corporate bonds. The market’s ts size - $ 8.4 trillion and 7000 instruments with a large number of documents - until recently has been very difficult believed to be fully automated.

GSA works only with transactions that do not exceed $ 1 million, but daily volume of trading made with help of the system reaches $ 75-100 million, says the FT. The new program will allow Goldman to reduce number of traders and to concentrate on serving larger and more profitable trades.

Shares of investment banks and their customers are already traded on electronic platforms, and great prospects for cost reduction are almost gone. About 85% of trading in shares takes place electronically, McKinsey cites the bank's top management. Trading of instruments with fixed income traditionally resisted digitization due to more active human participation.

In II quarter, investment banking revenues of European banks - Barclays, Credit Suisse, Deutsche Bank and UBS - were reduced by 17.5%. Their competitors from the United States had it better. Investment banking revenues of Goldman, Morgan Stanley, JPMorgan, Bank of America and Citigroup rose by 3.4% compared to last year. "It's two different worlds - said strategist at Vontobel Asset Management Andreas Nigg to the FT - US banks are much better capitalized, and their European colleagues will have to make a difficult decision." Matthieu Lemerle of McKinsey says that only 3-5 investment banks in the future will maintain the ability to work in all areas, and the rest will become more specialized. "They will get out of this, but the path will be painful, and not everyone will make it."

source: ft.com

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