Global investment banks (GIBs) will have to "surpass peers" in deploying people, capital and technology to successfully serve clients and effectively manage risk to survive and advance in an intensely competitive sector, according to a new report.
In a recent note to its clients, ratings agency Moody's said scale advantages could benefit some, although the competitive standing of individual GIBs is likely to be in flux.
Examining 14 GIBs in its report, the agency said it expects capital markets revenue to continue being supported by economic growth. But it noted that "trading operations are in the midst of a technological race" with fintech firms forcing the pace.
While these systems have hampered trading profitability, banks have not shied away from electronic platforms, making significant investments in core technology platforms and recruiting technology specialists, a trend that will persist.
"We expect the underlying demand for the core capabilities of global investment banks to endure," Ana Arsov, Managing Director at Moody's, noted. "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."
Moody’s said those GIBs best positioned to seize opportunities and navigate the markets with their strong franchises and diversified customer flows include Bank of America, Citigroup, Goldman Sachs, JPMorgan and Morgan Stanley.
Another five primarily European GIBs: BNP Paribas, HSBC, RBC, UBS and Société Générale will continue to fine-tune strategy, global ambitions and capital markets platforms. The other four GIBs it examined: BCS, Credit Suisse, Deutsche Bank, and Nomura are either subject to fundamental strategic overhauls or need to improve their execution to compete effectively.
"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 added. "The current 'goldilocks' period of synchronised upward growth momentum, low inflation, low interest rates, steadily rising asset prices and historically low financial market volatility will wane."
Moreover, the high valuations of some asset classes may be untenable in the context of rising interest rates and withdrawal of global liquidity is another concern. If these risks materialise, they would flow through GIB income statements in the form of market or credit losses or reduced client activity.
But sound capital and liquidity positions would mitigate the overall credit impact of these shocks on GIB credit profiles, Moody's concluded.
