DOES THE EVIDENCE we’ve seen to-date of how different investment banking models have performed over recent years provide proof of the robustness or otherwise of those strategies? Or has relative performance been more about banks’ success or otherwise in extracting the most from the different paths that they have taken?
In all honesty, the question this really throws up is: Are bold new strategies pointless if you’re not already at the top of your chosen segment of the investment banking industry – if indeed that is part of your strategy? And can the adoption of new and (hopefully) better new business models project banks into more powerful revenue streams, enabling them to punch above their weight in a constant and sustainable manner?
Is exiting businesses or contracting to the extent that you end up being small and maybe perfectly formed a sound strategy, or a wrong read of market opportunities bearing in mind cyclical business reflation on the plus side and regulatory or other barriers to entry on the minus side that may restrict or impede your ability to capture those opportunities?
Are business models actually being discredited by banks that don’t have the wherewithal or ability to make them work? When all’s said and done, does one bank do better than another because it’s got better bankers? And how do you define a better banker? Or is it about deeper, stickier client relationships? Or more progressive or attentive client coverage? Or better distribution, trading or research? Or better management?
Is it a factor of all of those or combinations or elements of those things? Can deep client relationships ever compensate for a sub-optimal cadre of product or coverage bankers (to the extent that the reason for being sub-optimal can ever be isolated, defined and solved for)?
So many questions. I’m in pensive mood this week but have been pondering questions like this for a while as investment banks plug into the perpetual strategy machine and continue their rounds of serial recalibrations to try and figure out their version of a current environment best fit; or perhaps more to the point: their best-guess present-value view of the future banking environment best fit.
A NUMBER OF things have led me to think of such things. I was struck, first of all, by Gary Cohn’s comments at the Deutsche Bank Global Financial Services Investor Conference in New York this past week. What was striking was his complete comfort with the firm’s structure, business-line distribution and client positioning.
He reminded the audience that the firm had made bold calls on the forward environment, taken bold decisions early but was now sticking to them in the absolute belief that regardless of the fact that the firm generated a 15% return on equity in the first quarter, it is rather the upside potential embedded in the business model and structure – bearing in mind Cohn said none of Goldman’s businesses were operating in an optimal environment – that are the core focus.
In that respect, it’s less about trusting abnormal or volatile market conditions that may or may not lead to more active client engagement to pull you through, which was an essential feature of the results that flattered a lot of banks in the first quarter. Cohn commented that the firm could grow revenues infinitely but that management had conscientiously chosen to exercise restraint (not least because of ROE impacts) and focus on the more difficult task of generating accretive revenue.
Some banks were just made to be ordinary. Get used to it
NOT EVERYONE CAN be Goldman Sachs, I guess, which – working my way back to my ponderous questions at the top – led me to thinking about the industry in a broader context. Oddly enough (for me anyway) a football analogy came to mind.
It struck me as interesting that Sam Allardyce was sacked as manager of London football club West Ham because of senior executive dissatisfaction with his performance. West Ham ended the season in 12th place in a league of 20.
But what, realistically, did the executives and owners expect of this classic mid-ranking-at-best club in a super-competitive environment where other incumbents have much bigger budgets and better and larger squads of players? Most people reckoned 12th was actually a creditable performance.
There’s a direct cross-over here with investment banking. I still sense that despite evidence that they can’t or it’s too expensive to get there, too many banks still have their eyes on IB glory rather than making do with being, well, mid-ranking and dull, and are recalibrating for that.
We’ve seen pretty much every major bank with an investment banking or trading arm apply the perpetual strategy machine to their businesses over the past five years. Great for the consultants that get rich off the back of it but what difference has it made to the banks?
Billions of dollars and countless hours that no-one will ever get back have been spent on this exercise but has the industry pecking order changed? Having written recently about my sense that regulatory fatigue would start to set in soon and that we would return to a modicum of common sense in that arena – I wonder if strategic fatigue will start to set in soon too. I hope so. Some banks were just made to be ordinary. Get used to it.
