In the report, Capital markets: building the investment bank of the future, EY’s analysts wrote that banks have been “struggling to redefine their roles” since the global financial crisis, adding that attempts to “recapture” their double-digit returns on equity of a decade ago have mostly been unsuccessful.
It noted that the average return on equity for the top 14 investment banks globally was just 6.3% in 2015, the lowest since a negative figure of -12.6% in 2008. EY estimated the average ROE could drop to a 10-year low of less than 5% in 2017.
Furthermore, it said that even if capital markets activity recovers, banks could “struggle to win back market share” as other market entrants pick up business.
It outlined five goals that investment banks should focus on and said: “Traditional organisation structures and business models are things of the past.”
First, EY said banks should reshape their businesses with disposals, writedowns, acquisitions and strategic alliances, deciding whether to be a global boutique, regional champion or universal superbank.
Next, they should develop a clear idea of which clients they want, where they want to serve them and what they want to provide them with in order to grow the business.
Banks should then optimise their business and balance sheets, EY said, and focus on organisational culture and security to protect the business. Finally, the firm said, bank bosses must gain greater control of their businesses by focusing on compliance and risk management.
EY said: “The challenge to investment banking leaders is to be bold and move beyond incremental adjustments to broader transformation. The challenge is to commit to a vision of the investment bank of the future, and build it.”
EY’s report strikes a similar tone to one published by McKinsey in September. The management consultancy also warned that the world’s biggest investment banks had to be bolder with their restructurings if they wanted to tackle the issues of “weak profits, high costs and lingering strategic uncertainty”.