CIB OUTLOOK 2015 - Roland Berger · CIB OUTLOOK 2015 ROLAND BERGER STRATEGY CONSULTANTS 3 2 1 THE BIG 3 CIB revenues by business p. 5 10 PTS The impact of litigation costs on Cost/Income:

BEYOND MAINSTREAM

JULY 2015

CIB OUTLOOK 2015Industrial journey – Episode II

2

THINK ACTCIB OUTLOOK 2015

ROLAND BERGER STRATEGY CONSULTANTS

3

2

1

THE BIG 3

CIB revenues by

business p. 5

10 PTSThe impact of litigation costs on Cost/Income: This is the contribution of non-recurring costs to Cost/Income mainly driven by litigation which should remain high in 2015 and 2016.p. 8

11-14%The average forecast ROE for Global CIBs in 2015: The projected ROEs for 2015 are driven by a combination of flat revenues, deleveraging helping to offset regulatory RWA inflation and an increased focus on costs.p. 9

4 Key priorities along a transformational journey: These consist of Economic capital re-deployment, Client centric industrialization, Digital transition and Cultural evolution & empowerment

ROLAND BERGER STRATEGY CONSULTANTS 3


to enforce transformation according to their ambition level. Whatever the model, the “Customer experience promise” needs to be onboarded as part of the trans-formation to drive operational set-up requirements

DIGITAL TRANSITIONAs evidenced by the success of new players across the value chain, many CIBs consider that embracing the digital transition is a priority in terms of both readiness and opportunity development. In this context, we be-lieve that CIBs should focus on

> Incarnating Digital transformation and governance > Driving cultural change > Embracing a think big / act small / learn fast project management mode.

In parallel, “open architecture” ecosystems are to be considered to promote initiatives spanning from Digital client experience to Process digitization and Advanced analytics.

CULTURAL EVOLUTION AND EMPOWERMENT The progressive decrease of resources and stagnation of compensation is putting increasing pressure on CIBs who have, in parallel, introduced increased mobility to support shifts in business portfolio. In this context, the transformations driven by digitization, compliance alignment and operating model evolution are calling for a profound cultural shift beyond the obvious. In order to meet this challenge, we believe that CIBs should fully leverage traditional initiatives (e.g. mobility gateway, training, lateral hires, succes-sion planning) and introduce innovations such as: reverse mentoring, brand & attribute realignment, excubation and new ways of working.

Challenging market conditions and increasing regula-tory burdens continue to apply significant pressure on CIBs. Normalized productivity of assets and the limited ability to sustainably improve cost / income, are calling for an active industrial strategy redesign with a more in-depth alignment of business and operational mod¬els. To regain appeal, grow competitiveness and meet stakeholders’ expectations, should they be cli-ents, shareholders or (future) employees, CIBs need to transform their model working along 4 priorities:

VIGILANCE ON COST & CAPITAL RE-DEPLOYMENT Differences in economic growth across regions and deleveraging initiatives have been reflected in the rela-tive revenue performance and market share evolutions. Going forward we expect revenues to be broadly similar in 2015 vs. 2014 as growth in equities and M&A offset the decline in fixed income. Similarly CIB RWAs should be broadly flat as sustained deleveraging helps offset regulatory RWA inflation. We therefore believe that marginal improvement of ROE will come as a combina-tion of structural cost improvement and re-deployment of capital on “new core” businesses and emerging markets (e.g. Asia and growing RMB opportunities)

CLIENT CENTRIC INDUSTRIALIZATIONAs observed in many sectors bipolarization is driving increasing alignment between business and operating models. However the reality of business footprint usu-ally requires a mix of factory (scale) and boutique (skills) models involving different business require-ments. Although CIBs have now well identified both models, they often lack maturity to accommodate them. We believe that beyond finalizing their business portfolio re-deployment, CIBs need to grow enablers such as value creation monitoring or smart compliance

Executive Summary

4 ROLAND BERGER STRATEGY CONSULTANTS


This decline in profitability and decline in growth has resulted in significant a de-rating by investors of global CIBs. In particular the median CIB now trades at less than half its book value compared with more a decade ago. The banks have responded by optimizing certain business lines (e.g. Deutsche Bank in Rates), exiting certain activities (e.g. Credit Agricole or Unicredt in cash equities) or more substantially refocusing the Group on a more profitable core (e.g. UBS in Wealth Management). In practice, many global CIBs pursue a combination of these strategies. However forward forecasts of industry profitability suggest that existing steps are still insufficient to deliver an ROE above the cost of equity and new strategies are called for.

1. Introduction

From 2001-2007, the median group return on equity (ROE) of the top 10 global CIBs has averaged 16%, peaking at over 20% in 2006 as leverage grew. Follow-ing the financial crisis of 2008 and the significant regulatory developments thereafter, the median ROE has averaged just 5% over 2008-14. Some of the change in profitability relates to higher expenses, with the median cost/income ratio of 80% in the last 3 years being more than 10% above the 2001-2007 average, inflated by restructuring, litigation and addi-tional compliance costs. However much of the decline in profitability has also resulted from a permanent decrease in leverage as capital ratios have effectively doubled under new regulatory demands. This leaves investors expecting an ROE of just 9% over 2015-17, still below the historic cost of equity. A

Market overview

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10

5

02001 2003 2005 2007 2009 2012 2015e20112002 2004 2006 2008 2010 2014 2016e 2017e2013

A

EXHIBIT: AVERAGE ROE EVOLUTION – TOP 10 GLOBAL IBS MEDIAN GROUP ROE



EXHIBIT 2014 CIB REVENUES BY BUSINESS [EUR BN]

B

44%

50%

44% 54%56%

16%

23%

35%30%

27%

11%

9%

6%2% 3%

12%

15% 10% 12%8%16%

2022%48

4%

2802%60

6%

396

Europe MEA AsiaLatinAmerica

NorthAmerica

FICC99

Equities 69

Total 2014985

IBD57

Lending

495

GTB

265


ROLAND BERGER STRATEGY CONSULTANTS6

2. Revenues

2014 was another challenging year for trading reve-nues although parts of investment banking (+9%) and traditional lending (+1%) fared better. Fixed income trading at large global CIBs weakened (-15%) as struc-tural change continued to weigh on the Rates business and higher volatility affected Credit, although Com-modities performance stabilized given increased activity in energy markets. Equity trading showed a more moderate decline (-2%) from a comparatively robust 2013 as the structural shift towards “low touch” execution weighed on cash revenues, offsetting an improved performance in Prime Services from higher cash balances. Debt capital markets activities sus-tained a high level of activity in a low rate environment while the most favourable growth came from Equity capital markets and M&A activities which traditionally follow a GDP recovery. Regionally the stronger eco-nomic growth in the US versus Europe was reflected in the relative revenue performance of the local banks, with greater deleveraging by European banks also weighing on market shares. B

Looking to 2015, the first quarter started well with most banks reporting improved revenues across major products, particularly in Equities due to robust volumes and higher market volatility. The second quarter saw continued strength in areas such as equities (led by APAC and derivatives) and M&A, however market volatility in June weighed on the performance of business lines such as credit within fixed income. At present in 2015 we expect M&A to continue to lead growth as global GDP further improves. Given the strong start to the year in Equity trading, we expect good high single digit growth across all main products for the year too. However in FICC trading and in DCM we believe that anticipation of preliminary rate rises in the US will dampen activity in credit products. While weakness in the Euro flattered the reported results of European banks to date, based on early trends and a need for further deleveraging, we would again expect US banks to show more resilient growth. C

D

EXHIBIT: INCREMENTAL DELEVERAGING PLANS AMONG TOP 10 GLOBAL INVESTMENT BANKS

Equity trading

MS

FICC trading

CS BARC

DCM

DBK

ECM

UBS

M&A

JPM

15%

10%

5%

0%-

5%

-10%

0%

-5%

-10%

-15%-

-20%

-25%

C

EXHIBIT: 2015 CIB REVENUES FORECAST BY BUSINESS



banks looking to reinvest in more balance sheet light areas such as M&A, cash equities and equity deriva-tives especially where they feel there are underexploit-ed gaps in the geographic or product franchise.

With new leverage regulations being a key driver of profitability and strategic decisions, it is the banks in Europe which still target the greatest incremental de-leveraging because of the historic way in which their balance sheets were managed. With one-time costs of restructuring and some ongoing loss of revenue from reduced positions, this does provide market share op-portunities to global competitors. D

Against a backdrop of a sluggish Fixed Income fee pool and regulatory pressure to improve leverage ra-tios, several banks have further refined their strategies with additional changes expected from those banks which have recently undergone changes in their senior management. Depending on the banks’ scale, these decisions typically involve exiting businesses which are no longer economically beneficial under new rules, such as parts of commodities, long dated un-cleared derivatives and single name CDS, as well as optimizing areas which are less profitable such as rates, prime finance and flow credit through repricing or restricting access to the balance sheet. At the same time, we see

120%

100%

80%

60%

40%

20%

0%1 5 9 13 17 213 7 11 15 19 23 252 6 10 14 18 224 8 12 16 20 24 26

Median C/I ratio

E

EXHIBIT: CIB C/I RATIOS (2014)



3. Cost

In the chart E we show the average reported cost/income ratio for a larger sample of global banks’ CIB divisions in 2014. The average stands at 60%, although “non-recurring” charges such as litigation, business mix (e.g. investment vs. commercial banking) and cost allocation (e.g. head office and funding attri-butions) create a number of outliers around the mean. Given that it tends to be the largest and most invest-ment banking-led banks which have reported the highest cost/income ratios, it is no surprise to see that incremental cost cutting plans feature most heavily among that group. For existing plans which have largely been executed, the incremental costs should come largely from the tail end of infrastructure and efficiency projects, as well as ongoing vigilance on compensation. For banks which have extended or relaunched cost cutting plans, business disposals and headcount reduc-tions feature more heavily in the planned savings.

A key reason for the larger banks’ need to continue to drive down costs is the rise of “non-recurring” costs, or perhaps more accurately given their persistence, non-operational costs. These include restructuring costs, litigation expenses, and more recently some banks have begun to highlight additional expenses related to compliance (e.g. establishment of holding companies, compliance monitoring exercise). For the top 10 global investment banks, these charges combined have added more than 10% to the aggre-gate cost/income ratio in 2014.

Litigation remains by far the largest expense. In the chart F we highlight the aggregate level of fines announced by global regulators post-crisis grouped by key category. These fines so far total USD160bn of which USD120bn relates to US mortgages. As addi-tional banks settle on current issues, and as newer issues including private litigations are worked through, the banks expect 2015 and even 2016 litigation charges to remain elevated.

In conclusion, especially for the larger banks where the business mix implies lower CIB revenue growth and higher litigation and compliance costs, a strong cost

F

EXHIBIT: COST INCOME CONTRIBUTION OF ONE-OFF NON-RECURRING COSTS FOR TOP 10 CIBS

2009 2010 2011 2012 2013 2014

1,2%

6,8%

4,7%

0,8%0,8%0,9%

1,9%

0,9%

2,8%

3,7%

5,5%

8,1%

12,5%

2,9%

1,3%

9,5%

1,8%

1

Litigation Compliance Restructuring



focus is necessary and many banks may need to extend their cost reduction plans further in order to improve ROEs.

4. Capital and ROE

In the chart G we show the 2014 ROE for the CIB divi-sions of a number of global banks. We have used a normalised tax rate if appropriate, and based the equity allocated on a standardized 10% of Basel 3 RWAs to avoid the inconsistencies of internal capital allocation models. Once again, non-recurring or imperfectly allo-cated costs (e.g; from the corporate center) result in a large spread. Nevertheless many CIBs posted ROEs close or below shareholder expectations indicative of the additional efforts required to improve profitability. As some of the restructuring and litigation charges begin to moderate, we expect the average ROE of these

CIBs to improve to between 11-14% in 2015-16. Howev-er, this is still below the level most investors would consider adequate given some corporate center costs should be reallocated back to these divisions.

CIBs showed considerable variability in RWA growth in 2014. Increases were generally higher among those banks showing regulatory/model driven increas-es in RWA density (mostly a European initiative) and/or growth in International Business. Many banks though looked to stabilize or reduce RWAs given the compara-tively lower profitability in some parts of CIB compared with the broader group. The median growth rate of the sample was around 1-2% in 2014, and we anticipate broadly flat RWAs in 2015 as deleveraging plans help offset regulatory inflation. H

In the chart I we plot profitability (income / RWA) against efficiency (cost / income).

20%

15%

10%

5%

0%1 5 9 13 17 213 7 11 15 19 23 252 6 10 14 18 224 8 12 16 20 24 26

2

G

EXHIBIT: CIB ROE OF SELECTED GLOBAL PLAYERS 2014

“hurdle rate” / “cost of capital” ~11%



While the average income / RWA is a fairly consistent 5.5% we see that some of the larger European invest-ment banks post considerably higher levels, partly due to mix (e.g. a greater degree of equities and IBD) and partly due to low RWA density (which is vulnerable to regulatory RWA inflation).

From an efficiency point of view, while many banks cluster around the 65%, average exceptional charges (such as litigation) and/or mix/allocation issues do re-sult in a degree of dispersion. This blurs the underlying bi-polarization between “cost effective corporate banks” and “market risk effective institutional banks” observed last year.

In the chart J we highlight how the CIB division ROE should evolve in 2015 compared with 2014. We expect overall revenues to be broadly similar in 2015 to 2014 as some growth in equities and M&A offsets a decline in fixed income. Similarly we expect CIB RWAs to be broadly flat as deleveraging helps offset regulatory RWA inflation. This leads, again, to higher expectations on structural cost improvement.

H

EXHIBIT: RWA EVOLUTION

J

EXHIBIT: ROE EVOLUTION CONTRIBUTION

15%

Stan

dard

Cha

rter

ed

HSBC

UBS

Gol

dman

Sac

hs

Citi

J.P. M

orga

n

Barc

lays

Cap

ital

RBS

Mor

gan

Stan

ley

Nat

ixis

Soci

été

Gén

éral

e

Lloy

ds b

ank

Créd

it Su

isse

CA C

IB

Deut

sche

Ban

k

BNP

10%

8%

5%

2%1%

11-14%~0.5%~1%

~0.5%9-12%

1%

0% -1%

-3%-4%

-6%-8%

-10%

-13%

0%

2014 Revenue Cost RWA 2015

“hurdle rate” / “cost of capital” ~11%



EXHIBIT ASSET PRODUCTIVITY AND COST EFFICIENCY

CIB NBI / RWA

CIB C / I

I

14

12

10

8

6

4

2

025 35 45 55 65 75 8530 40 50 60 70 80 90 95

10%<ROE<15% Size of the bubble: NBI ROE <10% ROE>15%

12 ROLAND BERGER STRATEGY CONSULTANTS


Client centric industrialization, transformation journey episode II

Boutique models (SKILLS) are meant to deliver a unique value proposition relying on distinctive skills with inherently lower volume and higher margins. These models call for optimized variable cost management via agility. K

In reality, a business footprint usually required a mix of these models which are combined as building blocks bearing in mind their differences to form a consistent assembly. From this standpoint, CIBs are not different from other sectors but lack maturity to accommodate these two models that they have now well identified.

1. Industrial bipolarization at work

Many sectors have embraced an industrial approach to make sure that both their business model and operating model are well aligned to meet client expectations and deliver sustainable economic performance. In this context, Industrial bipolarization is increasingly observed in many sectors where business requirements are driving towards two main macro models with different strategic imperatives and characteristics.

Factory models (SCALE) are set-up to offer products and services which are standardized or modular with large volumes and limited margins. These models call for optimized fixed cost amortization via economies of scale.

K

EXHIBIT: FACTORY & SHOP CHARACTERISTICS

Reach and operate at critical size (explore organic growth, focus on scale driven targeted spin-off & acquisitions)

Drive footprint in a cost-minded way (adapt and arbitrate geographical presence to optimize costs or gains regulatory advantage)

Position robust long term vision (set-up a solid industrial governance and define a long term plan for the operating model evolution)

FAC

TOR

Y SC

ALE

SHO

PSK

ILLS

Grow entrepreneurship (adapt the governance and culture to grow intra-entrepreneur behavior)

Develop skill driven light footprint (create an internal or external ecosystem to increase agility and/or capitalize on experienced partners)

Enforce real or perceived continuous innovation (exploit ability to build differentiation through short time to market on value added services)



Thus, entering the second episode of their industrial journey, CIBs need to recognize that strategic choices (e.g. business refocus, new business) are driving im-pacts and requirements on the operating platform. Traditional segregation of decisions and governance needs to be overcome to reach a co-creation mode with Business, Operations and IT, Compliance working hand-in-hand to shape the target and assess con-straints (e.g. capex, regulation). “Industrially mature” players have begun to reshape their governance and organization in consequence by creating specific “In-dustrial Units” in charge of actively managing the business and operating model consistently as well as steering medium term investment strategy.

2. Bold moves required towards industrialization

We believe successful industrial transformation requires choosing a legitimate mix of industrialization levers depending on model type and disruption level, and supporting implementation with a number of enablers that will help remove roadblocks and demonstrate tangible results. L

UNDER USAGE OF “CLASSICAL” LEVERS AND PRUDENCE IN DISRUPTIONTo start with, we think a number of CIBs that have com-menced transformation programs over the past years have hit a “glass ceiling” when contemplating the usage of optimization levers. We believe a third of the residual cost effort for “factories” can be reached by pushing classical levers (e.g. X-shoring, outsourcing, demand management) to their maximum level of legitimacy (cf. almost already old near-shoring of FI sales/traders of DB to Birmingham/Jacksonville). Moreover, we only see a few business-driven or technology-driven alli-ances whereby cost to serve and operational complexity should drive fur ther disruptive moves including “while-labeling” boutiques or factories (cf. BNPP equity derivatives and SGCIB cash equity platforms).

We believe successful industrial transformation requires choosing a legitimate mix of industrialization levers depending on model type & disruption level, and supporting implementation with a number of enablers that will help remove roadblocks and demonstrate tangible results.



MODEL AND DISRUPTION LEVEL MATRIX AND ENABLERSEXHIBIT

1) Across asset classes 2) “front to back”

CIB maturity: Low High

L

High

Low

Factory BoutiqueModel type

Disruption level

Scale driven alliancesX-shoring of business functions

Value creation monitoring by clients & product

Functional taxonomy of HR

Smart Compliance

Frugal Management

Digital ecosystem

Cultural shift

X-shoring of support functionsShared Services

Horizontalization 1)

Skill driven alliancesDigital Labs

Competence centersVerticalization 2)

Levers

Enablers



Cultural shift: We believe that CIBs whose workforces have shrunk significantly over the past years, need to develop their talents around dimensions such as own-ership, entrepreneurship, mobility, cooperation, which are strong catalysts of sustainable transformation (see new ways of working section)

3. Professionalizing customer experience

Whatever the industrial model, client centricity is at the crossroads. The “Customer experience promise” is key for both factory and boutique model although it will not focus on the same dimensions and might entail the implementation of different operational set-up.

ENHANCED SEGMENTATION TO CAPTURE RESIDUAL PRICING ELASTICITY AND WALLET SHAREGetting the promise expected by the client right can prove powerful, but this requires enhanced segmenta-tion and a deeper understanding of needs. Hence, we have recently seen a number of initiatives that could seem counter-intuitive. For instance developing a single digital point of entry for Mid-Caps on Global Transaction Banking has helped one bank position a well-suited “no frills” offering that has captured market share from supposed category killers having a one-size-fits-all over-engineered offering. Likewise, serving institutional investors such as hedge funds with an “ultra-responsive” set-up (e.g. regulatory impacts) has allowed another bank to bridge its pricing gap to com-petition (i.e. 6 times higher) although manufacturing super commoditized services (e.g. classical post trade servicing).

With regards to better understanding needs, we see a clear trend from a number of institutions micro-segmenting corporate sectors in order to complement traditional “risk assessment vision” with a “strategic strength assessment”.

POTENTIAL ENABLERSAs there is no magic in the optimization levers to be used (even though the time has come for a profound “break and rebuild” phase - cf. RB-Nomura CIB Outlook 2014), we believe that working on the 6 enablers listed below should help reaching the next industrialization level for CIBs

Value creation monitoring by client and product: We mentioned earlier we expect 2015 to be “flattish” in terms of revenues and normative capital charge. As demonstrated in RB “cost to serve by client bench-mark” interviews, many CIBs fall short of capturing the large standard deviation of cost to serve across clients and products and therefore struggle identifying / backing up their industrial moves by reliable metrics

Functional taxonomy of HR: Leading CIBs have used functional taxonomy (i.e. scoring the criticality of a given HR position regardless of process and organizational complexity) to have a systematic review of near-shoring and offshoring opportunities with no taboo under compliance and operating constraints

Right Compliance: We believe that as with any in-dustry, financial regulation requires proper interpretation so as to elaborate a meaningful industrial response. The automotive industry may be inspiring as we ob-serve large deviations across actors in terms of cost of compliance with the same norms (e.g. Renault-Nissan bears a third of Volvo cost of compliance with crash test regulation as the latter re-invoices a part of these costs into a “safe customer experience”)

Frugal Management: This well-known technique from other industries consists in systematically chal-lenging “value for money” of key projects that drive the bulk of investments. Early adopters of this technique in continental Europe (e.g. SGCIB) have found room to re-allocate up to a third of their “Capex”

Digital ecosystem: As the Digital revolution is very multi-dimensional and part of it unknown we believe that CIBs should gather around them a digital eco-system internally and externally to explore new territories and accelerate idea testing (see digital transition section)



Client experience patterns: These are meant to re-duce complexity of an infinity of client service levels (e.g by product, client segments, quality standards) down to a few that are both readable by the client and implementable at affordable cost by Operations

Client service teams within Operations: Many players have already taken action, bringing Operations into the commercial governance in order to widen the promise and upgrade perceived added value and re-sponsiveness.

Operating performance transparency: A number of players are now explicitly reporting quantitative and qualitative elements such as ‘cost to serve’ or client satisfaction to drive operating performance require-ments and better justify client promise fulfillment.

This helps cluster clients and design a real strategic sectorial dialogue that enhances perceived value from corporates and often translates into a “de-neutralized” coverage bringing in parallel product & sectorial exper-tise. Regarding institutional clients the same applies (e.g. life insurers) although it has to be reconciled with increasing reciprocity management across all relevant business (e.g. lending / structuring /distribution, De-rivative/Prime servicing/Custody).

CLIENT CENTRICITY OF OPERATIONS: “QUALITY” AT AFFORDABLE COSTMany banks now realize that the concept of client centricity needs to penetrate the organization and operating model beyond the coverage line, especially within Operations. Indeed, Operations partly fulfills the client promise and are in touch with clients Operations that definitely act as prescribers. We have identified 3 recent developments that are standing out:



Digital transition, the How before the What?

but in a “closed form” (e.g. proprietary trading / principal investments), many CIBs are turning to a more “open architecture” with new ecosystems more prone to enable digital innovation and capture their benefits. This evolution has laid the ground for the development of new players who have been positioning along the value chain with some success.

We can cluster digital “usage” in 3 clusters admit-ting that part of this evolution is still unknown, yet some of it disruptive. M

Until recently CIBs seem to have not participated in the digital revolution which has more drastically disrupted B2C business models (e.g. Mobility, Connectivity, Big data, Social Media). However the digital transition has started within CIBs sometimes under the radar but with critical impacts on client experience, industrialization, and overall competitive landscape. Many CIBs are selecting relevant digital opportunities and upgrading their digital readiness. Although historically very much technology oriented

M

THE WHAT: TERRA INCOGNITA OR TOO DISRUPTIVE TO BE DISCLOSED? What is digital for ? [Illustration non exhaustive]

Capital market e-access by asset class (Dealer to Client) Digitized processes (e.g. KYC, credit file processing) Granular regulatory data and reporting posting

Full cross-asset transaction portals Modularization and functional

decoupling in product processing (e.g. "event driven" Back Offices) Value driven segmentation for investment pattern detection

Cross-asset transaction portals / "Best price" alternative OTC platforms Self-care / Crowd exchange on best

investment ideas Real time processing (e.g. limit management / capital allocation)

Big data driven early volatility signals and risk adjusted pricing Embedded Compliance (e.g. fraud

detection) Data visualization new formats (e.g. Smart MIS)

KNOWN

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UNKNOWN

Client relationship Process Analytics



1. Digital client experience

We see a number of initiatives that push client experi-ence to a new frontier with unified full-service customer portals as they offer single point of contact with a focus on simplicity, customization and sometimes self-care. Although e-penetration is still heterogene-ous across assets, latest upgrades of e-trading platforms (e.g. UBS NEO platform) offer significant enhancements in client experience with a single point of contact across asset and trading lifecycle and more in-depth information including indicative prices with requests for quotes. These platforms tend to be in-creasingly across assets including bridging Capital Markets and Transaction Banking for some Corporate segments. We also witness emerging self-care and crowd trends mimicking “retail banking” either for choosing “best price channels” (e.g. swaps for corpo-rates) or for peers to share investment ideas and find suitable investment portfolios (e.g. Motif Investing).

2. Process digitization

Process digitization is yet another highly advertised aspect of the digital transformation with strong upside potential in terms of operating model performance. But this requires massive IT investment at a time where “value for money” is highly scrutinized. Therefore we see internal developments and new entrants in areas where spending is audible such as compliance (e.g. fraud detection from informal/unstructured/fragmented data such as Symphony, smart agents to mass-repair data sources for regulatory reporting). Tactically, we also witness the emergence of ultra-responsive processes notably in traditional lending (e.g. application and credit file answer in just the time it takes to have a cappuccino).

3. Advanced analytics

Bid data driven advanced analytics creates new opportunities to improve “client driven” or “risk driven” revenues and steering.

We see a number of initiatives that push client experience to a new frontier with unified full-service customer portals as they offer single point of contact with a focus on simplicity, cus-tomization and sometimes self-care.



N

> Time to market (e.g. within days) > Highly responsive to client demands (e.g. within minutes)

> Products and services based on latest technology

> Disintermediating middleman > Fees down between 50% to 90%

Key value proposition of new entrants

Limits of existing new entrant offering

> Startup, not institutional yet, capital limitation, many will not survive

> Niche positioning i.e. client accesses by segments, breadth of product offering

> Regulatory constraints to be anticipated

Client segments Marketing

& sales

Client on-boarding

Investing & tradingSymphonyanalytics

Execution Reporting

Processing

Post trade processing

Clearing Custody

Products / Services

Fin Small Large

Commodities

Rates

Equities

FX

Credit

DCM / ECM

EXHIBITPOSITIONING OF NEW ENTRANTS

ON THE CAPITAL MARKETS VALUE CHAIN

Hedgeserv

Hedgeserv

Hedgeserv

Yodlee Genpact Metamako UpsideMarkit MarketRiders

RobinhoodEtoro

Etoro

Quantopian

CalastoneStockpile



Amongst the short term priorities of CIBs, we see: > Incarnate Digital transformation and instill proper governance (only a few have appointed Chief Digital Officers)

> Drive cultural transformation (cf. BBVA “learning expeditions” in other industries)

> Embrace a think big / act small / learn fast project management mode (cf. DB Digital Labs)

But to make this happen we believe external partners are essential. The idea is to bring together a relevant ecosystem and a systematic approach leveraging on the partners’ expertise (Cf. Roland Berger Terra Numer-ata ecosystem and fund) to:

> Prioritize most attractive new ideas and ventures, > Build, invest in and support early stage Internet ventures with speed and quality of execution,

> Leverage experience, expertise and assets to quickly ramp-up to scale. N

We see the old quest of better understanding client behavioural patterns re-vamped now that access to fragmented information and interpretation is easier/cheaper (e.g. exploiting asset servicers massive database). In addition a number of investment firms contemplate deciphering weak signals to drive risk taking positions (e.g. early volatility signals on social or proprietary networks). Also, we have witnessed the bir th of “open source algorithmic trading” (e.g. Quantopian). Finally, as most CIBs are overwhelmed by internal and external reporting, we see a number of advanced data-visualization techniques coming from other industries (e.g. Aerospace, Consumer Goods, and Pharmaceutical) on-boarding into so called “data room” to enhance the performance of decision making.

THE HOW: OPEN ARCHITECTURE ECOSYSTEMS TO INNOVATE, TEST AND LEARNBeyond investing in promising FinTechs sometimes backing the wrong horse or experiencing difficulties in leveraging investments, digital transformation requires digital ecosystems to transpose “Silicon Valley’s recipe for disruptive innovation”. But these eco-systems are either difficult to find or to maintain in-house.



In fact CIBs need to face in parallel the strong require-ments around digitization, compliance alignment and operating model transformation while fighting back against multiple negative factors such as tough treat-ment by all media, low-to-zero growth perspectives, very top-down/pyramidal management style and gen-eral lack of empowerment within the organization. O

In this context we believe that CIBs need to work out a profound cultural shift leveraging traditional ini-tiatives:

Progressive decrease of resources across CIBs is im-pacting all layers of the organization. Although average compensation was less impacted, it is hiding greater differentiation based on performance and business line momentum and the need for increased flexibility and mobility of resources to support consequent shifts in business portfolio.

Besides, it is difficult to admit but people are not seduced by banking anymore, they are reluctant to work in this environment and employees are not as proud and enthusiastic about their job as before the crisis.

New ways of working / cultural change

O

EXHIBIT: EVOLUTION OF COMPENSATION AND STAFFING OF 5 MAJOR CIBS

2011 20112012 20122013 20132014 2014

Staff evolution [100 basis 2011] Compensation ratio evolution [2011-2014] Average compensation evolution [100 basis 2011]

100

44,5%

39,4%36,7% 36,7% 100 105 88

82

94

8882



Considering the size of the prize and the hurdle to transform we also see new innovative initiatives with strong potential

Reverse Mentoring especially applied to grow digital awareness. Many corporates have implemented this approach by pairing each Exco member or top executive with a generation Y digitally aware mentor

Brand realignment similar to other sectors who have experienced strong deterioration of their image, banks should work on establishing and implementing new values (e.g. CSR), rooting them widely from external communications down to the bank internal processes

New ways of working are already spreading in some CIBs, starting with proactive nearshoring of some front office activities to test around remote work for some support functions

Excubation which goes beyond lateral hiring, as it offers the opportunity to benefit from an environment which is more prone to entrepreneurship. We believe that excubation can be implemented towards employees on a part time basis or to specific projects which would otherwise face significant internal hurdles to their development

Internal mobility is one of the key elements required to maximize employability of talents under social constraints. As an example, other industries that have suffered through massive down-sizing (e.g. Telecom, Automotive) offer on average 10 mobility options per employee.

Lateral hires are essential to gain selected expertise which are less mature within CIBs (e.g. digital, industrialization) and expose employees to different mindsets

“Compliant” ownership is essential to re-program conduct consistently with compliance constraints and corporate culture singularity. It is also key to enforce working modes in a more decentralized/delayered way to regain agility (e.g. networks, communities) and better perceived work / life balance (e.g. working remotely)

Cultural change of the Executive Committee is central to the overall change process as key executives will personify and set expectations as well as influence the strategy.

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23

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Tricumen

Roland Berger Strategy Consultants, founded in 1967, is the only leading global consultancy with German heritage and of European origin. With 2,400 employees working from 36 countries, we have successful operations in all major international markets. Our 50 offices are located in the key global business hubs. The consultancy is an independent partnership owned exclusively by 220 Partners. WWW.ROLANDBERGER.COM

Nomura’s global research is renowned for its combination of accuracy and forward-looking coverage. With research hubs in key Asia-Pacific markets, including Tokyo, Hong Kong and Singapore, as well as in London and New York, we currently have some 560 researchers in 15 countries and regions globally. Our researchers collaborate closely across regions and disciplines to track changes and spot future trends in politics, economics, foreign exchange, interest rates, equities, credit and quantitative strategies. This extensive network of intellectual capital provides our clients with timely, actionable information.

Tricumen was founded in 2008. It quickly became a strong provider of diversified market intelligence across the capital markets and has since expanded into transaction and corporate banking coverage. Tricumen’s data has been used by many of the world’s leading investment banks as well as strategy consulting firms, investment managers and ‘blue chip’ corporations. Situated near Cambridge in the UK, Tricumen is almost exclusively staffed with senior individuals with an extensive track record of either working for or analysing banks; and boasts what we believe is thelargest capital markets-focused research network of its peer group.

Note: this report is a product of Roland Berger Strategy Consultants. The banking research team at Nomura & Tricumen has contributed data for certain charts in this report.

CORPORATE AND INVESTMENT BANKING OUTLOOK

Choosing your path in a transformed industry.Spring 2014 CEO Survey.

http://www.think-act.com

https://www.nomura.com/

http://www.rolandberger.com

http://www.rolandberger.com/expertise/industries/financial_services/Corporate_and_Investment_Banking_Outlook_2014.html


This publication has been prepared for general guidance only. The reader should not act according to any information provided in this publication without receiving specific professional advice. Roland Berger Strategy Consultants GmbH

shall not be liable for any damages resulting from any use of the information contained in the publication.

© 2015 ROLAND BERGER STRATEGY CONSULTANTS GMBH. ALL RIGHTS RESERVED.

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