Investment banks will be hit by reform
PROFITABILITY at the world’s largest investment banks (IB’s) could tumble by as much as a third due to the impact of regulatory reform, leading to hefty staff cuts, JPMorgan Chase analysts have predicted.
The bank said it expected that regulatory proposals, if they were applied, would reduce predicted return on equity (ROE) by an average of four per cent by 2011, falling from 15 per cent to 11 per cent.
“All banks are expected to lose earnings, but relative winners will be banks taking a proactive stance to regulatory proposals,” said the bank.
Banks are likely to react to falling profitability by slashing jobs in investment banking, the bank said, while pay is expected to fall in proportion with profits.
The worst affected bank, according to JPMorgan’s forecasts, would be Credit Suisse, which would see ROE plunge 5.3 per cent, from 17.3 per cent to 12 per cent.
Morgan Stanley would suffer a 4.8 per cent drop, while Goldman Sachs, UBS and BNP Paribas would each see declines of 4.4 per cent.
Fixed income will be particularly difficult, said the JPMorgan Chase analysts led by Kian Abouhossein, with revenues set to decline by 25 per cent.
Despite a predicted 25 per cent rise in equity revenues, the decline of fixed income is forecast to lead to an overall investment banking revenue drop of nine per cent between the end of 2009 and the end of 2011.
By contrast, the analysts expect traditional credit to offer the best earnings over the next two years, driven by stabilisation in the rate of US delinquencies.
“Our focus is on quality, credit-geared banks, excluding UK, Irish and German banks,” they said.