We may or may not have begun "the year of the goat" with a bang. That depends on which side of the globe you are. Well, it's now time to focus and re-think hard on some of the strategic priorities for 2015. On researching, I found the following resounding themes (in no particular order though) to be dominant and prevailing:
Business simplification: Primarily, this means hiving off unwanted lines of businesses that don't add enough value to both the top-line and bottom-line. To further add insult to injury, they may even contribute negatively to growth and revenues. In 2014, at JPMC it was the physical commodities group and the global special opportunities group (a P/E group that invested quite heavily in distressed debt) that didn’t do quite well. In Citi, we could expect continued cuts in prime-broking as the bank gracefully exits hedge fund services. In a nutshell, if something doesn’t add value – get rid of it.
Efficiency focused: This is definitely not something new and unheard of but in rough times, this message is broadcasted time and again over all possible channels. Goldman Sachs CFO Harvey Schwart was quoted mentioning “Although Goldman has replaced $2Bn of lost revenues, it would be great to have another couple of billion dollars in revenues.” - which can come about by relentlessly focusing on efficiencies in operations.
Rationalizing costs: Most of us feel this is no rocket science. I agree. But, could get daunting and unpleasant - especially, when you have to go about firing truck-loads of people who once had made the dough for you. Cutting costs are an inevitable (and in most cases, preferred) outcome of carrying out a business simplification and efficiency improvement exercise. All in the name of reporting earnings consistency and strengthening the balance sheet.
An eye on Risks: Another way to put it is “guarding reputation”. The last thing that investment banks want is to be associated with another LIBOR scandal, London whale or Societe Generale type fraud. As a consequence, I hope to be seeing significant spending (not just as a precautionary measure, but proactively) on risk information technologies across the board covering front, middle and back-office applications. IDC estimates, the spending could touch approx. $80 Bn in 2015 (or approx. 17% of overall IT spending) and even reach $97 bn by 2018
Regulatory compliance: Extending the aforementioned point a bit further, we just heard what Jamie Dimon (CEO, JPMC) had to clamorously say very recently on regulators assaulting the big banks. Earlier, it used to be one or two regulators looking for a potential prey, but today it’s five or six, making it increasingly difficult for these banks to comply with and do business globally. Further, this has also resulted in lengthy litigations, billions of dollars of penalties and fines where, eventually attorneys make the cut and regulators call the shots.
Investing in Sales and Products: This is by far the best thing banks should do in the years 2015 and beyond. Having a healthy deal-pipeline is sacrosanct – across geographies, asset-classes and product portfolios. I hope to see extensive innovation happening in this space in which technology will play a pivotal role (read: algorithmic trading) in making this happen. Product control functions will assume importance and banks would want to certainly live up to the adage - "sales is vanity, profit is sanity, cash is reality" - hopefully, in both letter and spirit.
Technology scale: Today, in banking nothing noteworthy happens without harnessing the power of technology. IT modernization is a big agenda in the investment banking arena where, a lot of legacy (and proprietary) applications are still in active use. As a result, investment banks are looking to scale these technologies organization-wide and not confine it to a region, product or asset-class. This means, big bucks in store for large global IT vendors in the quarters to come.
In the backdrop of these strategic priorities, it’s pertinent for investment banks to consistently deliver on the following mandate:
- Improve and expand margins through cost discipline and revenue growth.
- Improve ROE and expense ratios.
- Increase returns that meet (or even exceed) the current cost of capital.
- Increase capital return to shareholders.
References: efinancialcareers, Morgan Stanley's strategic update dated. 20th Jan, 2015 and Information Week'sBanking Technology