Investment banking will look more like it did in the mid-1990s than in the past decade, Ermotti said.
“The people who have succeeded in this business are the ones who took risks at the right time,” said Peter Hahn, a finance professor at London’s Cass Business School and a former managing director at Citigroup. “The growth lasted too long. Now the biggest business segment for investment banks, the financial industry, is under pressure to shrink. The realization that the biggest client has gone probably hasn’t hit some.”
Credit Suisse said in November it will cut risk-weighted assets at its investment bank by 37 percent from levels at the end of September to boost returns. The bank said it would end origination of commercial mortgage-backed securities and downscale or exit long-dated unsecured trades in rates, emerging markets and commodities and less capital-efficient businesses in securitized products. The company also has reduced headcount at the unit by 1,500.
The Zurich-based lender, led by CEO Brady Dougan, 52, said last month it plans to cut costs at the investment bank by an additional 550 million francs, declining to specify whether that would result in job cuts. It said it would “rationalize” the securities unit’s advisory and underwriting businesses to bring them “in line with market environment,” get rid of duplications between country, product and industry teams, and consolidate execution into hubs in the U.K. and Hong Kong.
The bank, which last month also announced plans to boost capital by 15.3 billion francs to appease regulators, should have made bigger cuts in fixed-income instead of raising capital, JPMorgan’s Abouhossein said in a July 18 note. “We see potential for Credit Suisse to shrink further,” he wrote.
Spokesmen for Credit Suisse, UBS, Deutsche Bank and Barclays declined to comment.
“There is more to come as regulators make it a more capital-intensive business, including in fixed income,” said Philippe Bodereau, the London-based head of research for financial firms at Pacific Investment Management Co., the world’s largest bond investor. “For the smaller guys, some of these businesses are becoming very debatable.”
UniCredit SpA, which employs about 8,900 people in corporate and investment banking, exited the European equity- brokerage business. The bank, the largest in Italy by assets, is now studying a partnership with Credit Agricole SA, France’s third-largest by market value, for managing stock offerings.
Credit Agricole is in talks to sell its European equity- brokerage business to Kepler Capital Markets SA and sold Hong Kong-based CLSA last month to China’s Citic Securities Co.
Royal Bank of Scotland Group Plc, Britain’s biggest taxpayer-assisted lender, said in January it would eliminate about 3,500 jobs at its investment-banking division and sell or close the unprofitable cash-equities, mergers-advisory and equity-capital-markets divisions. BNP Paribas SA, France’s largest bank, is cutting 79 billion euros of risk-weighted assets, mostly within the corporate and investment bank.
“As investment banks strip their businesses in the face of a poor economy, poor revenue and higher regulatory capital, it’s the survival of the very, very fittest,” said Kevin Burrowes, U.K. head of financial services at PricewaterhouseCoopers LLP. “We could see just three to five global investment banks.”