Transforming investment banks

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Major investment banks can transform to provide investors with acceptable, sustainable returns on equity (ROE) — but doing so won’t be easy.

The days of pre-crisis, 20%-plus ROE are long gone, and investment banks are now pursuing target growth barely above their costs of equity. We believe that with an unremitting focus on transforming existing business and operating models, banks should be able to achieve sustainable returns of 12-15%.

Investment banking is an industry in turmoil. Protect-and-survive solutions are failing.

Against the triple pressures of declining profitability, structurally higher costs and greater competition, current approaches to weathering the new and challenging business climate have proven to be damage control at best.

  • Over the last three years, only one investment bank has managed to achieve an average cost-to-income ratio below 60% and annual profit per employee in excess of US$300,000.
  • Powerful oversight from control functions has not been enough to manage front-office culture.
  • Traditional operating models of vertical asset classes and horizontal functional support lines are losing relevance.
  • Shifting from capital-intensive activities to fee-based business lines has made little change.
  • Reducing asset costs and lightening balance sheets have not gone far enough.

Achieving 15% ROE through cost reduction and revenue alone is virtually imposible

Banks would need to reduce their costs by around 34% without a rise in revenue, boost revenue by around 24% without a reduction in costs or simultaneously cut costs by around 15% and grow revenue by around 10%.

Rebuild ROE

If investment banks are to achieve double-digit returns and thrive, they must do more than react to current pressures. They must invest in a long-term strategy with an unremitting focus on four critical pillars of change.

EY - Rebuild ROE

1. Optimize both assets and operations by better utilizing balance sheets and radically reducing costs. Banks must review and re-engineer key processes including existing sourcing by assessing the role of utilities and undertaking a vendor assessment and supply chain review.

EY - Rebuild ROE

2. Transform culture by providing incentives for the behaviors that will deliver value for shareholders and clients while meeting regulatory expectations. That means reassessing compensation, setting the tone from the top, establishing clear accountability, identifying behavior drivers, rewarding good behaviors, reforming hiring practices and enhancing the non-financial employee proposition.

EY - Rebuild ROE

3. Become client-centric by moving away from product-centric approaches and putting the client at the heart of business and operating models. Banks must undertake profitability analyses to identify core clients and their needs, deploy client-satisfaction systems and enhance the client experience through "single shop-fronts” and portals.

EY - Rebuild ROE

4. Embrace technology-driven innovation that enables the transformation of legacy processes, supports a re-architecting of business models and supports a central focus on clients. Optimizing technology investment means reassigning staff costs to technology spending and re-investing savings in replacing legacy technology.

Key technologies include:

  • Collateral and capital management
  • New trading systems and processes
  • Customer-centric solutions
  • Security and surveillance
  • Improvements in data quality and analytics


Get radical. Five changes bankers can make now.

  1. Push optimization of risk-weighted assets (RWAs) 15-20% further by improving data, models and regulatory processes.
  2. Adapt compensation to reflect softer cultural issues; only 26% of banks are focusing on this.
  3. Analyze strategic lines of business to determine the top 20% of clients, which typically account for 80% of profits.
  4. Free up 5-10% of staff costs to reinvest in technology. Beyond advisory and underwriting businesses, the largest share of costs should be in technology.
  5. Make significant investments in technology to combat cyber threats and financial crime. One major bank spent US$250 million in 2014 alone to enhance cybersecurity.


Take the path to acceptable, sustainable ROE.

Download “Transforming investment banks” as a PDF

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