3:06 pm - Tuesday September 26, 0473

Realignments in Investment Banking – Sell Side to Buy Side

Euro and Europe are going through challenging times.

Stephen Hester, chief executive of Royal Bank of Scotland, has conceded for the first time that the state-backed lender could sell its investment banking division. Giving evidence to members of the Treasury Select Committee on Wednesday (23rd November 2011), Mr Hester said admitted RBS could offload its global banking and markets (GBM) business. (Source The Telegraph of UK)

UBS has unveiled a dramatic restructuring of its once-dominant investment bank that will see the unit’s size cut by 50pc as the Swiss group refocuses on its wealth management arm. Sergio Ermotti, the bank’s new chief executive, used his first public appearance to unveil a restructuring programme that will dramatically scale back UBS’s “casino” banking activities in favour of more predictable returns. UBS plans to shrink risk-weighted assets in the investment bank from Sfr300bn (£207bn) to Sfr145bn and reduce its staff levels from 18,000 to 16,000, predominantly through redundancies. (Source Reuters)

French Bank BNP Paribas is shedding jobs in India as part of its global plans to downsize. Last week, the bank asked nine executives from its domestic fixed income and investment banking divisions to leave. Globally, BNP plans to cut 1,400 jobs globally, including 1,000 outside France. A BNP spokesperson confirmed the development: “BNP Paribas like all other banks must adapt its business to the new regulatory environment. As part of this adaptation plan, we have now reduced our headcount in our corporate and investment banking division.” (Source Economic Times)

US Banks are also challenged by Dodd Frank Act and Volcker Ruling implementation specifically covering investment banks.

In these circumstances, banks are trying to realign their business and refocus on their customer side investment banking activities – buy side activities – mainly asset and wealth management. This is corroborated by the following developments.

Though the global asset management industry was severely hit by the worldwide financial crisis, it has now recovered well from the crisis. The resiliency of the asset management industry can be explained by a more diversified industry and investors turning to greater diversification in asset classes. The asset management industry is a vital source of economic growth as intermediary in the savings- investment channel.

Investors are turning to greater diversification in asset classes to protect their portfolios from market movements and generate higher returns. Institutional clients represent the dominant segment of the European asset management industry. The border between different asset management product types is getting blurred. There is a felt need to apply same distribution standards across all retail investment product categories.

The industry is also one of the most important providers of liquidity needed to ensure smooth functioning of capital markets and provides the means for its clients to diversify their portfolios and achieve their investment goals. Asset managers are expected to act as the custodians of their clients’ interest. There is a growing tendency in the minds of investors now to go in for short term investments and move funds at short notice.

Therefore our asset managers will need to a greater extent going forward in the specific areas of sound governance framework, more transparency, better communication with clients and better management of their expectations.

To play their roles effectively our asset managers will need to:

  • Tap capital from where it is in surplus at the right time
  • Provide liquidity to the retail investors when they need it most
  • Offer a wide range of products to diversify portfolios to investors
  • Improve disclosure norms and communication to investors

Slowly the regulators are also catching up with the market place in these areas. Surely, even if proprietary trading and investment banking activities are curtailed, greater opportunities will be made available in asset and wealth management space. One (service provider to banks) is expected to gear up their scale and skills to meet the growing needs in the market place in this sub vertical.

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