Will there be fewer investment banks at the end of 2012? According to breakingviews brutal market conditions forced almost all wholesale banks to cut costs and jobs in 2011. New regulations will force further shrinkage simply to generate acceptable returns. Unless the market picks up soon, smaller players may conclude they’re better off out of the game altogether.
Banks cut thousands of jobs from their wholesale divisions in 2011, as revenues collapsed amidst the euro zone crisis. And new regulations will halve average expected return on equity (ROE) across global investment banks in 2012 to 8.3 percent, according to analysts at JPMorgan, well below the 13 percent needed to cover their cost of equity. To reach that required return, banks have to shrink further. Even factoring in further headcount reductions of up to 20 percent and a 5 percent cut in non-compensation costs, returns would still be too low. To reach a 13 percent ROE, banks will have to slash pay too – by a hefty 23 percent per head on average, JPMorgan reckons.
Those cuts will not just remove fat, they will also undermine revenue....
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