'The need for a comprehensive and surgical assessment of business lines and client coverage continues'.
Analysis in the Boston Consulting Group’s (BCG) Capital Markets 2016 report predicts 2016 investment banking revenue to total $212bn (£147bn), down seven per cent from $228bn in 2015.
And revenue could fall even further next year, with BCG putting the figure between $182bn and $216bn.
According to the analysis, investment banking revenue has fallen each year since 2012, when it added up to $257bn.
“Economic uncertainty, monetary policy change, and further implementation of bank regulations were the driving factors behind the negative change in market sentiment during the second half of the year,” the report said. “Total revenue was lower last year than at any point since 2009, as the prospect of central-bank tightening in developed markets was swamped by a severe downturn in emerging markets.”
Overall, between 2010 and 2015, BCG said revenue had fallen by 16 per cent, from $271bn.
It has been a similar story in relation to profitability, with the report estimating that operating income has fallen 58 per cent from $95bn in 2010 to $60bn in 2015.
The report said: “Overall, declining revenues and difficulties in achieving consistent reductions in costs have eroded banks’ ability to return value to shareholders. Regulatory headwinds have compounded this problem.
“The need for a comprehensive and surgical assessment of business lines and client coverage continues. The greatest opportunity for [return on investment] improvement lies with the institutions that have a clear strategy for reducing their overall costs, optimising their balance sheets, and deepening their client relationships.”
Analysts were not surprised by the BCG figures.
Ian Gordon, Investec’s head of banks research, told City A.M.revenue figures from the first four months of 2016 support the finding that this year will see investment banking fall further.
He added: “After the January and February that we had, it is inconceivable that we’ll see full-year growth. In some ways, the damage has already been done.”
“I think it’s going to be a challenging year for investment banking revenue,” Simon Hunt, PwC’s UK banking and capital markets leader, told City A.M.
“While there’s clearly a pipeline of market activity, with the referendum, with the US presidential election, there are quite a lot of significant events which are going to create uncertainty. And an uncertain environment is a more challenging environment.”
He described investment banking revenue as a “good indicator of underlying economic activity”, adding: “When there are transactions being undertaken this is generally a sign of heightened economic activity and people are trying to do deals, grow businesses, raise capital.
“The slowdown of investment banking is an indication that there is more uncertainty in the economy, therefore there is less activity in the economy, and therefore economic growth, less activity, is what then trickles down into our lives.”
Despite investment banking troubles, BCG reported that the capital markets ecosystem “thrived” overall in 2015, with asset managers, hedge funds, high-frequency traders, exchanges, information service providers, clearing house and infrastructure firms among those to benefit.
The report said: “As banks retrench and relinquish control of the value chain, this broader set of industry participants is now being presented with an opportunity to compete for revenues that, traditionally, might not have been considered up for grabs.”