Shrinking investment banks: More pain to come?

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The investment banking industry across the globe has slowly started to shrink. Blame it on the financial crisis of 2008 or the massive fines that these banks have had to incur, but the sector is gradually starting to lose its charm.

Globally, banks have paid an estimated $170 billion in fines since 2008, according to reports from Macquarie. However, a number of analysts have also attributed the cost cutting they are undertaking to volatility and uncertainty in the global markets.

"It is a combination of factors," says Marc Ostwald, macro strategist at London-based ADM Investor Services. "There is central bank quantitative easing, negative interest rates and zero interest rates policies which effectively detract quite heavily from portfolio rotation in many sectors."

The second factor, he says, is more regulation and capital requirement hikes post the global financial crisis. That has led to less trading and much higher costs associated with compliance and risk monitoring. The third is "fintech disruption in all of its forms – migration to family offices, algo and high frequency trading."

In the last year, banks like RBS, Credit Suisse, Deutsche Bank and BNP have announced their plans to close operations that they saw as less profitable. The latest addition to the list is Japanese investment bank Nomura which announced on Tuesday its plans to restructure its business in Europe and the Americas. Sources told Reuters the bank could cut up to 600 jobs, mainly in its European cash equities business.

The investment bank has said it will focus on its core business in the Americas and will make further detailed announcements later this month. The bank stated that it will close certain businesses in EMEA but will not make any changes to its Asia Pacific platform.

Nomura's COO Tetsu Ozaki, in a statement, said: "this exercise will deliver significant efficiencies and cost savings for Nomura, refocusing the firm's activities and reallocating resources towards its areas of expertise and most profitable business lines."

A pedestrian walks past illuminated signage for Nomura Securities Co., a unit of Nomura Holdings Inc in Tokyo, Japan.
Nomura to close some operations in Europe

Analysts have pointed out that a number of banks have decided to close their non-core units in order to focus their resources on more profitable business - RBS is one of them. The bank has been in the news in the past couple of weeks for axing a number of middle-office positions within the investment bank, including support and technology services. On Monday, the bank announced its decision to close its banking operations in India. A total of 700 jobs are expected to be cut in the process.

The latest phase of restructuring at RBS comes after eight successive years of net annual losses, amounting to more than £50 billion ($71.4 billion) since the financial crisis. The bank expects to further save £800 million, after RBS chief executive Ross McEwan warned of further changes to be made in 2016.

Other giants like BNP Paribas and Credit Suisse also announced restructuring plans earlier this year. A number of banks have been reducing exposure to their fixed income business while doubling up on more lucrative options such as securities services and cash management. Some banks have also been closing down regional operations and diverting resources to a single-focused region.

Keeping the focus on more capital-intensive business lines, German giant Deutsche Bank too recently announced its plans to shrink its investment banking business by 50 percent. John Cryan, the bank's new CEO has announced his plans to cut back on businesses considered too small or risky.

While the sector is slowly shrinking, there is hope for giant banks to be reasonably well-positioned as the global economy starts to improve. A report from PricewaterhouseCoopers, titled "That Shrinking Feeling" suggests that the financial crisis has left banks in a period of painful transition. "They remain unsure what new regulatory and legal requirements they will be asked to meet - to say nothing of what further misconduct fines they might have to pay," the report states.

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