Investment banks should shrink to boost profits, says survey

Investment banks should curtail their post financial crisis expansion and rationalise their services to boost profitability and retail banks should grow, according to a survey of senior financial services managers by Interim Partners, the leading provider of interim managers.

The research among over 170 interim managers working in financial services identified the top priorities for the banking sector: • investment banks need to cut poorly performing product lines or services to improve profitability (48%).
• retail & commercial banks should pursue a strategy of organic growth (34%). (full results below)

Interim managers are recruited on a short term basis at board level or just below.

The findings follow an interim report from the Independent Commission on Banking that calls for banks to ring-fence their retail banking operations and suggests increasing the capital reserves required for the riskier activity carried out by investment banks.

Andrew McIntee, Director of Financial Services at Interim Partners, comments: “Retail and commercial banks have not been as quick as investment banks to recover profitability from the credit crunch but interims are saying that they are now better placed for future growth and even to create new jobs.”

Retail and commercial banks were identified in the survey as likely to be the biggest creator of new financial services jobs by 35% of interim managers followed closely by investment banks, chosen by 30% of interims.

Says Andrew McIntee: “Investment banks have bounced back well from the credit crunch and are once again competing with each other for staff. However, there is a concern that their return on equity is not as high as it should be.”

“Interim managers say that investment banks should be more ruthless with poorly performing business units and cut them in a bid to recover the high profitability they achieved before the financial crisis. Their swift recovery means they are now in the position to take stock and identify the areas which they are likely to profit most from.”

“So far IPO and M&A is still subdued and the message from interim managers is that they should be competing in fewer markets, identifying the areas where they really excel.”

Some investment banks have tried to allay investor concerns about profitability by publicly declaring that they will cut or sell underperforming divisions to meet a higher hurdle for return on equity.

Unsurprisingly given the round of M&A prompted by the credit crunch, neither investment nor retail & commercial banks were advised by interims to follow acquisitive expansion strategies: • Only 4% of interims identified a programme of acquisitions as the top priority for investment banks • Even fewer (2%) said retail and commercial banks should seek aggressive expansion through M&A

Adds Andrew McIntee: “Retail and commercial banks play a vital role in the UK economy which is why interims think it is important for them to grow – but to grow prudently.”

What should investment banks’ top priority be to improve profitability? Cut underperforming product lines or services – 48% Cut costs across the board – 17% Major investment in technology – 14% Invest in new staff – 8% Increase margins – 7% Programme of acquisitions – 4% Reduce staff – 2%

What broad business strategy do you think retail & commercial banks need to concentrate on most over the next 12 months? Pursuing organic growth – 34% Reducing debt – 25% Driving sales – 22% Cutting costs – 17% Aggressive expansion through M&A – 2%

Which financial services sector do you think will generate the biggest increase in new jobs in 2011? Retail & commercial banks – 36% Investment banks – 30% Insurance sector – 16% Asset management – 13% Hedge funds – 5%