Banks Risk Getting Caught in the Middle

Current trends in what financial trends are concerned seem to favor specialist banks and not general providers. That is to say that buy side clients are becoming weary of banks that offer a wide range of options, turning more and more towards specialized banks.

A joint report conducted by Oliver Wyman and Morgan Stanley has given further insight into this ongoing trend. According to their report, the state of the global investment banking industry is sure to face a change in what the options of clients are concerned, leaving banks no other choice than to mend themselves as to be able to provide the services needed.

The report shows that 60% of those interviewed want to work with banks that offer specialism in products, ranging from research, derivations, FX and hedging, and geographies. This big chunk of respondents also identified partner banks as trustworthy for a client’s precise geographic interest. Out of these respondents, 50% said that they fully expect to reduce the amount of relations with occasional trading partners, as well as with the banks that are currently offering a more general service in product lines and regions.

It seems that more and more buy side clients are adopting the “less is more” or “smaller is better” philosophy, being more and more attracted to banks that do not expand their activity too much. To quote from the report, “one of the most striking findings from our client interview was that investor clients are actively looking to deal more with partner banks and specialists, reducing spend with the middle tier of core providers and the tail or counterparties to whom 45% of total wallet is directed today”.

As we speak, investment banks are facing the not so great situation of shaking equity commissions from their buy side clients. These buy side clients are taking steps towards cutting their broker lists- and this can only mean bad business for banks offering investment deals. The bright side is that partner banks, smaller banks and specialists will finally prosper after a long time of being almost ignored. On the other hand, mid- tier providers are left with only one option: they have to go through the not so easy process of reinventing and reshaping the way in which they provide banking services, as well as their attitudes towards clients.

Quoting once again from the Oliver Wyman- Morgan Stanley report, “we think that banks will have to think much harder about where to offer full service, and when to compete much more specifically”. Big banks will have a hard time in successfully completing this challenge; shrinking down is often more difficult than it may seem at a first look. But those banks which will manage to do so will, according to this report, have no trouble in keeping afloat. Lots of banks that are accustomed to continuous growth have, unfortunately, taken several steps back from providing services with which clients can be sufficiently rewarding.

Some banks have wisely already taken some steps in order to make some real changes in the way in which they provide services. UBS, for instance, is taking slow steps to retreat from the fixed income market. The Royal Bank of Scotland, one of the largest, if not the biggest, banks in the world, is effectively shutting down its equity businesses. Nomnia is starting a plan of combining equities and fixed income businesses into a combined market construct, taking the decision focus the biggest chunk of its resources on where it has the best chances to compete and make considerable profit.

This trend is quite the opposite of what banks have been doing in the last years. As opposed to expanding their tentacles as much as possible, big banks are now trying to shrink their size.

How much will these banks manage to become more attractive to their buy side clients is a matter that will only become clearer in the future, once these banks manage to make the necessary changes.

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