Investment banking 'needs shake-out'

TWO or three major players in the investment banking market need to close down or go out of business in the next couple of years. Otherwise, the entire sector's profitability will continue to wane.

More than 10% of bank costs or 20% of capital needs to be withdrawn to maintain returns at the levels achieved before 2001, according to a stark report entitled European Corporate and Investment Banking Faces a Further Shake-out. This equates to the closure of up to three substantial firms.

The report - compiled by financial consultancy Oliver, Wyman and top investment bank Morgan Stanley - predicts that revenues from European business will fall by about e2bn to e74bn (£45.5bn) this year, having already drifted by more than 7% between 2000 and 2001.

'There are too many banks chasing too few clients. There needs to be a rationalisation, said Oliver, Wyman's head of corporate and commercial banking Simon Harris.

The consultancy firm cites second-tier institutions such as ABN Amro, Commerzbank, Dresdner Kleinwort Wasserstein and Societe Generale as particularly vulnerable. The report suggests that these types of bank will be reluctant to take the necessary action and that this is likely to affect profitability throughout the sector.

'The excess capacity means the balance of power has shifted dramatically in favour of corporates,' said Harris. 'Banks need their corporate clients more than the corporates need any one bank.'

Oliver Wyman believes eight top institutions can withstand this change - Goldman Sachs, headed by chief executive Henry Paulson Jr, Merrill Lynch and Morgan Stanley alongside Citigroup, CSFB, Deutsche, JP Morgan Chase and UBS. Other firms operating in Europe are likely to find the environment increasingly challenging.

'Second-tier banks are becoming trapped in low margin businesses,' says the report. 'Particularly outside their home market these banks find it difficult to compete and succeed in cross-selling more than one product in less than one-third of their relationships.'

The situation is exacerbated because plain vanilla lending is losing banks almost e1.5bn a year, according to Oliver, Wyman.