Wholesale Banks And Asset Managers – Winning Under Pressure

The 2018 edition of our annual report with Morgan Stanley offers an overview of industry trends and analysis in wholesale banking and asset management. It finds that the contrast between winners and losers should be stark as banks and asset managers battle for near-term growth, while also positioning themselves to benefit from powerful longer-term shifts.

A decade on from the financial crisis, the focus is back on growth for both wholesale banks and asset managers. Rising rates, robust economic tailwinds and tax stimulus in the US promise a more favorable trading and investment environment that should provide near-term relief for both.

James Davis and Christian Edelmann outline the key messages of this year's report

Implications for Asset Managers

This year’s report outlines a number of asset management trends likely to affect the industry in 2018. These include

Challenged margins

Revenues only grew 1ppt faster than costs in 2017 despite a stellar year for AuM growth. We do not expect fee pressure for the industry to abate and, combined with lower market returns, there is an imperative to address cost. A bear case scenario could force much more radical restructuring.

Disruption in distribution

We see uncertain outcomes and high regional variation, but believe the emergence of an Amazon-like ‘marketplace’ is a credible possibility. This would result in a magnetic pull towards Vanguard-like pricing for active management and an estimated decline of up to 50% of industry revenues.

Finding alpha

Top performers are winning flows and resisting fee pressure leading asset managers to search for the means to enhance alpha generation. Harnessing AI or buying access to proprietary data sets are potential levers but proliferation of data and algorithms is putting the opportunity constantly at risk. While spend in this area will naturally favor deep pockets, we believe that success will go beyond this and ultimately require a range of other capabilities. Short term applications of using data may be financially more rewarding in distribution

Advantage of scale

Our analysis shows that large managers are suffering from lower outflows in active products driven by economies of scale in distribution. We also observe larger firms being more effective in shifting or diversifying their business models. However, technology will challenge scale in operations, opening up opportunities for emerging alternative business models.

Technology trends in asset management

Efficiency gains

Immediate data and technology efforts should be focused on cost. Data management still represents 10-20% of the cost base. We estimate automation and outsourcing can deliver ~30% industry savings, with a maturing vendor landscape and potential greenfield solutions putting more activities on the table.

Shifts in workforce

Technological advances in asset management will have a number of important implications, but in the long-term will result in fundamental changes to the make-up of the asset management workforce. Automation and externalisation of the skill-set in particular are likely to result in lower headcount but also require re-training of up to 40% of the workforce and strong top down guidance from CEOs.

Implications for Wholesale Banks

This year’s report outlines a number of wholesale banking trends likely to affect the industry in 2018. These include

Revenue and ROE outlook

Driven by a rebound in volatility and robust macroeconomic growth, we estimate industry revenues will grow ~5% in 2018, but slow to ~3% per annum to 2020. While US tax changes, capital and regulatory relief will be positives for RoE, we believe the 'fight for share' will intensify.

Shifting wallets

We estimate the Institutional wallet faces $15-25BN of structural pressure from shifts to passive, consolidation, electronification and unbundling, limiting growth medium-term growth to 2% p.a. In contrast, we estimate the Corporate wallet will grow at 4% p.a. and will be more resilient, though high costs have dragged industry earnings below than the cost of equity in 2017.

Active solutions

Efforts by banks to monetize data have had mixed results to date. We believe banks should learn from Big Tech to design propositions that bind together data and function, and tackle broader client problems like outsourced execution or risk analytics for institutional clients, and treasury solutions for corporates.

Investing in tech and innovation

We estimate the leading players are outspending mid-tier rivals on innovation by as much as 3 to 1. Yet it is not all about of spend – focus and disciplined execution are vital to drive initiatives to scale. With total technology spend now worth 15-20% of the cost base, managing the transition to a modular platform architecture, and to an agile delivery model will also be critical.

War for talent

As banks reimagine the business around technology and data, they will need to manage a transition in the talent model – including a ~30% shift in spend away from traditional roles and towards technologist and quants. We believe a new employee value proposition is required as competition for top talent increases.

Positioning to win

We see scale players, broad based corporate franchises and specialist players being well placed. Regional skews are increasingly stark: large US banks have gained 8ppts of revenue share over the last 5 years, and tax reform adds to their advantages. We believe this raises profound questions for EU policymakers over the future shape of the wholesale sector in Europe, e.g. around Brexit and cross-border consolidation.

More information

For more detail on our analysis of the wholesale banking and asset management industry, please download the full version of the report.