Investment bank consolidation seen likely amid virus fallout
London
A "NEW wave of consolidation" among global investment banks could be triggered by the coronavirus pandemic, according to a new report by Oliver Wyman and Morgan Stanley.
Some banks may find their lack of scale and the short term pressure "too acute" to survive the crisis, particularly in Europe where returns are lower compared to bigger, more profitable global banking rivals. A spate of upcoming CEO successions at banks, a "recent shift in tone" among European policymakers and regulators, and banks' current discounts to asset values could also prompt consolidation, the report states.
Any potential consolidation comes at a time when all global investment bank earnings are under severe pressure because of the virus. Analysis in the report shows that even in a "rapid rebound" recession, lasting up to six months, there could be a 100 per cent decline in earnings this year.
In a worst case "deep global recession" scenario, lasting a year or longer, earnings could fall by 277 per cent and there could be significant losses for weaker banks. The report states that credit losses could surge to between US$200 billion and US$300 billion, compared with US$30 billion to US$50 billion if a rapid rebound occurs.
Banks have built up strong capital buffers since the 2008 financial crisis but "returns have never been lower entering a major stress event" and "only a handful of wholesale banks are resilient to a protracted period of earnings stress", the report states.
GET BT IN YOUR INBOX DAILY
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Large "global powerhouses" pursuing consolidation and operating leverage could be the most resilient during the crisis, it adds. "Our analysis suggests the biggest single driver of profitability is scale - within a clearly defined area of specialism, or across a broad set of related activities."
Banks' high fixed regulatory and compliance costs makes it harder to slash costs to compensate for falling profits. Few big banks are also likely to carry out large scale redundancies "in the midst of a public health emergency". "With limited room to manoeuvre in the near-term, some banks may be pushed into disposals, asset sales and/or exits to create breathing room," the report states, adding that "consolidation may be the best answer for some". BLOOMBERG
BT is now on Telegram!
For daily updates on weekdays and specially selected content for the weekend. Subscribe to t.me/BizTimes
Banking & Finance
Philippines eyes US$2 billion in its first global bond this year
UniCredit jumps past 60 billion euro market cap to join elite club
New Thai finance minister downplays row with central bank
China's CICC may cut investment banking headcount by at least 10% this year
Apac finance M&A to stay subdued after Q1 decline as uncertainties linger: S&P Global
MAS ‘following up’ with DBS on cause of May 2 glitch in digital banking services