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.

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