Wall Street Profits Face Bigger Squeeze by Regulation, BCG Says

Photographer: Scott Eells/Bloomberg

Wall Street firms from Bank of America Corp. to Switzerland’s UBS AG have already seen their profitability reduced by new capital requirements designed to avert future bailouts. Close

Wall Street firms from Bank of America Corp. to Switzerland’s UBS AG have already seen... Read More

Close
Open
Photographer: Scott Eells/Bloomberg

Wall Street firms from Bank of America Corp. to Switzerland’s UBS AG have already seen their profitability reduced by new capital requirements designed to avert future bailouts.

Profitability at Wall Street banks has further to fall as more rules designed to prevent another financial meltdown are imposed, according to a study released today by Boston Consulting Group.

The average return on equity for the 30 biggest companies in the capital markets and investment-banking industry will drop 3 percentage points after sliding to a range of 10 percent to 13 percent last year, according to BCG’s Global Capital Markets 2013 study released today. BCG didn’t say when the decline would be completed. Return on equity, or ROE, gauges how well companies reinvest shareholders’ money.

“We’ve seen two-thirds of the regulations’ impact, another third is coming,” Philippe Morel, the London-based global leader of BCG’s capital markets practice, said at a news conference today. The average ROE achieved by U.S.-based banks last year was 13 percent, while European banks trailed with around 10 percent, Morel said.

Wall Street firms from Bank of America Corp. to Switzerland’s UBS AG (UBSN) have already seen their profitability reduced by new capital requirements designed to avert future bailouts. Measures that still aren’t in place include a ban on banks trading for their own benefit, and strengthening margin requirements to make derivatives safer.

The 15 percent to 20 percent returns achieved before the financial crisis “appear to be a thing of the past for most players,” according to the study. Banks will need to cut more costs and find new revenue to achieve the minimum 12 percent return on equity that investors probably will demand, according to the report, and revenue probably will remain flat for years, the authors told reporters.

Long Wait

“Don’t expect in this industry we’ll be seeing any comeback in revenue anytime soon,” Morel said. “All of the increase we’re going to see in banks’ profitability is going to come from the cost side.”

Collateral management, which includes helping to supply the financial backing that banks and investors need for securities trading, could produce $4 billion to $7 billion of revenue by 2016, the report found. That’s a small amount compared with the industry’s $300 billion of revenue and some of that collateral management revenue is likely to be generated by non-bank financial firms, Morel said.

Lenders must decide whether they can afford to invest in the electronic trading systems required to be an effective participant in equities and fixed-income trading, the report found. Trading in cash equities and foreign exchange has already become the most electronic, with government bonds and some types of corporate debt and derivatives following, according to the report.

Some banks may drop out of certain areas of trading because they’ll decide the cost of investing in the electronic platform is too high, Morel said. The new information technology, or IT, platforms may change the types of salespeople that the banks employ, as well as how they’re paid, according to the report.

“You don’t need those sales people and traders because you’ve got machines doing that for you,” Morel said.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.