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Technology is a spoiler for I-banks as it is reducing
transaction costs for all industry players, bringing in higher
automation and reducing employment
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Despite challenges, I-banking can
continue to be profitable with modest
business & lesser arbitrage
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Munesh Khanna
As an adviser and an investment banker, I
have lived and experienced the highs and
lows of investment banking for the past two
decades. Until 2008, the investment
banking industry was growing at a
prodigious rate, generating staggering
payoffs for the key stakeholders - the
shareholders and the employees. The
return on equity was over 25% and
bonuses bordered on or often crossed the
obscene.
Stories abound of bankers being offered
compensation three to four times of the
existing package to switch jobs. Terms like
sign-on bonus, guarantees and golden
handcuffs were common. Bankers
reminisce of those golden bonus days of
December and January when sales of
luxury cars went up, houses in Alibagh
were acquired, first-class tickets to exotic destinations booked and expensive
champagnes drunk, including, famously, the 44,000 wine ordered by Barclays bankers
in London.
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This unpredicted boom was fuelled by a surging credit demand across the globe. The
developing countries, especially the BRIC economies, witnessed a surge in credit
expansion as a result of domestic growth opportunities, liberalisation of economies,
growing younger population, expansion of production capacities and significant
infrastructure spends.
The developed countries meanwhile experienced the credit expansion on account of
growing wealth which opened itself up to more leverage and an investible surplus. In
addition, the rising profits of companies, assisted by deregulation in the financial
industry and innovations in technology and financial sector products, increased banking
assets to 100-150% of most countries' GDP.
However, since 2008, equity returns are a more measured 11-13%, the number of people
working in the industry has drastically reduced and salaries and bonuses are in a free
fall.
Life has come a full circle for the bankers - cars are now being changed after six years
instead of three, partly paid apartments in Imperial and Vivaria are being traded
ostensibly to book profits, everyone travels IndiGo to avoid having to clarify they no
longer fly business class. This would have been acceptable if there was no additional
pain from here onwards, but the prognosis for the industry still does not bode well.
A further reduction in the number of players is expected (the European banks look most
suspect) and the overall return on equity could dip to the 7-10% level, which is clearly a
huge challenge.
THE FUTURE IS CHALLENGING
This gloomy scenario is due to reduced economic growth across the globe and erosion
of wealth for a significant number of high net-worth individuals, except the super wealthy
- their assets continue to compound, the bookings in luxury apartments in London's
Hyde Park area attest to that. The central banks have also enhanced regulation for
financial institutions by increasing capital adequacy requirements, demarcating or
fencing banks activities (such as proprietary trading and client business) and addressing
some of the weaknesses of the Basel II norms.
Technology is also a spoiler for the investment banks as it is reducing transaction costs
for all industry players, bringing in higher automation and reducing employment
opportunity. This creates a more level-playing field, increasing competition and trimming
down profitability of the investment banks.
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