There are investment banks and there are investment banks. Just because you work in the industry, that doesn’t mean you’ve entered a realm of bland conformity and strategic universality. All banks are different – or at least there are four different types.
Tricumen, the financial services strategy company, says today’s investment banks fall into one of four business models as shown by the charts below. Briefly, they are: 1) Global universal banking, 2) Regional universal banking, 3) A blend of electronic and high margin business, 4) Global investment banking and wealth management.
No one model is right, but each has its distinct advantages and disadvantages under different market conditions. This is what Tricumen says each model looks like, which banks follow it, and how it measures up. Which one do you want to work for?
1. Global Universal Banking: Bank of America, Citigroup, HSBC and J.P. Morgan
Advantage: It’s efficient – the bank can use its technology and operations teams to service capital markets (the investment bank), transaction banking and corporate banking. There’s also a lot of cross-selling – the bank sells its investment banking and commercial and transaction banking services to the same corporate clients. Investment banking client coverage professionals usually deal with the CEO/CFO, corporate banking client coverage professionals usually deal with the treasurer and deputy treasurer. Global Universal Banks also have the advantage of deposits from corporate clients, which they can use as capital to fund their investment banks.
Disadvantage: Global universal banks generate plenty of revenues, have a solid return on equity and low earnings volatility but they can be unwieldy bureaucratic beasts. This is reflected in the complaints of those who work for them.
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2. Global investment banking and wealth management: Credit Suisse, Morgan Stanley and UBS
Advantage: Banks that combine investment banking and wealth management can make the most of the synergies between the two. Wealthy CEOs encountered by investment bankers can be passed on to the private bankers and sold wealth management services. Similarly, the investment bank can be used to structure products sold to clients in the private bank. Technology and operations teams for the two parts of the business can be shared, creating efficiencies. And deposits gathered from the private bank can be used to fund activities in the investment bank.
Disadvantage: Revenues are usually lower in this model than in model one and revenue volatility is usually higher. Banks pursuing this model and be averse to the more capital hungry and risky areas of fixed income (think UBS) and investment bankers can sometimes feel like second class citizens compared to private bankers (think Credit Suisse bankers in Asia).
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3. ‘Barbell’ across high margin and electronic businesses: Goldman Sachs
Advantage: This is the most innovative and exciting of the four business models. It’s all about combine high-volume ‘low touch’ electronic trading businesses with the sort of high margin businesses that need higher capital and require the bank to take a risk with its own money (to make a ‘principal investment.’) Although much of the trading under this model is done electronically, a high calibre ‘high touch’ salesforce is particularly imperative for dealing with complicated and demanding clients on high margin accounts. Banks like Goldman Sachs combine this investment banking model with a private banking arm to bring in some deposits and shore up capital.
Disadvantage: The risks of revenue volatility under this model are high. The business also needs an excellent risk management function to help stay out of trouble and maintain its capital strength.
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4. Regional Universal Banking: Being toyed with by Barclays, BNP Paribas, RBS, Societe Generale, Standard Chartered and Wells Fargo
Advantage: Regional Universal Banks are lot like Global Universal Banks, but are focused on one or two geographical regions only. They’re still organizationally efficient and they still get funding from corporate clients. Their modest regional ambitions can help reduce complexity and lead to less bureaucracy on a global level.
Disadvantage: What happens when the region the bank is focused on stagnates or falls into an economic crisis? Things can get messy when you’re over-exposed to one place.
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