Embracing Disruption Through Digitalisation: Investment Banking Trends for 2020

Summary

• Investment banking domain has been severely impacted by the Covid-19 pandemic
• Global investment banking revenue has shown a declining trend in the previous year as well
• Existing players in the investment banking space are now facing new competition from fintech companies

The uncertainty in the global economy and volatility in the financial markets arising from the wake of c have certainly impacted revenues in the investment banking domain. Moreover, the low-interest rates scenario, Brexit uncertainties and apprehensions around trade war, also affected the market conditions.

2019 – Reflecting Winners and Losers

As per data from known research platforms, global investment banking revenue declined by around 3.6 percent to USD 76.8 billion in the year 2019 against 2018. This was primarily due to factors including changing competitive landscape, geopolitical tensions across the globe, lower interest rate regime, and wavered client demand.

In North America, the investment banking revenue dipped by about 4.0 percent to USD 42.7 billion in 2019. While in Europe, investment banking revenue fell dramatically by 15 per cent to USD 16.4 billion against the revenue noted for 2018. Contrarily, other major regions witnessed growth during 2018-19 as the revenue in Latin America, Middle East, North Asia, and Southeast Asia grew by 16 per cent, 27 percent, 2 per cent, and 3 per cent, respectively.

2020 - Revenue Contraction as we see from here

COVID-19 Pandemic has already tempered economic results across the globe, and subsequently, interest rates have gone down significantly, while the global supply chain is being tested. Fees generated from equity capital markets (ECM), mergers and acquisitions (M&A), and debt capital markets (DCM) have plunged by around 8.8 per cent in the Asia Pacific region (excluding Japan) in Q1 FY20, as noted through key statistical numbers coming from known market data platforms.

Even for JP Morgan, the investment banking division was impacted by widening funding costs in Q1 FY20, which resulted in a significant decline in the income. JP Morgan had a growing market share in the investment banking industry space for four consecutive years.

2020 – Investment Banking Trends

While we know that things keep on evolving in the Investment Banking space, emerging trends always trickle down to a disruptive approach against the traditional ones.

Existing players in the investment banking space are now facing new competition from fintech companies that are fetching investments and clients. In other words, Fintech or as we say ‘Big or Mid-Tech’ companies are giving a tough competition to global investment banks as they are attracting both millennial and traditional clientele. The current landscape suggests that many variations of fintech have emerged that draw on cutting edge technologies, specifically tailored for niche functions within the investment banking space, such as “regtech” and “insurtech”. Emerging technologies have given a good platform for companies to create convenient, personalised, data-intuitive products and services. We believe that the Internet of Things (IoT) and Robo-advice can be the game-changer in the near- to medium- term within the competitive landscape.

On the global M&A landscape front, many companies are aiming to transform their businesses or acquire new capabilities through acquisitions. Most notably, technology as a sector remains to be a top-notch sector M&A target.

As per trends, volumes of announced transactions have been in line as expected in 2019. In 2020, M&A activities are expected to accelerate to tap financial and operational synergies. Strategic bolt-on acquisitions can improve efficiencies for companies and help them to withstand risks. Meanwhile, private equity firms will remain active to bounce upon lucrative strategic investment opportunities.

Moreover, companies have accelerated capital raising, as they shift from strengthening liquidity to pursuing new growth opportunities. Over the past few months, many big players have resumed tapping multiple markets to seek M&A opportunities through hybrid securities, utilizing debt and options through private capital markets. As the economy moves towards revival, lucrative bolt-up M&A acquisitions can be preferred before transformative deals.

‘Digi-Investment Banks’ are required in the mainstream to deliver top-notch client experience

Investment banks will surely need to adjust business strategies to weather the economic turbulence, and challenging market conditions as increasing capital requirements for banks, sluggish economic growth and persistently low-interest rates scenario will continue to impact the overall earnings of banks. From a technology perspective, the sector needs to swiftly adapt to several innovative trends with regards to cryptocurrency, blockchain, artificial intelligence, cybersecurity, etc. Therefore, the investment banking industry needs to execute technological reformation, adopt a strategic approach to reduce costs, renovate business models for enhancing trading commissions, and meet client demands by tracking their behaviour.