competitive strategies in global wholesale financial markets
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Competitive Strategies in Global Wholesale Financial Markets. Annual Washington Conference of the Institute of International Bankers. March 5, 2007. TODAY’S DISCUSSION. Competing in wholesale financial services NY/US competitiveness as a market. TODAY’S DISCUSSION. - PowerPoint PPT PresentationTRANSCRIPT
Competitive Strategies in Global Wholesale Financial Markets
Annual Washington Conference of the Institute of International Bankers
March 5, 2007
2
TODAY’S DISCUSSION
1. Competing in wholesale financial services
2. NY/US competitiveness as a market
3
1. Competing in wholesale financial services
– Strong starting point
– Opportunities going forward
– How are players positioned?
2. NY/US competitiveness as a market
TODAY’S DISCUSSION
4
STRONG STARTING POINT
The growth and optimism of 2004 and 2005 has continued through 2006 . . .
• Banks have been firing on all cylinders
• Advisory and underwriting at record highs
• Equity markets experiencing strong growth
• Rising asset prices make making money easy
• Ever-growing demand for structured credit
• Plentiful capital flowing into alternatives
• Favorable macroeconomic conditions across the globe
5
*ROE for entire organization; does not report ROE for CIB divisionSource: McKinsey Global CIB 50, company filings
BANKS HAVE PRODUCED EXTRAORDINARY RESULTS
Revenues,2005,$b
23.9
21.8
19.8
15.7
14.6
14.1
13.9
12.7
12.2
11.5
Revenue CAGR,04-1H06,%
ROE, 2005,%
15.7
39.4
27.1
28.8
21.1
60.5
29.2
27.4
31.1
13.9
24.0
21.8*
18.0
24.2
18.0
27.6*
16.0*
21.6*
16.2
16.8*
Profit CAGR,%
8.8
48.6
59.3
38.7
12.3
18.0
32.2
35.7
73.7
8.9
10-year growth rate
Top 10 corporate and investment banks
6
UNDERLYING IT ALL, FINANCIAL STOCK GROWTH
Source: McKinsey Global lnstitute
CAGRs (2001-05), Percent
8.0
10.3
16.0
12.6
Eurozone
U.S.
Non-Japan Asia
UK
Private debt
19.4
4.4
5.2
2.5
Non-Japan Asia
UK
Eurozone
U.S.
Equities
7
EUROPE NOW ALMOST AS LARGE IN REVENUES AS AMERICAS, ASIA WITH FURTHER POTENTIAL
2005 Capital Markets revenue
*Average of range is shownSource: McKinsey Global Capital Markets Revenue Pool, Global Insight (World Market Monitor, 28.08.2006), team estimates
Estimated revenue growth*%, 2004–2005
Penetration (revenues/GDP) bp, 2005
0
5
10
15
20
25
0 20 40 60 80 100
Non-JapanAsia Pacific
EMEA
Americas
Japan
8
LARGE GLOBALS DOMINATE THE AMERICAS, OTHER REGIONS ARE MORE BALANCED
Capital markets revenues, %, 2005, global figures
Source: McKinsey Global Capital Markets Revenue Pool
Americas100% = $92 billion
Japan$ 16 billion
Non-Japan Asia Pacific$ 20 billion
63
3
9
25
44
3
24
29
49
3
18
30 33
324
40
Aspiring globals and Major regionals
National champions
Exchanges
Global players
EMEA$ 85 billion
9
Benchmark Bonds
Exotic Credit
Commodities
Brokerage Execution
Convertibles
FX
STIR/MM
Flow Derivatives
Exotic Rates
Equity Derivatives
Flow Credit
Securitization
Institutional Cash Equity
BOTH AMERICAS AND EMEA WITH PRODUCT STRONGHOLDSTotal capital market revenues, USD billions, 2005, Global figures
Source: McKinsey Global Capital Markets Revenue Pool
Americasrevenues
Fixed income
Equities
EMEA revenues
0
5
10
15
0 2 4 6 8 10 12 14 16
FX
STIR/MM
Flow Derivatives
Exotic Rates
Flow Credit
Exotic Credit
Securitization
Commodities
Convertibles
Equity Derivatives
10
IN PARTICULAR, EUROPE CAPTURES MOST OF THE FLOW AND STRUCTURED DERIVATIVES REVENUE
$ Billions, percent
Source: McKinsey Global Capital Markets Survey
2005 Revenues
$26
Flow derivatives
6%9
25
60
$26
Structured derivatives
APAC
Japan
Americas
Europe
100% =
8%
8
32
52
11
WHERE THE WHOLESALE BANKING MARKET IS HEADEDMarket developments Implications for players
Increasing scale of capital markets • Trading and risk management increasingly important
Excess capacity and capital in the industry at large
• Margins compressed and capital commitment required to compete for accounts
Technological advancements continue
• Marginal costs fall to zero, making scale critical
Relentless regulatory push for greater transparency
• Increased scrutiny of dealer risk monitoring of client exposures and conflicts when acting as principal
Revenue increasingly concentrated in a smaller number of mega deals and fewer clients
• Disciplined and focused client service a must
Broader product suites needed to create sustainable returns and buffer against down cycles
• Pressure to hire top talent particularly in structured product areas
Players that cannot leverage scale or scope forced to compete on skill, driving specialization
• Strategies diverge with losers caught in the middle
12
KEY INITIATIVES FOR 2007
1. Focus on providing coordinated service to increasingly demanding hedge fund and financial sponsor client segment
2. Should you compete for the middle market?
3. Lead the innovation in new risk management products4. Build out structured product capabilities across asset classes
5. Pursue effective and efficient geographic expansion – localization will be increasingly important
6. China and India: Still the next big thing; Great Crescent?
Where to compete
Penetrate key client segments
Build out or expand product offerings
Explore new geographies
7. Provide distinctive client service through a targeted and disciplined approach
8. Use cutting edge front-office technology as a competitive weapon
9. Design the next-generation operating model10. Win the war for talent
11. Deploy capital for key clients while monitoring returns12. Invest in state-of-the-art risk management to ride
the uncertainty
How to compete
Serve clients better
Build the best infrastructure
Deploy capital wisely
13
Banking legacy
Broker-dealer legacy
Ideas and principal
Efficient execution
Product-focused
Regional powerhouse
Universal
Industrial legacy
HOW ARE PLAYERS POSITIONED TO WIN?
Source: McKinsey Global CIB Revenue Survey
14
1. Competing in wholesale financial services
2. NY/US competitiveness as a market
TODAY’S DISCUSSION
15
FINANCIAL SECTOR COMPETITIVENESS BECAME AN URGENT PRIORITY FOR KEY POLICY MAKERS IN 2006
“Unless we improve our corporate climate, we risk allowing New York to lose its pre-eminence in the global financial services sector. This would be devastating for both our City and nation.”
Mayor Michael R. Bloomberg and U.S. Senator Charles E. Schumer November 1, 2006, Wall Street Journal
“U.S. capital markets are the lifeblood of our economy.”
Treasury Secretary Henry M. PaulsonNovember 20, 2006, New York Economic Club
“America’s capital markets are the deepest, the broadest and the most efficient in the world. Yet excessive litigation and over-regulation threaten to make the financial markets less attractive to investors, especially in the face of rising competition from abroad. To keep America’s economic leadership, America must be the best place in the world to invest capital and do business.”
President George W. Bush, January, 2007, Federal Hall, New York
16
CEOs BELIEVE LONDON’S NEAR-TERM FUTURE PROSPECTS ARE FAR BETTER THAN NEW YORK’S
Source: Dealogic; year-to-date data compiled as of 11/02/2006.
Do you believe this city will become moreor less attractive over the next 3 years?
Much more attractive
More attractive
About the same
Less attractive
Much less attractive
LondonNew York City
44
15
9
41
38
8
54
0
Ranking by response, percent
0
0
0
Source:McKinsey Financial Services CEO Survey
17
NEW YORK EXCELS IN TALENT BUT UNDERPERFORMS IN LEGAL AND REGULATORYPerformance gap, rating scale
Importance*HighMediumLow
Government and Regulators are Responsive to Business Needs
Fair and Predictable Legal Environment
Attractive Regulatory Environment
Reasonable Compensation Levels to Attract Quality Professional Workers
Close Geographic Proximity to Other Markets Customers and Suppliers
Reasonable Commercial Real Estate Costs
Favorable Corporate Tax Regime
Openness of Immigration Policy for Students and Skilled Workers
Workday Overlaps with Foreign Markets Suppliers
Openness of Market to Foreign Companies
Low Health Care Costs
Deep and Liquid Markets
High Quality Transportation Infrastructure
Availability of Professional Workers
High Quality of Life (Arts, Culture, Education)
Low All-In Cost to Raise Capital
Effective and Efficient National Security
Availability and Affordability of Technical and Administrative Personnel
*High importance factors were rated between 5.5-6.0 on a 7-point scale; medium between 5.0-5.4; low were less than 5.0
Source:McKinsey Financial Services Senior Executive Survey
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ENHANCING THE COMPETITIVENESS OF U.S. FINANCIAL MARKETS
• Competitive U.S. financial markets, especially global financial hubs like New York, are critically important for sustained U.S. economic growth
• External factors and internal factors that we can control are damaging the competitiveness of U.S. financial markets
• Bloomberg-Schumer Report recommendations focused on ensuring U.S. and New York global financial services leadership
19
ENHANCING THE COMPETITIVENESS OF U.S. FINANCIAL MARKETS
• Competitive U.S. financial markets, especially global financial hubs like New York, are critically important for sustained U.S. economic growth
• External factors and internal factors that we can control are damaging the competitiveness of U.S. financial markets
– External factors naturally shifting benefit international markets
– U.S. winning the war for talent for now, but losing on legal and regulatory environment
– As a result, U.S. losing critical contested markets, with stark future absent change
• Bloomberg-Schumer Report recommendations to ensure U.S. and New York global financial services leadership
20
ENHANCING THE COMPETITIVENESS OF U.S. FINANCIAL MARKETS
• Competitive U.S. financial markets, especially global financial hubs like New York, are critically important for sustained U.S. economic growth
• External factors and internal factors that we can control are damaging the competitiveness of U.S. financial markets
• Bloomberg-Schumer Report recommendations focused on ensuring U.S. and New York global financial services leadership
– Critically important near-term priorities
– Initiatives to enhance U.S. competitiveness
– Important longer-term national priorities
– Enhancing New York as a financial center
21
BLOOMBERG-SCHUMER REPORT RECOMMENDATIONS
Source: Bloomberg-Schumer Report
• Critically important near-term priorities– Provide clearer guidance on SOX implementation– Implement securities litigation reform– Develop a shared financial sector vision and guiding principles to set strategic
direction
• Initiatives to enhance U.S. competitiveness– Ease restrictions on skilled non-U.S. professional workers– Recognize IFRS now without reconciliation and promote faster convergence of
international standards– Protect U.S. competitiveness under Basel II international capital accord
• Important longer-term initiatives– Create independent, bipartisan National Commission on Financial Market
Competitiveness– Modernize financial services charters and holding company structures
• Enhancing New York as a financial center– Create a public-private joint venture focused exclusively on financial services
22
QUESTIONS?
Competitive Strategies in Global Wholesale Financial Markets
Annual Washington Conference of the Institute of International Bankers
March 5, 2007