Returns on investment banking fall again as regulation tightens

Tim Wallace
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Investment banks’ profitability fell again in 2014 as tighter regulation combined with sustained high costs stopped the sector recovering for another year, according to a study out today from Boston Consulting Group (BCG).

Average return on equity across the industry fell to below seven per cent in 2014, compared with a cost of capital often estimated at around 11 to 12 per cent.

And BCG forecasts that without substantial restructuring and cost cutting, those returns could fall to a miserable six per cent in 2016.

The consultants recommend banks specialise, instead of following the universal banking model.

“Each institution must choose its own path,” the report said.

“All firms will need to take drastic action on the cost side, exploring which activities are not differentiated and considering utilities, shared services and agreements to mutualise costs.”