The global investment banking business is facing structural challenges that will likely keep the major Wall Street firms underperforming for several years, according to a new report from Toronto-based Hamilton Capital Partners.
In the report, the firm argues that the current tough environment for the global investment banks reflects structural issues, not cyclical factors. As a result, it suggests that the traditional investment banking business model is effectively under siege, and is going to require fundamental reform.
Much of this pressure on the banks, the report suggests, can be traced back to the financial crisis, and the widespread regulatory reforms that resulted. These reforms have hampered profitability at the big investment banks by raising capital requirements, reducing leverage, and curbing risky trading, among other things, the report says. And, at the same time the weak market environment “is adding to
these challenges by weighing on stock prices and investor sentiment,” the report says.
Until recently, “firms appeared to be hoping that revenues would rebound.” Yet, as that hasn’t happened, “the urgency of these firms to restructure their business model is rising,” the report says.
That restructuring is likely to take years, the report adds. “In the meantime, low returns are expected to persist for the foreseeable future, weighing on book value growth, multiples, and likely, stock price performance.”