Updates from McKinsey

Small capital markets businesses have been insulated against many of the troubles affecting their larger competitors. Now things are getting tougher.
By Fuad Faridi, Jared Moon, Anoop Ravindranath, Roger Rudisuli, Manu Saxena, Matthew Steinert – The capital markets arms of regional and national banks are often seen as smaller versions of the capital markets businesses of the top 10 global firms. However, they are actually quite different. Regional businesses have evolved along their own paths, with distinct client franchises, operating models, and sources of profitability. As a result, they require a strategic agenda that is tailored to their specific needs.

Until recently, the capital markets businesses of regional banks have been insulated against many of the troubles affecting larger global banks, and in some cases have performed better than them. Regional capital markets businesses’ returns on equity (ROE) held up better than those of their larger counterparts and regionals maintained their market share.

Now, however, there are signs that life is getting tougher. Structural shifts such as increasing electronification and falling revenues, and questions about the sustainability and “fit” with their parent organizations, are leading to increased scrutiny of these businesses. This has been especially pronounced in Europe. Temporary revenue upticks from market volatility linked to COVID-19 are seen as providing only temporary relief.

Even seemingly more robust franchises are being forced to answer difficult questions. They have found that after stripping out the impact from internal flows and adjacent client bases, the businesses that remain are often far less profitable. They have also found it challenging to unlock the next phase of growth.

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In response, regional players across geographies are focusing on improving productivity end to end. A subset of firms is also trying to identify three to five pockets of opportunity for capturing revenue. more>

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