NEW YORK & LONDON – (COMMERCIAL THREAD) – With near-record income levels in 2020 for investment banks (sell side) and strong growth in assets under management (AUM) for wealth and asset managers (buy side), the Capital markets faces a critical opportunity to accelerate technology investments to modernize operations, improve customer experiences and protect against disruption, according to a new report from Accenture (NYSE: ACN).
The report, entitled “Towards the markets of tomorrow: Capital Markets Vision 2025, ”Is based on Accenture’s proprietary financial analysis of the global capital markets industry for 2020 and draws on a previous report and 2017 data analysis. In 2020, the capital markets industry reported revenues of US $ 1.12 trillion and profits * of US $ 119 billion. The buy-side generated 90% of the industry’s profits, up from 87% in 2017, despite investment bank income reaching levels not seen in more than a decade of over $ 285 billion.
While investment banks have restructured and cut costs since the financial crisis, these actions have had limited success, according to the report. Bank cost-to-income ratios, which measure the efficiency with which the bank is run, have remained at similar levels over the past decade. On average, cost-to-income ratios stood at 61% in 2020, down just 1% from 2010 levels, with some banks reporting ratios as high as 100% last year.
“2020 has been a financially strong year for investment banks, but the crucial question is whether this is the start of a new trajectory or an anomaly due to increased market volatility,” said said Matt Long, managing director who heads Accenture’s Capital Markets business group in Europe and co-author of the report. “The role of investment banks as a vital link that connects companies to investors could be threatened as other players step in to take market share by using technology to disrupt the industry. Investment banks should accelerate investments in new technologies, associated with data and analytics, to transform their operations and infrastructure, and improve the customer and employee experience.
The report recommends that investment banks reinvest their 2020 profits to permanently bend the cost curve, using automation to help reduce front-office processing costs and reshape support functions, and adjust their real estate footprints to account for staff working remotely or in lower-cost locations. . Banks also have the ability to re-evaluate their business strategies to focus on the products, companies, geographies and customers where they have a competitive advantage and to use data and analytics to create more targeted customer interactions.
Wealth management assets are skyrocketing, but rising costs are cannibalizing income; decline in asset management revenues
While the buy side generates the vast majority of industry profits, revenue growth is showing signs of slowing down as costs remain high. For asset managers, the gap between assets and revenues continues to widen, with assets up 4.4% in 2020 and revenues down 2.6% despite a slight drop in costs. 0.4%. The report suggests that asset managers are going beyond cutting costs and tackling bigger structural issues, including product and fee pressures, distribution issues and operational inefficiencies.
During this time, the wealth management industry has grown significantly, but has also become more crowded and competitive, with costs cannibalizing revenues. Despite a 24.6% increase in assets under management in 2020, revenues increased only slightly to 1.8% and costs increased by 1.4%. The report notes that more flexible business processes and the wider adoption of technology solutions, such as artificial intelligence (AI) and the cloud, could help create a more profitable operating model and enable businesses to build new business models. better customer experiences. This would improve both sides of the cost / income ratio.
Another rapidly growing area of the buy-side is the private markets, made up of companies in the private equity and alternative asset management industries. They have been the direct beneficiaries of historically low interest rates, the change in central bank monetary policy, and a flood of cheap debt and inflated stocks. Assets under management grew 19.5% in 2020 and revenues increased 3.9%, but the rapid rise in costs to 9.3% offsets the positive gains. By adopting cutting-edge data and analytics solutions, private market companies could optimize the investment process, ultimately helping them go faster and lower costs, according to the report.
“The decoupling of assets under management and income is increasingly pronounced on the buy side, and these companies cannot simply use cost-cutting tactics to achieve the necessary growth; they need to digitize a lot of their operations, ”said Laurie McGraw, managing director who heads Accenture’s capital markets industry group in North America. “Businesses need to take decisive action and fully embrace AI, data and analytics to make decisions faster and deliver more focused and personalized experiences to customers. ”
The full report is available here.
* Reference to profits throughout the release is calculated as economic benefit (income minus credit losses, full operating costs, taxes and cost of equity).
About the research
Accenture analyzed publicly available information from global capital markets companies to define a clear vision of profitability at the industry and sector level (investment banking, asset management, wealth management, private markets, stock exchanges and asset services) using 2020 business financial results as a benchmark. Accenture calculated the economic benefit to the industry, defined as revenue less credit losses, full operating costs, taxes, and cost of equity. The analysis and the main management challenges were validated by discussions with leaders of large capital markets companies.
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Accenture’s Capital Markets business group helps wealth and asset managers, investment banks and stock exchanges rethink their business models, manage risk, redefine workplace strategies and improve operational efficiency to prepare for the digital future. To learn more, visit www.accenture.com/CapitalMarkets.
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