If 2008 and 2009 were the years that Main Street USA was battered by the nuclear meltdown on Wall Street, 2010 was the year that Wall Street started to feel the consequences of its antics. Sure, the legislation could have turned the screws on the industry much more than it did (and I wish it did), but it was largely a step in the right direction.
So what's ahead for the investment banking industry in 2011? I've got a few themes for investors to keep an eye out for.
Show me the money!
Not surprisingly, Wall Street's compensation policies came under fire after the financial meltdown. But much of the row over banking compensation has thus far proven to be idle saber rattling as banks have continued to hand over huge sums of money to their employees.
But banker compensation promises to be a contentious issue for the industry as we head into next year. In an interview over the weekend, Elizabeth Warren was bemoaning Wall Street bonuses, saying:
This just staggers me; I mean, I just don't have words to describe what this means. ... For me, what an economic recovery is about, is about what happens to American families. It's what happens in the real economy. It's whether or not families are building up wealth in their homes or whether or not their homes are dragging them over an economic cliff.
Granted, Warren will have her hands full helping to set up the Consumer Financial Protection Bureau, but if you're an investment banker looking for a fat paycheck, you don't like people in her position bellyaching about compensation practices.
The upshot for investors in all of this is that if banks feel the heat when it comes to compensation, more of the banks' profits could end up in shareholders' pockets.
Banking on China
China is growing like crazy, and while we're used to hearing about certain things booming in China -- like Yum! Brands' Kentucky Fried Chicken and Coach purses -- investment banking has been big business there as well.
Through late September of this year, equity capital raising in the Asia Pacific region (which excludes Japan) totaled $184 billion, up 36% from the prior year period. That compares to $144 billion raised in the Americas and $86 billion in Europe. Merger and acquisition activity still trails the West by a significant margin, but the $202 billion in M&A deal volume is nothing to sneeze at.
So who's getting tapped to handle China's banking work? Home-grown investment banks such as Ping An Securities, China International Capital, and Citic Securities are grabbing a good share of the work. However, it probably won't surprise anyone that the big global players are playing a very prominent role. According to data from Dealogic, Goldman Sachs (NYSE: GS) and JPMorgan Chase (NYSE: JPM) top the list of investment banking revenue earners in the ex-Japan Asia region.
The profit centers
Investment bankers may epitomize the saying "when one door closes, another one opens." If they're not swimming in profits from junk bonds, then they're raking it in selling stock in money-losing Internet companies. And if Internet companies aren't bringing home the bacon, then they're slicing and dicing credit to make tasty concoctions like collateralized debt obligations.
But what's next? "Traditional" investment banking -- raising equity capital, M&A advising, and so on -- will certainly continue to make its contribution. However, the income from those activities is a relatively small contributor for the banks these days. Bank of America (NYSE: BAC) and Morgan Stanley (NYSE: MS) -- which are Nos. 2 and 4, respectively, on the global investment banking league tables through the third quarter -- each took in less than $4 billion in fees. That compares to revenue over that period of $36 billion for B of A's Global Banking & Markets and Wealth & Investment Management divisions and $24 billion in total revenue at Morgan Stanley.
It's been trading activity -- both internal trading done on banks' accounts and client-driven activity -- that's been the backbone of the investment banking world in recent years. But that's coming under major pressure. Regulation changes will be a major force in changing this aspect of the business, while slowing volume will also challenge trading results.
One direction that it appears Wall Street is looking to bolster profits is wealth management. Earlier this month, Bloomberg reported that major banks such as JPMorgan, Deutsche Bank (NYSE: DB), and Citigroup (NYSE: C) have all been hiring the type of bankers that cater to high-net-worth individuals. The move makes sense as the business is fee-based and less risky than what got the banks into so much trouble during the financial meltdown.
Of course, Wall Street seems to excel at cockamamie schemes that bring in big profits while creating big financial risks, so 2011 may simply be a transition year between the last such scheme and the birth of the next.
Expect the unexpected
As I think the preceding themes suggest, there is plenty of flux going on in the investment banking world and that should make for a very interesting 2011. As banks continue to work to solidify balance sheets and lift profits, we could see some drastic actions that just a few years ago would have seemed unthinkable.
My favorite of these crazy potentialities? Bank of America splitting itself up. Analysis from Dow Jones Investment Banker suggests that the sum of B of A's individual parts is two or more times what the stock is currently trading for and that breaking the bank up could unlock that value. It's definitely a long shot, but it sure would shake up the banking industry.
Now you've heard what I have to say, so what do you see ahead for investment banks in 2011? Head down to the comments section and share your thoughts.
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