Why Investment Banking Revenues Are Heading Down

Investment banks may have wrecked the world economy in 2008, but they sure made money picking up the pieces. In 2009, the global investment-banking industry took in $311 billion in net revenue, a 50 percent jump from 2008 and only $17 billion off its 2007 peak. Profit margins last year were 24 percent, the highest ever. Leading the pack were the usual American suspects: Goldman Sachs, JPMorgan, Citi, and Bank of America. Armed with TARP cash--essentially, free money from the Fed--and facing a cleared field thanks to the demise of Lehman Bros. and Bear Stearns, i-banks took advantage of a lack of liquidity and huge spreads in credit and fixed-income markets. Trading revenues soared as leverage remained high. Those that dialed back on risk, like Morgan Stanley, came to regret it. For the most part 2009 was easy money.

But that party is over. A recent Boston Consulting Group report forecasts an 11 percent drop in industry revenues in 2010. Even as the economy recovers and traditional businesses--like underwriting stock offerings and mergers and acquisitions--return, it won't be enough to match 2009. For one, the specter of regulation has put a damper on things like proprietary trading, where banks trade their own money rather than their clients'. The practice has become a bit unseemly and could be banned if Congress passes the proposed Volcker rule. Analysts foresee a return to a more client-centric approach and the age-old practice of deploying capital to areas of need, like emerging markets. Either way, a more vanilla, less profitable i-banking sector may not be so bad.