Investment Banks Forced to Slim Down
It is no secret that world of finance is headed towards a future that is drastically less labor intensive than it is today. It seems like most of the quantitative functions of banking are already being automated away, and sales and trading, risk management, and retail banking have already seen the impact of this in the form of significant job cuts. Those jobs are only the beginning of the automation displacement within banking, and investment banking is likely the next.
IPOs remain a very profitable business for investment banks, but I believe that we are seeing a shift in this process as we have seen a few notable companies prefer a direct listing rather than use an investment bank as an intermediary. Additionally, the NYSE recently filed paperwork with the SEC that makes this process easier for the companies that choose to do it.
For the companies that still opt to IPO, they have the bargaining power when negotiating with banks over fees. These companies are not at the same stage of the business lifecycle as the companies filing to go public ten years ago; they have established themselves for longer periods of time and have been able to leverage their size and recognition to extract lower fees lower fees from the investment banks. Related to this point, the new company lifecycle has become a factor here as there is now more access to capital in the private equity markets which has allowed for companies to stay private longer, which in turn has forced banks to compete with each other over smaller, lower revenue-generating deals. Combining all of these factors together, IPOs once accounted for around 25% of investment bank revenues, but in recent years that figure has decreased to about 15%, according to Seeking Alpha.
As the top line for these investment banks has shrunk, they have been forced to turn to technology to rethink their internal processes and automate repetitive tasks. Many of the functions of an investment banking analysts’ job can be categorized as repetitive; things like reviewing pitch decks, finding comparables, and performing background checks can all be easily automated out. We are already seeing some of this transformation play out as almost 30,000 jobs at HSBC, Barclays, Citi, Deutsche, and others have been cut since April of this year.
I think that there are huge secondary effects that will take place once this transformation matures. For the better part of the past three decades, investment banking has become labeled as one of the more lucrative professions for young finance professionals. I watched it through undergrad as the recruiting process stressed students out every fall. Despite this, many of the smartest kids I graduated with ended up taking an IB job in New York.
Looking ahead, it will be interesting to see what happens once even less investment banking jobs are available. The recruiting process is already selective enough to make very smart kids go crazy; you have to assume that as less and less jobs become available, many of the would-be applicants will begin to focus their recruiting efforts elsewhere into other industries. It will be really interesting once this happens to see what they choose to pursue instead.
