2020 and 2021 have proven good years to be working in the investment banking industry. In a giant report released today, JPMorgan's team of European banking analysts note that 2020 was "stellar" for fixed income currencies and commodities (FICC) revenues, while JPM CEO Jamie Dimon himself said this week that JPMorgan's investment bankers are the midst of what may well be their best quarter ever.
It's unlikely to last, though. At some point, gravity will reassert itself, and when it does, it's wise to be positioned defensively.
JPMorgan's analysts predict that gravity could strike as soon as 2022, when they expect overall investment bank revenues to fall by 3%, but revenues for some areas (see the chart below) to fall by as much as 8%. If you're working in cash equities or credit trading next year, you probably don't want to be working for a bank that's already struggling to cover its cost of equity in that area. If you lose your job, It's also likely to be more difficult to find a new one than before: "IBs are becoming more machine like with less dependency on human capital," note the JPM analysts; for this reason, they say there are also fewer bidding wars for staff (although try telling that to headhunters in the junior investment banker market right now).
JPMorgan's guide to past and projected revenue growth by product
However, the report also identifies a number of areas that are likely to see ongoing growth no matter what. It notes, too, that U.S. investment banks are amassing more and more market share in key product areas. If you want to future-proof your finance career in 2021, it will therefore help to implement one of the following pre-emptive strategies.
1. Transaction banking
Yes, it's boring but as Goldman Sachs is demonstrating, transaction banking is a key growth area. Transaction banking allows banks to keep key corporate clients captive and make ongoing product sales across corporate bonds, FX, rates and hedging products. Banks are therefore going to be investing in their transaction banking platforms and if you work in this area you should be comparatively safe.
Custody, or securities services, is also rather boring but like transaction banking JPMorgan says it's becoming a necessary part of doing business as a major bank. It predicts that banks will "further ramp-up" their services here, noting that the key is, "to generate captive flow business for cross-selling products such as Research, trading and potentially in-house benefits from improved risk analytics."
3. Prime brokerage
We've already highlighted the strategic importance of prime brokerage divisions to investment banks and JPMorgan's analysts do the same - despite the losses at Nomura and Credit Suisse due to Archegos.
While prime brokerage is a "very low ROE business on a standalone basis", JPMorgan's analysts note that it has a far broader strategic significance. "Top prime-brokerage houses now generate 2x+ in multiplier effect revenues such as liquidity (for example, Dividend Swaps), risk-recycling (for example, correlation, Vol risk in structured products), block trades, and convertibles." They also bring in key hedge funds, who are a "very important client base in the trading lifecycle."
4. Platform businesses
Goldman Sachs has been talking about platform businesses for a while and JPMorgan notes that Goldman's Marquee platform is one of the truest examples of the genre, offering "i) research content, ii) trading, and iii) risk management functionality on one platform."
More and more banks will move towards offering, "fully integrated front-to-back platforms based mainly on the cloud," predict JPMorgan's analysts. The future is about improving the ability to transact at speed through a "one code" platform. It you're working on one, your job should be secure.
5. Artificial intelligence
JPM's analysts say AI isn't a revenue opportunity in itself, but an opportunity for improving business performance. Over time, they predict it will allow the front to back of automation of trading operations in commoditized linear products, plus the collection of data on clients that will help sales distribute relevant products.
Environmental social and governance (ESG) investing and products remain a huge growth area despite big growth this year. "We believe we are still only scratching the surface, and growth potential remains high," say the analysts.
7. Private markets
Lastly, the JPM analysts highlight the potential for private markets to drive banks' revenues in the future. Private equity assets under management have grown at a rate of 10% CAGR over the past 10 years and 13% over the past five years. Either you want to get out of a bank and work in a private equity fund, or you want to work for a financial sponsor group within a bank, or you want to get into one the private lending businesses that banks are already investing in.
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