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CIB Global Practice

CIB OUTLOOK Summer 2013 – Learning to prosper in a continuously uncertain world

Financial Services Competence CenterThis report is a product of Roland Berger Strategy Consultants. Data for some exhibits has been provided by the Nomura banks research team.

EXECUTIVE SUMMARY

2012 and early 2013 were uncertain times for corporate and investment banks around theworld, which saw a slight uptick in the financing businesses (driven mostly by the growingemerging markets) while capital markets remained hesitant (fixed income in particular, which dropped in the first quarter of 2013 after performing well in 2012).

After years of prosperity and exceptional returns on equity (>15%), many CIB decision makers seized this sluggish period to work on profitability, initiating much needed cost initiatives, impacting their cost-income ratios to greater or lesser degrees.

But the environment of the industry is still changing and those changes are here to stay: for instance, "shadow banking" is increasingly addressing corporate needs, and regulations are becoming more and more stringent (and divergent between countries).

CIB leaders can no longer wait and see. Hence, we believe that despite all the challenges surrounding them, regulatory uncertainties especially, the time has come for CIBs to resume boosting their top lines through sales effectiveness initiatives, and to proactively write their own futures by clarifying their positioning through one of four coherent business models:

> Category killer> Niche product specialist> Solution provider/aggregator> Trusted advisor

"Roland Berger is not authorised or regulated by the PRA or the FCA and as such is not providing investment advice. Roland Berger authors are not research analysts and are neither FCA nor FINRA registered."


1. GLOBAL MARKET OVERVIEW

1.1. CIB is a EUR ~1,000 bn market, its growth increasingly driven by emerging markets

After a weak 2011, and despite the gloomy mood among many investment bankers, the CIB market slowly began to grow again in 2012.

Growth in 2012 was quite widespread, though some areas were more buoyant than others:> From a geographical perspective, emerging

markets saw gains in shares, in particular on the financing side

> From a product perspective, while trading and advisory were stable, financing (both through lending and DCM) resumed growth, thus accompanying the corporate sector in restored expansion

It is worth noting, however, that the CIB world is increasingly divided:> US market where banks are more advanced in taking into account the

increasing disintermediation> European market where banks are waiting for the dust to settle after regulatory

evolutions (while shadow banking has not yet gained as much market share as expected)> Asian and Latin American markets where the economies are still growing, and

where regional banks are feeding them through increasingly sophisticated products

We believe that the increasing lack of alignment between regulations in these markets will feed this centrifuging movement over the coming months and years, with local dynamics taking the place of the past years' globalization trend.

970

58%

42%

920

62%

38%

950

67%

33%860

72%

28%

Developed markets

Emerging markets

2012201120102006

~ 56 MEA

~ 37 EE

~ 60 Japan

Global NBI of Corporate and Investment Banks, 2012 [EUR bn]

~ 250 WE

~ 210 North America

~ 280 Emerging Asia

~ 47 Latin America

~ 30 A/NZ

Developed markets Emerging markets

4 CIB OUTLOOK Summer 2013 – Learning to prosper in a continuously uncertain world

ZOOM 1: SHADOW BANKING

Given the broad spectrum of "shadow banking" (i.e. credit intermediation by non-bank entities), and the different degrees to which shadow banks (e.g. investment and money market funds, structured finance vehicles, financial holding companies) compete for traditional CIB business, one of the best indicators of disintermediation trends is the proportion of total private sector credit granted by banks.

As the graph shows, developed markets (the US in particular) have a greater level of bank disintermediation, with a large part of private sector credit provided by non-bank sources (e.g. insurance companies). However, the rate of increase of non-bank finance in emerging markets such as China is more rapid than in developed markets. The still large gap between Europe and the US is likely to keep narrowing. On the supply side, European banks face greater balance sheet constraints due to existing leverage and a weaker economic outlook. On the demand side, more and more corporations are equipped to access the debt markets.

It is also worth noting that, beyond financing, some "shadow banks" are now increasingly competing for the pure IB activities of banks, e.g. PE and hedge funds, advising corporations and helping them structure their capital market transactions.

Private sector credit from banks [%]

30

40

50

60

70

80

90

100

110

20USA UK Europe China

Dec 99 Dec 03 Dec 07 Dec 11


1.2. Global CIB market growth in 2012 was largely driven by financing products

Structured finance and lendingA low rate environment and an investor search for yield led to good demand for credit in 2012, with growth largely driven by emerging markets where GDP growth remained more robust. In developed markets, weaker growth and the need to complete deleveraging for most European banks led to more muted performance, even as competition from shadow banks in core activities remained low.

Global transaction bankingLow interest rates continued to weigh on transaction banking revenues, with volatility in Europe also impacting market share among some banks.

Capital markets and advisoryGrowth in capital market activity in 2012 was driven by FICC trading as narrowing spreads from a recovering Euro crisis and the positive impact of the ECB's LTRO helped boost credit and rates revenues. This helped offset cyclically challenged equities and M&A activity, where despite some improvement in market sentiment volumes remain depressed by historical standards.

Structured finance & lending – Vanilla lending, Structured Finance[EUR bn]

2012

485

2011

445

2010

450

2006

380

+9%

2012201120102006

Global transaction banking – Cash Management, Trade Finance, Investor Services [EUR bn]

245245235235

0%

2012201120102006 2012201120102006

Capital market & advisory – IBD (M&A, ECM, DCM), Equities, FICC [EUR bn]

240230265245

+4%

2012201120102006


2. SELECTED TRENDS BY ACTIVITY

2.1. IB: US banks are gaining market share on IB deals in both Europe and emerging markets – at the expense of European banks

In general, the major CIBs in the US had a more successful 2012 than their European counterparts, as can be seen in their individual NBI growth. That performance stems from a set of factors that have generated a vicious circle:

> Deleveraging began in the US before it began in Europe. The exercise reduced the need for "stop and go" on the balance sheets, which heavily impacted revenues (e.g. some European banks abandoning entire sectors of the economy to refocus on a handful of client segments)

> Better access to USD liquidity through deposits and repos> Strong push for IB origination, facilitated by their increasing attractiveness

for top talents, where pressure on bonuses is lower than in Europe

Together, these factors have created a new situation where US banks hold their strong positions on the US market (>75% market share for M&A, ECM and DCM deals) while they eat into the share of European banks in the rest of the world. European banks are the clear losers in that context, with shares falling from three-quarters to two-thirds of the European market, and from half to two-fifths of emerging markets.

Geographical breakdown of IB deals [deal volumes]

20122011

12%

50%

25%5%7%

73%

22%

22%

76%

14%

40%

31%7%10%

67%

27%

21%

76%BANKS' ORIGIN

88% 83%

USA Western Europe Japan Emerging markets

Emerging markets

13%

Japan0%

Western Europe

0% 5%

North America0% 2%

22%

Emerging markets

15%

Japan0%

Western Europe

0% 6%

North America0% 2%

21%

DEAL LOCATION


European banks may be both missing out on EM growth and losing one of their key success factors, i.e. the client intimacy and access to local/regional (European) markets, which they have been traditionally able to convert into revenues and cross-sell opportunities.

Does this mean that European banks should review their business models, developing new strengths for a battle they did not have to fight when capital and liquidity were flowing?

2.2. Capital markets: after a strong growth in 2012, FICC is being hit and DCM is carrying on

2012's improvements over 2011 are primarily due to a recovery in FICC credit (narrowing rather than widening credit spreads as the Euro crisis flared, then recovered) and a strong first-quarter boost in rates in from the LTRO. Together, these helped offset a continued cyclical/secular downturn in equities and the sluggish ECM and M&A. This also helps explain why Q1 2013 was down compared to Q1 2012, added to that a normalization in credit and rates combined with the volatility around Cyprus.

FICC52%

23%

58%

18%

CAGR-6%

-15%

+19%

ECM/DCM& M&A

Equity

Q1 2013

3%

21%

Q1 2012

3%

21% -5%

+12%Prop &Princ. Inv.


ECM/DCM & M&ASeveral firms saw record DCM activity in Q1 2013, driven by leveraged finance and commercial mortgage related activity. ECM activity also benefited from improved volumes. It was, however, a slow quarter for M&A – albeit seasonal – with some activity from Q4 2012 carried over.

FICC tradingFICC trading led the y-o-y decline in capital market revenues primarily due to a tough precur-sor: the year prior saw rates and credit boosted by, respectively, the ECB's LTRO and the narrowing spread. Securitized products had a strong quarter, led by CMBS, as did emerging markets, though FX continued to suffer from spread compression despite strong volumes. Commodities still face some cyclical headwinds.

Equity tradingEquities revenues improved sharply from a weak Q4 2012, but generally declined from the year prior as confidence was shaken after Cyprus. Nevertheless, European banks fared quite well relative to their global peers. In derivatives and cash, margin pressure continued to weigh on revenue levels, although higher client cash balances supported prime services businesses.

All in all, over the coming quarters it will be interesting to observe whether primary markets continue to outperform secondary trading, which would imply that investors have shifted towards "buy and hold" strategies.

Focus on ECM/DCM & M&A

ECMM&A/

Advisory

Q1 2013 65% 19% 16%

Q1 2012 62% 17% 21%

DCM & Securitisation

Focus on FICC

FXCredit

Q1 2013 37% 36% 19%

Q1 2012 42% 32% 18%

Rates Commodities

8%

8%

Focus on equity

EQCash

PrimeServices

Q1 2013 49% 31% 20%

Q1 2012 50% 31% 19%

EQ Derivatives & Converts


2.3. Financing: the US and European models are converging

As section 3 below explains, US CIBs are still much closer to the traditional "bulge bracket" model than their European counterparts. While in the US some players have retained a pure IB model (Goldman Sachs, Morgan Stanley) or come largely from it (JP Morgan, BoA-Merrill, Citi), European banks still carry their "universal bank" genes, which heavily influencestheir retail banking DNA. Of course, this helped them access cheap capital, thus building strong positions in balance sheet businesses such as structured finance. This influence has traditionally been reflected in their revenue breakdown, with a higher share stemming from lending rather than DCM fees.

However, as seen above in section 1.2, the situation is rapidly evolving under the combined pressure of clients (who are increasingly interested in getting direct access to markets) and the necessary deleveraging of European CIBs. The key question now is to understand how much time it will take for the non-Anglo Saxon markets to converge towards the US situation, where bank lending covers only a third of corporate needs.

The recent trend seems to indicate that the share of DCM in European banks' NBIs may soon be aligned with the US market, but we believe that disintermediation is close to its maximum potential in Europe, both from a demand perspective (there is some appetite from investors, but many corporations are still reluctant to expose themselves to the scrutiny of debt capital markets) and from a supply perspective (some continental universal banks are again looking for (profitable) lending/structured financing opportunities).

Corporate Bond Underwriting fees as a % of total CIB revenues [%]

1

2

3

4

5

6

7

0

2006 2012


2.4. In 2013 and 2014, we expect advisory revenues to rebound

FICC revenues are expected to decline by 1-2% in 2013, a tough comparison with the more successful Q1 2012 described above. Equity revenues are forecasted to rise by 1% as cash equities gradually recover from their cyclical depression, facilitated by rising asset prices and tactical asset allocation shifts in anticipation of a reduction in central bank easing. Advisory revenues are expected to rise by 8% in 2013, with DCM activity in a low rate environment continuing to be the main driver after a strong start to the year. However, ECM and M&A activities should also benefit from recovery in developed market growth.

Investment Bank revenue growth [%]

0

2

4

6

8

-2FICC Equity IBD

2013E 2014E


3. SELECTED TRENDS BY BANK'S REGION

3.1. The comeback among Anglo-Saxon universal banks balances the sluggish trend of Euro banks

US banks US banks' greater exposure to FICC trading, and a more buoyant domestic economy, led to superior, double-digit, core CIB revenue growth in 2012. In capital markets, credit businesses were driven by narrowing spreads and rates businesses by the European LTRO. In lending businesses, good loan volume growth helped offset margin compression. Recoveries generally led to positive loan loss reversals and cost/income ratios were competitive, helped by improved compensation control, although legacy assets and litigation costs in non-core divisions still dragged at the group level. The EVA of the CIB divisions of US banks is at the top end of global peers as a result of mid-teens ROEs. This confirms their lesser need for core CIB restructuring than their European peers. While Q1 2013 was a solid quarter for US banks, with a strong seasonal improvement in capital markets from Q4 2012, FICC and equity trading were generally lower than the year prior. Nevertheless, further growth in capital levels saw the banks through the Fed's challenging CCAR stress test.

Operating results

29.0

11.6

17.4

32.7

14.2

18.9

+13% +18% +15%

21.8

14.9

0.1

25.7

9 8

15.7

0.2

22.4

8 0

15.2

25.8

11.0

14.9Operating cost

Cost of risk

results

20122011

-0.1 -0.3

20122011

6.7 9.8

20122011

8.0

-0.8 -0.1


European banks While the larger banks in Europe also benefitted from the robust FICC environment, the mid-sized CIBs suffered more from greater market volatility, weak economic growth, and liquidity constraints. Many banks announced changes to business models, selecting an "originate to distribute" model which, though more favorable to capital and liquidity consumption, did lead to reduced revenues and disposal losses.

The larger banks in Europe show a structurally higher cost/income ratio, so it is no surprise to see these banks propose some of the largest cost programs among their global peers. Like their US peers, the benefits will be felt in 2014-15, with industry costs remaining elevated by litigation in 2013.

Cost of risk

15.4

11.2

1.4

18.4

5 5

11.5

1.3

+20% +22% -16%

9.1

8.9

11.1

8.8

0 0

7.0

5.75.9

5.5

Operating cost

+11%

17.7

12.4

0.2

19.7

14.2

0.3

Operating results

20122011

2.75.5

20122011

0.10.1

2.3

0.0

20122011

1.30.0

0.4

0.0

20122011

5.0 5.1

Cost of risk

Operating results

11.0

5.0

5.9

0.1

9.8

3 1

6.3

0.5

-11% +5% -11%

6.7

4.5

0.1

7.0

4.1

0.4

5.1

3.0

0.5

4.6

2.60.3

Operating cost

-1%

2.81.7

0 1

2.81.7

0 3

+10%

6.8

2.8

1.9

7.5

2.6

2.8

0% +11%

4.6

1.60.1

4.7

1.60.3

2.50.8

0 1

2.7

0.90 2results

20122011

3.1

20122011

2.0 2.5

20122011

1.6 1.7

20122011

1.10.1

0.80.3

20122011

2.1 2.0

20122011

2.9 2.8

20122011

1.50.1

1.70.2


With ROEs for many European CIB divisions struggling to break double digits against this backdrop, EVA was at the low end of global peers. Although the revenue outlook looks better in 2013, with the banks posting comparatively good Q1 2013 results against perhaps an easier year prior, this low level of profitability and tough macro backdrop demonstrate the need for ongoing cost vigilance.

Asian banks The more rapid growth of emerging markets also led to solid top line growth in 2012 for the CIB divisions of Asian banks, with trade finance a particular highlight at banks such as Standard Chartered and HSBC. There continues to be strong variation between markets, in terms of both growth and risk, with Hong Kong, for example, showing strong revenue and profit growth in 2012 but Korea still burdened by a high cost of risk. Low interest rates continue to weigh on asset/liability management revenues. Helped by recent cost reduction plans, and with a commitment to delivering positive jaws, cost/income ratios are competitive with global peers. However, arguably conservative RWA calculations (i.e. relatively higher risk weighted to gross asset ratios) deliver ROEs and economic value added mid-way between European and US peers. Into Q1 2013, margin pressure from abundant central bank liquidity, and concerns about a slowdown in China, have weighed on revenue growth guidance and investor sentiment. Nevertheless, a more proactive approach to cost and capital management have softened the blow for multinational banks.

Cost of risk

Operating

22.4

8 3

12.1

2.0

26.6

11.1

13.3

2.2

+19% +16%

6.93.7

0 3

8.04.1

0.4

Operating cost

p gresults

20122011

8.3

20122011

2.90.3

3.5

0.4


ZOOM 2: INVESTMENT BANKING IN ASIA

The flow business, which dominates IB revenues in Asia Pacific (excluding Japan), enjoyed a positive first quarter 2013 and remains the main revenue generator for Asian banks despite increasingly constraining regulations. Fixed income The total market rose 14% in Q1 2013. The Korean exchange, which consistently represents ~60% of the region's bond trading market, remained a primary growth driver, recording a Q1 y-o-y growth of 20%. As the retail and institutional investor base expansion persists, volumes are expected to continue to climb. Strong growth in the domestic currency bonds market and enhanced internal capabilities will drive the increased relevance of domestic banks as trading participants. Commodities The Asian commodities market is largely dictated by the state of the Chinese economy, as China is easily the largest consumer of global commodities. In 2012, 40% of total global commodity futures trades originated from Chinese exchanges. Y-o-y, commodity futures traded in Asia tripled compared to Q1 2012, as Chinese regulators cautiously opened the market to local financial institutions. Macroeconomic uncertainty in China and other EMs will likely increase demand for hedging opportunities. Currency FX markets continued to grow, with Southeast Asia among the top-three in the region by volume. Volumes are predicted to increase due to RMB internalization as more multinational clients resort to Yuan to settle trades, make investments, and arrange Yuan-denominated dim sum bonds. Three years ago only 2.5% of China's international trade flow was settled in Yuan, whereas in Q1 2013, this ratio increased to about 15% of total and this trend is expected to continue. Equities Stock exchanges reported a 7% uplift in equity trading, driven by a gradual return of inve-stors' confidence. Investor appetite for riskier assets is expected to improve, but the overall outlook for equities is cautiously optimistic as the Asian growth story is increasingly under pressure. Debt capital markets In Q1 2013, total DCM volumes fell 8%. China's domestic bonds continue to remain strong as issuers gradually switch from equity to debt raising. By contrast, Hong Kong debt issuances are at their lowest levels. But overall, structural growth drivers remain solid. Most Asian corporates are in good health, demographic changes and the development of social safety nets are leading to a growing demand for long-duration yielding assets to e.g., match long term pension/project liabilities, while governments are keen to shift social financing away from bank lending.


Equity capital markets ECM deal volume in Asia increased 16%, but fee margins decreased by 25% as IPOs and block trades became increasingly commoditized. The hiatus of mega-deals will likely continue, but the market has shown signs of recovery driven by block trades. Though the pipeline for deals remains strong, deteriorating market conditions could delay the lifting of the current IPO ban in China, thus impeding growth. Mergers and acquisitions M&A volumes declined by 23% compared to Q1 2012, while fee margins remained relatively stable. The volume drop can be attributed to tightened lending from banks for LBOs and the transition of China's leadership in late 2012. The M&A outlook is positive on both demand and supply sides – there is pressure on cash rich corporations to better utilize their surplus, while targets have become more affordable due to depressed valuation multiples.

5144

+16%

ECM volume [USD bn]

1.08%

1.44%

-25%

ECM fees/volume [%]

Q1 2012 Q1 2013 2012 2013


3.2. In 2013, trends will diverge by region

US banks Given the greater presence of FICC trading in revenues among US banks, which will decline modestly in light of 2012, we expect an overall decline decline in 2013 revenues at US banks. Ongoing margin pressure in the lending business as well as probably less beneficial moves in the average USD/EUR exchange rate will also weigh on top line growth. With already competitive cost/income ratios, ongoing litigation pressure across the industry, from mortgage and other issues, and with credit costs already at very low levels, pre-tax profit growth will be difficult to deliver. That said, incremental RWA mitigation could still see a small improvement in EVA. European banks While 2013 should see slightly better top line performance for European banks given a broader business mix, the variability between individual players will grow. In some cases, a strong start to the year in trading (e.g. UBS and SG) will provide the foundations for a full year of strong performance. In other cases (e.g. CASA), business disposals will weigh on top line growth, even if the actions contribute to medium term profitability. With particularly the larger European banks showing high cost/income ratios in 2012, the initial benefits of the large cost cutting programs will generally yield better pre-tax profit growth than was seen for their US peers. This should help lift ROEs closer to or above the cost of equity, helping a greater range of banks deliver positive EVA, even as US peers maintain the lead on this measure. Asian banks Asian banks are expected to see slightly positive growth in 2013, driven by their emphasis on more traditional CIB activities and by solid underlying volume growth. However, as margins have remained under pressure from excess central bank liquidity, banks have been cautious in their statements, and similar to the outlook for US banks, the FX rate is a headwind for 2013 growth expectations. The cost/income ratio (which is already at low levels) and cost of risk will generally remain stable. With above average growth in core RWAs, in line with underlying volumes, this will put some amount of downward pressure on EVA, albeit remaining comfortably above the cost of equity.


4. NAVIGATING THROUGH CONFUSING WATERS

4.1. The volatility and uncertainty of the current CIB environment calls for a review of business models

Key regulatory challenges > Increased capital and liquidity constraints (Basel 2/3) > Vickers/Liikanen regulation impact still being analysed > Tobin's tax on equity and FI transactions (scope still TBC) > OTC clearing additional costs (e.g. infrastructure, compliance)

ZOOM 3: REGULATION

Regulatory expenses (including FDIC, the UK bank levy, FSA and other regulatory fees) have risen six-fold over the last couple of years. Incremental effects from market structure changes, subsidiarization, "too big to fail" measures and additional taxation could rise significantly depending on how rules are finalized, how much cost can be passed on to the end customer, and how banks can develop alternative or complementary products to compensate. Market structure changes are potentially the most costly element for banks, with around one-third of market revenues (FICC and equity trading) at risk from issues such as mandatory clearing, SEF trading, new margin rules, post-trade transparency and extraterritoriality – with rates businesses likely to absorb around half the impact. Industry players have estimated the potential impact at around 5-10% of market revenues (perhaps more at the pre-tax level), though new revenue opportunities in areas like OTC clearing and collateral management may reduce the impact by 2-3% of market revenues.

Examples of incoming regulatory challenges (non-exhaustive)

Revenue challenges

CUSTOMER FOCUSED COUNTRY FOCUSED

Cost

Market structure changes

OTC derivatves, EMIR, MiFID IIIndustry estimates cost at 5-10% of markets revenues (EUR 10-20 bn), with Rates players most impacted: new business (e.g. collateral management) may reducethe impact by 2-3%.

Subsidiarisation

Vickers/Liikanen/TarulloThe ICB estimates the cost of the Vickers proposals at cGBP 2-5 bn or c1-2.5% on ROTE. Liikanen proposals are likely to be less severe depending on ultimate scope adopted.

"Too big to fail" measures

Bail in debt leverage caps

Taxation

FTT Balance sheet leviesCost challenges

Bail in debt, leverage capsThe IIF estimates that a higher funding cost from a minimum 10% of bail-inableliabilities (excluding derivatives) could reduce EU bank earnings by over 10%.

FTT, Balance sheet leviesEC estimates cost of FTT at EUR 5-34 bn for EU11 countries depending on whether this becomes a narrow stamp duty or broad transaction tax: how much can banks pass to customers?


Key demand challenges > Still above normal volatile markets in equities and fixed income with investment uncertainty

(e.g. sovereign governments)> Solvency II impacts insurers' appetite for equity > Development of e-markets and parallel need for standardization> Differentiated trends by region, implying strategic complexity Key competitive challenges > New overcapacity and redistribution of market shares driven by repositioning of some

CIB businesses (e.g. OTD SF model)> New competition emerging from diversification of some specialized players

(e.g. PE entering pure financing landscape, hedge funds developing origination capabilities model in the US)

4.2. To succeed in the coming years, CIBs will have to clarify their positioning and business model

Corporate and investment banking has long been a very prosperous industry, with largely above average RoEs despite little attention paid to costs "B2B marketing", compared to most sectors. However, regulatory changes combined with the economic crisis have made the environment much tougher, leading to a massive drop in RoEs.

In that context, some banks have been able to deliver slightly higher RoEs than their competitors, leading to a massive gap be-tween their respective share performances. As a result, most CIBs have now resolved to undertake more or less drastic measures on the cost side, such as front office staff cuts, bonus caps, or more comprehensive cost reduction programs (leveraging techniques such as the accelerated zero-based budget-ing). Regaining flexibility by improving cost base elasticity is now seen as a must across the entire industry.

On the revenue side, however, beyond some work on sales effectiveness improvement (e.g. client segmentation, organization, process reviews), many CIBs are still very timid about transforming their business models. But the winners of tomorrow will be the banks that, while managing their costs carefully, stop trying to be everything to everyone and choose a clear positioning – similar to the leaders of every other industry of the developed world. To succeed with this evolution, banks will have to clearly align client value proposition with the business model, thus empowering themselves to deliver the right level of service at the right cost.

0

10

20

30

40

50

60

0CIB ROE >= 15%

2012 share price performance

CIB ROE <= 12%

Core 2012 CIB ROE


Most banks currently claim that they simultaneously develop the broadest and deepest range of products while focusing on "client centricity". But CIBs will likely converge towards one of four typical business models. More specifically, some players will need to increase their leverage of product strengths, while others will benefit from their client relationships. The first category of banks have built their credibility on product expertise. Two antagonistic paths are possible. The first (category killer) relies on volume, i.e. the capacity to deliver quite standardized products at the best price, with flawless execution. In order to be competi-tive in such a "low cost" positioning, banks will have to develop a cost advantage based on economies of scale, i.e. industrialized operations and heavy investments. The second (niche specialist) relies on margins, i.e. the capacity to design exclusive products and push them to the market. Such a bank has to be very agile and flexible to reinvent its product range if market demand changes, or if regulation makes an activity suddenly much less profitable (e.g. exotic products have required a hefty repricing in order to remain value-enhancing for their producers).

Business model

Operating model

Client value proposition

CATEGORY KILLER NICHE SPECIALISTHigh-volume positioning driven by flow product leadership

High-margin positioning driven by premium product leadership

Industrial model> Technological edge (e-platforms)> Economies of scale> Focus on streamlining selected flow

products

Mini factories> Reactive operations to serve small batches> Qualified human resources, adaptable

processes & IT

Product excellence> Seamless execution> Competitive pricing

Cutting-edge products> Exclusive products> Innovation

Illustrations

Strengths

Weaknesses

> Creates barriers to entry> Allows to be a supplier to CIBs (white

labeling)

> Built-in competitive edge generated by creativity/ R&D

> Requires large investments> Sensitive to a market downturn

> Relies on a handful of experts creating differentiating products


The second category of banks have built their competitive advantage on their proximity to clients. One route (solution builder), which may be the most natural one for many continental Europe banks, relies on a large client base, sometimes captive (e.g. local relationships with midcaps for some French or Italian banks, synergies with wealth management for some Swiss banks). In order to offer those clients a broad range of products and services at a reasonable price, such banks will increasingly have to outsource operations (or even entire activities) to third parties. In such an "aggregator" or core-satellite model, the providers of these "white label" products may well be the category killers that have developed a huge cost leadership on flow. Another route (trusted advisor) relies on a narrower but deeper client base, with very high-level relationships. Such a model has also been known as a "boutique" model, borne by personal relationships, volatile but highly flexible in terms of capital and cost base.

Business model

Operating model

Client value proposition

SOLUTION BUILDER TRUSTED ADVISORHigh-volume positioning driven by numerous client relation-ships (often related to historical role in a geography/industry1))

High-margin positioning driven by premium client relationships

Aggregator model> Outsourcing of some operations> Branding of third-party created white-label

products

Craftsmanship model> Focus on products requiring little

investment in Ops & IT> Adhoc processes to serve customer

requirements

One-stop-shop> Attention to client needs> Flexibility

Bespoke service> Selectivity> Premium service, advisory

Illustrations

Strengths

Weaknesses

1)Can also be driven by synergies with non-CIB divisions, e.g. Wealth for Credit Suisse and UBS

> Allows to follow market demand evolutions

> Generates client stickiness through trust

> Relies on high quality sales teams to create differentiation

> Relies on a handful of senior bankers "owning" relationships


ZOOM 4: WHITE LABELING

Poor cost/income ratios or any G&A indicator outside market standards in specific asset classes may explain why some CIB players have begun outsourcing part of their value chain to third parties. In turn, these third parties have developed a cost excellence that allows them to reap the benefits from such agreements. These CIB players still have strategic matters in mind: > Where existing clients are no longer in a position to fund their own servicing

(i.e. self-servicing), maintain the same asset class coverage > Reach the lowest level of cost to manage the run-off of specific portfolios/activities

Following peers who have advanced towards "white labeling", a large number of banks has claimed – not too loudly – to be interested in this type of outsourcing.

The strategic decisions of these CIB players will definitely limit the size of this new

business, but some first lessons are clear: > This market does not limit itself to specific asset classes, but it virtually covers all asset

classes managed by regional or global CIBs (e.g. equity, commodity, credit, fixed income > Capital market service providers address a large scope of functions: from traditional "pro-

cessing" of operations (e.g. "trade capture", matching, settlement/payments) to "front-of-fice white labeling" activities (structured product issuing for third parties and related white labeling operations processing), leveraging secondary market making, collateral manage-ment, or even client post trade services such as client services, P&L management and risk metrics. In a nutshell, all activities from front office to accounting to financial reporting.

Observed costs gap between white labeling option and full house solution

[First servicing year1), comparable perimeter2)]

Front office servicing3)

Operations servicing

Finance servicing

IT impacts4)

x 10 to 14

x 7 to 11

x 6 to 9

up to 10

1) Based on a set up estimation before "white labeling" decision and servicing go live2) I l d l di t t (i E l d f t i t g ti f (if ) th i di t t h i f t t )2) Includes only direct costs (i.e. Excludes upfront integration fees (if any), other indirect costs such as infrastructure)3) Excludes Risk transfer pricing in case of book purchasing4) Applicable if servicing perimeter embeds an end to end block of the value chain allowing applications decommissioning


CONCLUSION

In conclusion, the agenda of CIB decision makers for the months and years to come is clear, despite the uncertain environment – or rather because of it: > Keep pushing costs down. Go beyond the obvious

(i.e. budget cuts) and review entirely new ways of working in a more “industrial” fashion

> Boost the top line through selective actions on sales effectiveness (i.e. client segmentation, organization alignment, sales cycle process enforcement)

> Think beyond product development to review positioning in depth, and work towards one of the four business models of the CIB player of the future

To operate the strategic shift properly, execution will be key.


GLOBALPierre ReboulGlobal CIB Head, Paris +33 1 53670 325 [email protected]

Damien KoNew York/Hong Kong +1 917 603 3697/+852 9664 2108 [email protected]

EMEAKlaus JuchemFrankfurt +49 69 29924 6323 [email protected]

Cécile AndréParis +33 1 53670 978 [email protected] Paul JowettLondon +44 20 3075 1113 [email protected] ASIA/PACIFICMartin TonkoTokyo +81 3 35876 723 [email protected]

AMERICASDuarte Carvalho São Paulo +55 11 3046 7111 [email protected]

NOMURA CONTACTSJon PeaceLondonNomura International plc.+44 20 7102 [email protected]

Corporate & Investment Banking contacts

Alain Le CouédicHong Kong +852 3757 9488 [email protected]

Marc GrueterZurich, London +41 43 336 8730 [email protected] Ricardo WehrhahnMadrid +34 91 564 7361 [email protected]

Mark de JongeAmsterdam +31 20 7960 658 [email protected] Philippe ChassatSingapore +65 6597 4560 [email protected]

Bruno PerrinParis +33 6 8320 3048 [email protected]

Olaf ToepferZurich +41 43 336 8660 [email protected]

Francesco PavoniBahrain, Milan +90 212 358 6401 [email protected]

Edoardo DemarchiMilan +39 335 769 6954 [email protected]

Note: The banking research team at Nomura has contributed data for certain charts in this report.

24 CIB OUTLOOK Summer 2013 – Learning to prosper in a continuously uncertain worldAmsterdamBarcelonaBeirutBeijingBerlinBostonBrusselsBucharestBudapestCasablancaChicagoDetroitDohaDubaiDüsseldorfFrankfurtGothenburgHamburgHong KongIstanbulJakartaKuala LumpurKyivLagosLisbonLondonMadridManamaMilanMontrealMoscowMumbaiMunichNew YorkParisPragueRigaRomeSão PauloSeoulShanghaiSingaporeStockholmStuttgartTokyoViennaWarsawZagrebZurich

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