Investment banks must take tough decisions to quit ailing business areas and should reduce their balance sheets by $1 trillion - or almost a tenth - to lift profitability, an industry report said.
European banks face a particularly challenging outlook and are likely to continue losing market share to big U.S. rivals, according to the 2014 Wholesale & Investment banking Outlook by Morgan Stanley and Oliver Wyman, released on Thursday.
The report said investment banks needed to cut their balance sheets by about 8 percent, even after cutting them by a fifth in the last four years, and to redeploy another 5-7 percent to business areas that were more profitable.
Return on equity (RoE) across the industry should recover to 12-14 percent by 2016 if banks implement changes across fixed income, equities and advisory and cut costs by greater efficiency in areas like technology, Morgan Stanley/Oliver Wyman predicted.
Banks have struggled since the financial crisis to lift profitability back above their cost of capital, which is typically 11-13 percent, mainly due to tougher regulations.
RoE averaged 6 percent last year, but was 11 percent for core operations after stripping out the drag from regulatory fines and closing down non-core assets, the report said.
It said regulatory issues could still knock 3 percentage points off the industry's returns by 2016, due to the impact of localized rules and requirements - or "balkanisation" - and caps on leverage imposed by U.S. and European regulators....MORE