Transforming investment banks shows how an unremitting focus on transforming existing business and operating models can help banks unlock investor returns of 12% - 15%. Read more: http://www.ey.com/investmentbanking

1. Transforming
investment
banks

2. 2 | Transforming investment banks
The halcyon days of investment banking are over, and 20%-plus returns on
equity (ROE) are long gone
Investment banking is an industry in turmoil:
► Weak efficiency and productivity
► Cultural crisis
► Eroded trust
► Intensifying competition
Profitability is being destroyed:
► Commoditization and move to exchange-trading
squeezing margins
► Limited scope for revenue growth, e.g., non-modelable
products restricted due to capital requirements
► Structurally higher cost base due to regulatory and
compliance change
► New competition eroding dominance across many
areas of business
Low ROEs highlight the significant challenge IBs face
Aggregate investment banking revenue and expense

3. 3 | Transforming investment banks
Major investment banks can still deliver sustainable ROE of 12%–15%, but
doing so will require radical reform
Investment banks have entered “protect
and survive” mode:
► Tactically optimizing capital, liquidity and costs
► Shifting away from capital-intensive, fixed
income trading activities, toward fee-based
advisory business lines
They are delivering tactical solutions founded
on broken models:
► Front-office pursuit of revenues coupled with strong
oversight from powerful control functions is no
longer viable
Announced changes in strategic direction for leading investment banks

4. 4 | Transforming investment banks
To deliver 12%–15% ROE, banks must focus on four pillars of
transformation
Applying the four pillars of change to deliver sustainable returns

5. 5 | Transforming investment banks
Pillar 1: optimize
Investment banks must better utilize balance sheets, radically reduce costs …
The industry is suffering a cost and productivity crisis, and traditional, short-term approaches to
cost reduction are no longer viable
Investment banking productivity and efficiency, as measured by average
profit per employee and cost-to-income FY12–14 (illustrative)

6. 6 | Transforming investment banks
Pillar 1: optimize
… and explore innovative sourcing and shoring options
Business-line and legal entities
► We estimate the carrying costs
of a single legal entity at up to
$US600,000.
Assets and collateral
► We have found that further
savings of 15%–20% of risk-
weighted assets (RWAs) can
still be made when RWA
optimization programs have
already been attempted.
Costs
► We believe banks can release
savings by reviewing and re-
engineering key processes
across the enterprise.
Sourcing and shoring
► We believe there are three key
areas where supply chains
should be reviewed: client
support services; internal support
services; and execution services.
Supply chain opportunities

7. 7 | Transforming investment banks
Pillar 2: transform culture
Weak controls and employee behavior have proven costly to investment banks
Cost of control

8. 8 | Transforming investment banks
Pillar 2: transform culture
Investment banks must incentivize behavior that will deliver value for
shareholders and clients and meet regulatory expectations
Banks must look more closely at what
is driving behavior …
► Most attempts to change culture have been
reactive “point” solutions
► Management teams must lead by example
► Individuals must be held accountable
► “Good” behaviors must be rewarded
… and reform hiring practices and
employee propositions
► Focusing on internal recognition programs,
mobility, secondments, education and
training, and time to develop innovative ideas
Top initiatives to strengthen risk culture

9. 9 | Transforming investment banks
Pillar 3: become client-centric
Investment banks must put their clients at the heart of their business …
Trust in investment banks has been eroded:
► Beyond low public trust, client trust has
suffered from high-profile reports of
investment banks ignoring conflicts of interest.
► Traditional operating models, based on
product innovation to drive the bottom line,
are inadequate.
► Banks must better identify their core clients and
their needs.
► They should improve systems to monitor
client satisfaction …
► … and enhance the client experience by
considering creating a “single shop-front.”
(1) Product innovation:
► Evolving products to support revenue-making capability
► Innovation results in lack of price transparency
► Emergence of silos to support flow vs. non-flow booking requirements
(2) Business capability:
► Capabilities emerge to optimize increased support of greater product portfolios
► The need for flow optimization drives efficiency
The traditional investment banking operating model evolved from a focus on product innovation and business capability

10. 10 | Transforming investment banks
Pillar 3: become client-centric
… and ensure future operating models are client-centric

11. 11 | Transforming investment banks
Pillar 4: be technology-led
Investment banks must transform legacy processes and embrace innovation
Today, banks are people-led businesses —
tomorrow, they will be technology-led:
► In a more commoditized, risk-averse future, cost-to-serve,
speed of execution and quality of service will be the key
performance differentiators.
► Currently, 50%–66% of costs are staff costs. This is
unsustainable.
Transition to a technology-led business will
be difficult and stretch budgets
► Banks must invest across a number of
areas — new collateral and capital
systems, client-centric solutions,
improving data, controls technology.
► But with around 75% of IT spend on systems
maintenance, they must first deal with
legacy technology.
IT investment pipeline (36-month budget horizon)

12. 12 | Transforming investment banks
The pillars of change support the path to improved and sustainable ROE
Achieving a sustainable, mid-teens ROE is possible, but it will require an
unrelenting focus on transformation across four pillars of change

13. EY | Assurance | Tax | Transactions | Advisory
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All Rights Reserved.
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This material has been prepared for general informational purposes only and is not intended to be
relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific
advice.
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