competitive strategies in global wholesale financial markets

Competitive Strategies in Global Wholesale Financial Markets

Annual Washington Conference of the Institute of International Bankers

March 5, 2007

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TODAY’S DISCUSSION

1. Competing in wholesale financial services

2. NY/US competitiveness as a market

3


– Strong starting point

– Opportunities going forward

– How are players positioned?



4

STRONG STARTING POINT

The growth and optimism of 2004 and 2005 has continued through 2006 . . .

• Banks have been firing on all cylinders

• Advisory and underwriting at record highs

• Equity markets experiencing strong growth

• Rising asset prices make making money easy

• Ever-growing demand for structured credit

• Plentiful capital flowing into alternatives

• Favorable macroeconomic conditions across the globe

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*ROE for entire organization; does not report ROE for CIB divisionSource: McKinsey Global CIB 50, company filings

BANKS HAVE PRODUCED EXTRAORDINARY RESULTS

Revenues,2005,$b

23.9

21.8

19.8

15.7

14.6

14.1

13.9

12.7

12.2

11.5

Revenue CAGR,04-1H06,%

ROE, 2005,%

15.7

39.4

27.1

28.8

21.1

60.5

29.2

27.4

31.1

13.9

24.0

21.8*

18.0

24.2

18.0

27.6*

16.0*

21.6*

16.2

16.8*

Profit CAGR,%

8.8

48.6

59.3

38.7

12.3

18.0

32.2

35.7

73.7

8.9

10-year growth rate

Top 10 corporate and investment banks

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UNDERLYING IT ALL, FINANCIAL STOCK GROWTH

Source: McKinsey Global lnstitute

CAGRs (2001-05), Percent

8.0

10.3

16.0

12.6

Eurozone

U.S.

Non-Japan Asia

UK

Private debt

19.4

4.4

5.2

2.5

Non-Japan Asia

UK

Eurozone

U.S.

Equities

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EUROPE NOW ALMOST AS LARGE IN REVENUES AS AMERICAS, ASIA WITH FURTHER POTENTIAL

2005 Capital Markets revenue

*Average of range is shownSource: McKinsey Global Capital Markets Revenue Pool, Global Insight (World Market Monitor, 28.08.2006), team estimates

Estimated revenue growth*%, 2004–2005

Penetration (revenues/GDP) bp, 2005

0

5

10

15

20

25

0 20 40 60 80 100

Non-JapanAsia Pacific

EMEA

Americas

Japan

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LARGE GLOBALS DOMINATE THE AMERICAS, OTHER REGIONS ARE MORE BALANCED

Capital markets revenues, %, 2005, global figures

Source: McKinsey Global Capital Markets Revenue Pool

Americas100% = $92 billion

Japan$ 16 billion

Non-Japan Asia Pacific$ 20 billion

63

3

9

25

44

3

24

29

49

3

18

30 33

324

40

Aspiring globals and Major regionals

National champions

Exchanges

Global players

EMEA$ 85 billion

9

Benchmark Bonds

Exotic Credit

Commodities

Brokerage Execution

Convertibles

FX

STIR/MM

Flow Derivatives

Exotic Rates

Equity Derivatives

Flow Credit

Securitization

Institutional Cash Equity

BOTH AMERICAS AND EMEA WITH PRODUCT STRONGHOLDSTotal capital market revenues, USD billions, 2005, Global figures

Source: McKinsey Global Capital Markets Revenue Pool

Americasrevenues

Fixed income

Equities

EMEA revenues

0

5

10

15

0 2 4 6 8 10 12 14 16

FX

STIR/MM

Flow Derivatives

Exotic Rates

Flow Credit

Exotic Credit

Securitization

Commodities

Convertibles

Equity Derivatives

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IN PARTICULAR, EUROPE CAPTURES MOST OF THE FLOW AND STRUCTURED DERIVATIVES REVENUE

$ Billions, percent

Source: McKinsey Global Capital Markets Survey

2005 Revenues

$26

Flow derivatives

6%9

25

60

$26

Structured derivatives

APAC

Japan

Americas

Europe

100% =

8%

8

32

52

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WHERE THE WHOLESALE BANKING MARKET IS HEADEDMarket developments Implications for players

Increasing scale of capital markets • Trading and risk management increasingly important

Excess capacity and capital in the industry at large

• Margins compressed and capital commitment required to compete for accounts

Technological advancements continue

• Marginal costs fall to zero, making scale critical

Relentless regulatory push for greater transparency

• Increased scrutiny of dealer risk monitoring of client exposures and conflicts when acting as principal

Revenue increasingly concentrated in a smaller number of mega deals and fewer clients

• Disciplined and focused client service a must

Broader product suites needed to create sustainable returns and buffer against down cycles

• Pressure to hire top talent particularly in structured product areas

Players that cannot leverage scale or scope forced to compete on skill, driving specialization

• Strategies diverge with losers caught in the middle

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KEY INITIATIVES FOR 2007

1. Focus on providing coordinated service to increasingly demanding hedge fund and financial sponsor client segment

2. Should you compete for the middle market?

3. Lead the innovation in new risk management products4. Build out structured product capabilities across asset classes

5. Pursue effective and efficient geographic expansion – localization will be increasingly important

6. China and India: Still the next big thing; Great Crescent?

Where to compete

Penetrate key client segments

Build out or expand product offerings

Explore new geographies

7. Provide distinctive client service through a targeted and disciplined approach

8. Use cutting edge front-office technology as a competitive weapon

9. Design the next-generation operating model10. Win the war for talent

11. Deploy capital for key clients while monitoring returns12. Invest in state-of-the-art risk management to ride

the uncertainty

How to compete

Serve clients better

Build the best infrastructure

Deploy capital wisely

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Banking legacy

Broker-dealer legacy

Ideas and principal

Efficient execution

Product-focused

Regional powerhouse

Universal

Industrial legacy

HOW ARE PLAYERS POSITIONED TO WIN?

Source: McKinsey Global CIB Revenue Survey

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FINANCIAL SECTOR COMPETITIVENESS BECAME AN URGENT PRIORITY FOR KEY POLICY MAKERS IN 2006

“Unless we improve our corporate climate, we risk allowing New York to lose its pre-eminence in the global financial services sector. This would be devastating for both our City and nation.”

Mayor Michael R. Bloomberg and U.S. Senator Charles E. Schumer November 1, 2006, Wall Street Journal

“U.S. capital markets are the lifeblood of our economy.”

Treasury Secretary Henry M. PaulsonNovember 20, 2006, New York Economic Club

“America’s capital markets are the deepest, the broadest and the most efficient in the world. Yet excessive litigation and over-regulation threaten to make the financial markets less attractive to investors, especially in the face of rising competition from abroad. To keep America’s economic leadership, America must be the best place in the world to invest capital and do business.”

President George W. Bush, January, 2007, Federal Hall, New York

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CEOs BELIEVE LONDON’S NEAR-TERM FUTURE PROSPECTS ARE FAR BETTER THAN NEW YORK’S

Source: Dealogic; year-to-date data compiled as of 11/02/2006.

Do you believe this city will become moreor less attractive over the next 3 years?

Much more attractive

More attractive

About the same

Less attractive

Much less attractive

LondonNew York City

44

15

9

41

38

8

54

0

Ranking by response, percent

0

0

0

Source:McKinsey Financial Services CEO Survey

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NEW YORK EXCELS IN TALENT BUT UNDERPERFORMS IN LEGAL AND REGULATORYPerformance gap, rating scale

Importance*HighMediumLow

Government and Regulators are Responsive to Business Needs

Fair and Predictable Legal Environment

Attractive Regulatory Environment

Reasonable Compensation Levels to Attract Quality Professional Workers

Close Geographic Proximity to Other Markets Customers and Suppliers

Reasonable Commercial Real Estate Costs

Favorable Corporate Tax Regime

Openness of Immigration Policy for Students and Skilled Workers

Workday Overlaps with Foreign Markets Suppliers

Openness of Market to Foreign Companies

Low Health Care Costs

Deep and Liquid Markets

High Quality Transportation Infrastructure

Availability of Professional Workers

High Quality of Life (Arts, Culture, Education)

Low All-In Cost to Raise Capital

Effective and Efficient National Security

Availability and Affordability of Technical and Administrative Personnel

*High importance factors were rated between 5.5-6.0 on a 7-point scale; medium between 5.0-5.4; low were less than 5.0

Source:McKinsey Financial Services Senior Executive Survey

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ENHANCING THE COMPETITIVENESS OF U.S. FINANCIAL MARKETS

• Competitive U.S. financial markets, especially global financial hubs like New York, are critically important for sustained U.S. economic growth

• External factors and internal factors that we can control are damaging the competitiveness of U.S. financial markets

• Bloomberg-Schumer Report recommendations focused on ensuring U.S. and New York global financial services leadership

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– External factors naturally shifting benefit international markets

– U.S. winning the war for talent for now, but losing on legal and regulatory environment

– As a result, U.S. losing critical contested markets, with stark future absent change

• Bloomberg-Schumer Report recommendations to ensure U.S. and New York global financial services leadership

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• Bloomberg-Schumer Report recommendations focused on ensuring U.S. and New York global financial services leadership

– Critically important near-term priorities

– Initiatives to enhance U.S. competitiveness

– Important longer-term national priorities

– Enhancing New York as a financial center

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BLOOMBERG-SCHUMER REPORT RECOMMENDATIONS

Source: Bloomberg-Schumer Report

• Critically important near-term priorities– Provide clearer guidance on SOX implementation– Implement securities litigation reform– Develop a shared financial sector vision and guiding principles to set strategic

direction

• Initiatives to enhance U.S. competitiveness– Ease restrictions on skilled non-U.S. professional workers– Recognize IFRS now without reconciliation and promote faster convergence of

international standards– Protect U.S. competitiveness under Basel II international capital accord

• Important longer-term initiatives– Create independent, bipartisan National Commission on Financial Market

Competitiveness– Modernize financial services charters and holding company structures

• Enhancing New York as a financial center– Create a public-private joint venture focused exclusively on financial services

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QUESTIONS?

Competitive Strategies in Global Wholesale Financial Markets

Annual Washington Conference of the Institute of International Bankers

March 5, 2007

competitive strategies in global wholesale financial markets

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