New Celent Report on Cost Management Released

In the past, corporate and investment banking businesses experienced strong, long-term growth. Despite market crises over the past 20 years, revenues have seldom fallen for more than a year, and the industry has always been able to grow back to profitability. The current crisis, however, is different, making cost cutting and restructuring necessary, according to a new report, Cost Management in Corporate and Institutional Banking from Celent, a Boston-based financial research and consulting firm. Key findings of the report include the following: A great deal of risk comes from the fact that, as revenues tumbled in the fourth quarter of 2007, costs continued to grow. In February 2008, employment levels in the US securities industry reached their highest level ever, exceeding even the height of the Internet bubble in 2001. Many financial institutions have hesitated to cut costs or reduce headcount, in the hope that revenues would rebound quickly and painful cost-cutting measures could be avoided, according to a press release on the report.

Secondly the report says that significant improvement in the market in 2008 is unlikely. Risks will continue to accumulate and exert further pressure on investment banking revenues. Under a base case scenario, assuming that credit revenues decline by 60% and Investment Banking Division (IBD) revenues decline by 40% year-over-year, investment banking revenue pools will be down by around 20% in 2007. Under a bear scenario, total revenues will decline by 45% year-over-year, stated the release.

It also said that investment banking cost income ratios are rising rapidly, as lower margin flow businesses now face an overburdened cost base. Historic crises have seen cost income ratios rise to 75-80%. Given this painful reality, market players need to react drastically to remain profitable in this environment, and cost optimization is emerging as a strategic imperative in 2008, the release stated.