Source: www.breakingviews.com is Europe's leading financial commentary service
Date: July 2003
By Jonathan Ford
Much has been written about the severity of the investment-banking downturn. But if this is as bad as things are going to get, it is actually pretty mild compared with the last one.
To know what real pain is, it is necessary to scroll back to the early 1990s. During that recession, most of the big investment banks struggled to make any profits at all. The quoted US brokers, for instance, made a return on equity of just 6% in 1991. Today, by contrast, they are making returns in the mid-teens.
Investment banks claim to have weathered this downturn better than the last because they are better at running their affairs. Risk controls have been sharpened, and costs cut more snappily. Bankers also point out that the securities industry has globalized, making the top tier intrinsically more profitable.
There may be some truth in this. But it is not clear cut. For all the talk of consolidation and globalization, US bulge-bracket brokers are no more productive today - in terms of revenue per employee dealing directly with clients - than they have been on average since the mid-1980s, according to Deutsche Bank.