Thoughts on International

• Europe is a mess with the current crisis, which will take much time to unravel. Firms should cut more deeply; the market is way over brokered, while the other parts of EMEA (Middle East & Africa) are ripe for continued growth.
• Latin America: Have local access; having banking helps given deal flow appetite. While Brazil is the main focus, other countries could present cheaper alternatives.
• Asia has an appetite for OTC products; access to restricted markets is key. Margins are hard to improve with high competition for talent.
• Emerging markets: build carefully with research, sales and banking; they will continue to “develop” into important money centers.

Thoughts on Technology

• IT must be viewed as a full partner to the business; not a cost center.  IT must be fully integrated in the business -- no “ivory towers.”
• Measure ROI on initiatives; cost to maintain can, at times, exceed cost to build.
• IT budgets rarely match reality; they should be prioritized by business.Technology failures often are due to minimal business involvement, little or no project management, poor change management process or a lacking system design.
• Client information systems are needed for data mining; firms need a ‘golden’ source of all data.
• Common platforms across businesses and regions are needed (though this is not easy to achive).

Thoughts on Expense Management

• Identify full costs of goods sold; and reduce variable costs such as bank fees, clearing charges, and transaction costs. Collateral management is key to lower funding costs.
• Allocated costs are lethal: They offer little transparency; control what you can. Legal, Facilities, IT, HR, Operations, and Finance must be run like real businesses.
• Cost Savings initiatives are invisible to clients, but not to the bottom line. Some firms name their cost-saving programs, suggesting that they are not in the daily DNA.

Thoughts on Regulatory Matters

• Dodd-Frank is a real quagmire, with its limits on prop trading, investments in HFs, central clearing for derivatives, and higher RWAs for non-cleared products. But it is even worse for FICC; will credit become a pure flow business?
• The Volcker Rule is the least wanted, with its restrictions on prop trading.
• The Fed’s CCAR scores determine banks’ excess capital; upcoming scores should be better, with banks improved capital starting positions in 2012.
• OTC derivatives will clear on exchanges. Clients could need $2 trillion in additional margin; collateral optimization a must. BNY and State Street should benefit most here.
• Basel III requires more capital, liquidity and liquidity buffers, depending on your SIFI grouping. Target Tier 1 capital ratios (8%-10%) are phased in over 6 years, though most banks already are near required ratios. Swiss banks must have even more, as they are too big to fail.
• MIFID II continues to focus on more transparency and efficiencies and to bolster client protection; UCITS IV is useful regulation that promotes faster approvals of funds cross borders.
• Vickers/Liikanen: ‘Ring fence’ risk taking activities into separate capitalized entities away from government guaranteed deposit businesses.
• Regulations are changed globally by indifferent regulators; look for regulatory arb as well as the law of unintended consequences. Costs for compliance are rising, as are fines (Libor, Money Laundering, Failure to Supervise) -- firms paid $14 billion in fines in 2012.
• Corporate finance, FX, asset management and wealth management largely will NOT be impacted by the new regulations; they are good areas for continued investment.

Thoughts on Investment Banking Division (IBD)

• IBD is the most competitive global business; it touches the C-suite like no other. The best bankers become trusted advisors to CEOs and boards.
• IBD revenues by product are: M&A ($20B), ECM ($15B), DCM ($35B). The advisory business has the highest margins, but the longest lead time; ECM/DCM includes large costs (research and distribution), shrinking spreads and more firms.
• Bankers have extensive reign to manage client relationships (such as wealth management); they need to institutionalize IBD client relationships (and reduce key man risk).
• Tracking banking teams’ time must be seamless; the expense meter runs every day (but not the revenue meter).
• Clients should be ranked/tiered. Be more strategic about client selection. Financial sponsors demand deal flow, big blocks and cheap financing, and they are over-banked -- but they are still 25+% of the fee pool.
• Bought deals is still an ultra-competitive area; many are still buying share (Citi, Barclays).
• Leveraged finance is a money maker (with less risk as loans usually trade) and an essential part of the sponsor coverage model.
• The Private Funds Group raises money for private equity and gets success fees; it’s very profitable and needs no loans, no research, no product bankers.
• Firms need better controls over how the deal pipeline is built and maintained; a much-needed management tool in resource planning among sector teams.
• IBD does need an operational risk framework to cover conflicts (determine “best horse”), compliance, due diligence, capital commitment, fee approvals, etc.
• IBD is often managed to the top line (not the bottom line). Firms need stricter expense discipline over the loan book, subscriptions, T&E, junior staff time, and deal write-offs (watch legal spend as lawyers get paid deal or not).
• Teams should be lean; the junior-senior banker ratio should be 1.2x. Pitch books should be lean, too; the smaller the book, usually the better the banker. Way too much time and money is spent on unread pitch books. The board wants to know the number and types of deals the banker has completed.
• Firms need a banker scorecard to monitor and capture banker profitability: revenues (gross, direct), loan book usage, expense recovery ratios, rank/market share.
• Structured trades are not reported to Dealogic, so the exact rank/share may be skewed; but overall directional views are consistent.
• Tracking Deals Done Away (DDAs) requires bankers to explain misses in real time to senior management. Accountability matters.
• IBD has no major IT spend like Equities/FICC, but it needs systems that track deals, banker activities, “client alerts,” and detailed client info (CRM lite).
• Loan Book: Firms need a disciplined approval process (and follow up); hedging can get expensive with high RWA charges. Firms must monitor returns on loans, and  bankers should recoup fees of  2x to 3x the loan credit cost.
• Internal accounting for IBD often looks like a not-for-profit business, with the various joint venture splits; firms need P&Ls that show revenue to the firm along with all costs (distribution and research). The origination of revenue is worth more than the distribution of it.

Thoughts on Management

• Managers must manage – they must be the “culture builders” and the “glue.” They must work for their teams, they must lead, they must be client-facing and they must be accountable.
• Build a bench: College recruiting is critical and needs senior management involvement.
• Compensation: Only reward performers who deliver well above seat value; comp to revenue ratios need to drop well below 50% to deliver meaningful ROE.
• Equities, FICC, IBD and Wealth Management have different degrees of complexities and needs. They are all Client-first-driven businesses and should be managed accordingly.