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Pin to quick picksHSBC Holdings Share News (HSBA)

Share Price Information for HSBC Holdings (HSBA)

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Share Price: 705.00
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Thanks, but no thanks: Investment banks cull clients

Tue, 17th Nov 2015 14:49

* Investment banks find many clients not profitable

* Consider cheaper operating model for small clients

* Regulatory, economic, trading landscape prompts change

By Steve Slater

LONDON, Nov 17 (Reuters) - Bank customers. They aren't whatthey used to be.

That at least is the message coming out from investmentbanks, who say they want to cut the number of clients they havebecause a lot of them aren't profitable.

At many investment banks the top 100 clients can account for40 percent of revenues and the top 1,000 may contribute morethan 80 percent of income, leaving thousands of smallercustomers who contribute little revenue but suck up resourcesand capital.

"A major challenge is finding a way to reprice or find acheaper operating model for a long tail of smaller clients,"said Roger Rudisuli, a partner in McKinsey's corporate andinvestment banking practice in New York.

Investment banks are taking a more forensic and hard-nosedapproach to clients - typically small and large companies - dueto a more difficult trading, economic and regulatory landscapeand a shift from an obsession with revenues to profitability. Itis prompting firms to cut customers loose.

Deutsche Bank's new CEO John Cryan plans to axeabout half his investment bank's clients, or in his language,"off-board" them.

"In global markets and global transaction banking we expectto off-board about half of the current list of clients as theeconomic returns in these relationships are inadequate to us,"Cryan told analysts two weeks ago as part of his bank's revivalplan.

He said 80 percent of the investment bank's income came from30 percent of clients.

Deutsche is not alone. Standard Chartered's new CEOBill Winters this month said he is addressing a similarchallenge.

"We will systematically, client by client, blocking andtackling, discuss with the clients the profitability challengewe have," Winters said.

In some cases "we'll be in a position where we're forced toexit those client relationships. We'll do that thoughtfully, butdeliberately," he said.

While some banks have been quietly shedding clients forseveral years, the pressure to be ruthless appears to beintensifying.

HSBC's investment bank dropped 275clients from its roughly 4,000 main client groups between 2011and June this year, when it said it was gearing up to cut700-950 more, or a quarter of its main clients.

Investment banks' change of tone towards clients is part ofa broader shift across all areas of banking to close operationsthat are risky, unprofitable or lack scale.

HSBC's attempt to simplify and cut costs has seen it sell orclose dozens of businesses across retail and commercial banking,leaving it with 44 million fewer customers than it had just fouryears ago.

TOO RISKY, TOO COSTLY

At investment banks, there are two reasons for the cull ofclients - conduct and capital.

Banks continue to cut customers where there are compliancerisks regarding sanctions or anti-money laundering rules in thewake of massive fines on banks for any breaches.

Separately, investment banks are dropping customers becausenew rules require them to hold more capital, which raises thecosts of handling many trades.

A repurchase or 'repo' trade, for example, used to be a lowcost transaction carried out by banks daily for dozens ofcustomers. Under new rules a bank may need to hold five timesmore capital for the trade - making it unprofitable unlesscharges rise or it gets clients to take more products, whichDeutsche Bank is trying to do.

The changes have prompted many big companies to reduce thenumber of banks they have a relationship with, possibly from ahandful to two or three banks, who access more of the client'swallet as a result.

The shift also raises the threat of 'adverse selection',where banks that are worst at assessing clients may be left withthe least profitable customers, bankers and analysts said.

That is encouraging banks to improve their scrutiny of whatclients do, which many bankers admit has been lacking in thepast.

One senior investment banker, who asked not to be named,said his staff now had to break out time spent on each clientand product every week, and the bank had dropped clients whereit was spending too much time for too little revenue.

Estimating costs typically proves most difficult, as itneeds to include not just sales, research and trading, but alsoa share of middle and back-office operations and the cost ofcapital the client uses.

"The first challenge is having good information, butsometimes the bigger challenge is making sure the people on thefloor in New York or London implement it. There's a culturalchange that is needed," said McKinsey's Rudisuli.

Banks tread carefully to handle unwanted clients. Rudisulisaid most will try to reprice products or push them towardslower cost options, such as an electronic trading platform, orbeing handled by staff in lower cost locations.

"Clients can vote with their feet if they want to accept thenew pricing or not," he said. (Additional reporting by Anjuli Davies; Editing by SusanFenton)

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