Discuss the future prospects of the Investment Banking Industry, focusing on the main lines of business and distinguishing

between the Developed and Emerging Markets. What separates an investment banking from a commercial or retail bank is that investment banks dont take deposits with their core activities focusing in assisting individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities. They also assist companies involved in mergers and acquisitions, and provide ancillary services such as derivatives, fixed income instruments, foreign exchange, commodities, and equity securities. In Sep.2008 the Economist run an piece titled Investment banking: Is there a future? asking whether investment banks could continues function or even survive as pure investment banks without incorporating some of the commercial or retail banking business model. Could it be that the investment banking business model could be wiped and maybe we were at historical cross roads, urging the change of the investment banking business model? Four years after the Economists question the answer might be easier to answer than before. In the first nine months of 2011 year, global fees for investment-banking services stood at $64.2 billion, up 8% on the same period a year earlier. Mergers and acquisitions, which account for 36% of total fees of the investment banking, were down 23%. Fees from equity and debt capital markets, (45% of the global pool), declined by a colossal 55% and 46% respectively. JPMorgan earned $4.3 billion in fees since the beginning of 2011, an increase of 12% on a year earlier, according to Thomson Reuters. It seems that Investment banks did not go away, although some of their main lines of business were down, overall they have managed to show better results than the previous years. Anshu Jain, head of corporate and investment banking of Deutsche Bank said that Industry experts are predicting that future fee pools will flat line from current levels and that he disagrees and that he is optimistic about the future for our industry. Could it any truth in what Mr. Jain claims? It seems that the number released from Thomson Reuters justifies his sayings and Investment Banking could continue the way it did.

It might be that Mr. Jain could be optimistic and the numbers to support Mr. Jains claims but these are extremely difficult times and for investment banks to continue making the returns that they used to they should exercise excessive caution in navigating within the new challenges that lay ahead of them. Investment Banks should continue doing best of what they already know but at the same time they should keep an eye o tomorrows changes. That way, they can ensure they are positioned to take advantage of the next wave of growth instead of having to react to it. The banks that successfully capitalise on future strategic opportunities will possess acute strategic insight, be early adopters of emerging technologies and, critically, be able to make measured assessments of tomorrows key battlegrounds and their chances of success in each of them. Unknown unknowns may be proliferating in todays operating environment. But one basic fact remains there are still really only three ways to make money in investment banking: take risks, grow revenues and control costs. Prior to the financial crisis, investment banks typically achieved returns on equity of 20 percent or higher. On Feb 17th 2011 the Economist stated that Barclays expected its investment-banking unit to hit an ROE of 15%, JPMorgan Chase a soft target of 17% for its unit and Credit Suisse aimed for above 15% for the entire firm with optimised partly premised on growth. But with leverage held at more conservative levels and proprietary trading limited, banks are naturally seeking growing economies, in order to achieve their growth prospects where their services will be in demand, and that usually means targeting emerging markets.

Source: International Monetary Fund, World Economic Outlook Database, September 2011

As emerging markets move out of poverty, then double and double again their GDP, they have the

real potential to drive growth and revenues for investment banks. These opportunities are in direct contrast to developed markets, weighed down by economic uncertainty and stifled by intense competition; emerging markets are identified as a key component of banks future growth strategies. Looking ahead to 2012, the attractiveness of these markets can only grow. Banks with aggressive growth targets in place for boosting returns on equity targets that simply cannot be met solely through operations in developed markets. At a higher level, global economic growth will be concentrated in emerging markets, where the middle classes are now bigger than the consumer base in developed markets. In India alone, the middle class (already 180 million strong) is forecast to grow by 10 percent each year. With increasing amounts of income available to invest, these consumers will drive higher demand for financial services, both as individuals and through the demands they place on companies, which will be meeting their consumer demands. The result is new business opportunities for banks across multiple sectors. The priority for banks now is to ensure that their global strategies fully incorporate opportunities presented by emerging markets, while providing the flexibility needed for newly established operations in these markets to generate higher returns on investment. But as Investment Banks seek to take advantage of these new opportunities, they will face a number of strategic, operational and cultural challenges. They should examine carefully their target markets with rigorous competitive and cost benefit analysis, clear milestones in place for progress review and close management of ongoing business development. Indeed, whilst GDP growth is an important economic indicator, it rarely correlates with the attractiveness of a market for investment banks and it should only be taken into consideration along with the availability of talent, ongoing infrastructure investment, government policy regarding foreign investment and the ability to translate global strengths locally, in order to identify successful targets which can and should lead to focus on some unexpected countries. Investment Banks must also invest in researching and developing market-relevant products that meet precisely with client demand both new local clients and current clients expanding

internationally. These will inevitably differ (often dramatically) from developed world products. Service levels may need to be much higher, for example, with face-to-face interaction often an essential consideration. Emerging market offices and branches must be properly integrated into the business the infrastructure supporting the emerging markets business must be continuously checked to limit non- standard systems and tools. Careful strategic planning will be needed as regulatory requirements in particular markets vary hugely, and may be subject to rapid change. Given the high (and growing) level of regulation surrounding the banking industry, an invitation from the host government is critical in order to mitigate and correctly ascertain cost and resource issues. Successful Investment banks proactively and continually explore new geographic sources of value. They constantly look outward, sensing their business environment (and that of their clients) and making focused choices about where to compete and whom to engage. No two markets are the same. Companies often need to go to multiple markets to find what they need, be it talent, capital or technology. Investment Banks truing to venture into emerging markets they should try and reach out to potential clients in overseas markets with new business models, channels and infrastructure investment that unlock otherwise latent demand. They should also source talent wherever it may exist geographically, as well as from sectors of the population that may have been overlooked previously, such as women and rural workforces. Tying to identify emerging centres of excellence in different technologies, products and processes around the world should be high in their agenda. Improve access to capital and diversify risk by updating knowledge, relationships and financing models to reflect the new map of global investment flows. One of the major challenges for Investment Banks is that they should try and be authentically local. Although searching for value in emerging markets is a cross border task, unlocking that value is a local exercise. As tastes, customs, regulations and political environmentsdiffer widely; banks should embed themselves with full commitment in

their chosen local and regional markets as they execute their strategies by identifying critical local differences in client preferences and usage and in response to that to tailor products and services to the new client segments. This can be achieved through the development of local talent that should be used not only for today but also for tomorrow. Embedding innovation activities into local research and development and consumer environment, working in tandem with industry peers and policymakers should not be overlooked and must always try to optimize resource strategy under differing economic, cultural and regulatory constraints across markets and harness incentive regimes for current and new business. They must be willing to draw knowledge from a broad suite of investment models tailored to the characteristics of different markets. But acting on knowledge from around the world and executing company strategy in multiple locations requires the ability to transfer people, resources, capital and know-how to the right places at the right time. Creating organizations that are permeable, both internally and externally, enables flows of people, idea and best practices. I believe that it is all too easy for investment banks to underestimate the complexities involved in setting up or expanding securities operations in an emerging market. Crucially, they must not expect to apply the same implementation approach as in the major developed markets where they already operate. Also, they should be aware that the higher complexity of designing and delivering emerging markets operating models applies across the key domains of the business, operations and IT. It is critical to allocate sufficient financing and resources to maximise the new unit's chance of success. This means securing enough investment to tackle several challenges that affect all satellite operations, but more especially those in developing markets. In particular, it is important to move quickly and achieve high speed to market once the opportunity has been identified, since the first mover will often corner the lion's share of the local market. This means it may be better to launch now with good-enough' offering, than to wait until the fully- engineered service is ready. While most investment banks are organised and managed globally on the basis of relatively segregated product silos, setting up emerging markets operations is typically a cross-product

implementation. Therefore, organisations that are normally highly effective in delivery and execution within a product silo often face new implementation challenges in emerging markets where far more cross-product collaboration is required. Furthermore, the critical importance and rapid growth of wealth management in emerging markets raise major questions about how and how closely to integrate wealth management services with investment banking. Investment banking and wealth management have different origins and heritages in the global hubs which have led to largely separate operational infrastructures. However, in setting up emerging markets operations there are opportunities to address the significant operational redundancies and duplications between investment banking and wealth management operations (e.g. in securities settlement) that are common in global hubs. This requires new ways of thinking about the operating model to more effectively share infrastructure between the investment and private banking arms of the business. Inevitably, addressing these issues increases the complexity of development, testing and roll-out. From day one of the project, it is crucial to focus on developing a full understanding of local regulatory requirements, accepted modes of market behaviour and the legal environment, and to incorporate these factors at the design phase rather than trying to bolt them on later. This applies especially to new locations where the bank lacks an existing presence or experience on the ground. In these entirely new sites, compliance, tax, legal, anti money laundering and other regulatory functions should be addressed as early as possible. It is also important to remember that products based on a similar concept and designed to fulfil a similar objective in two different markets may be based on fundamentally different legal definitions. Examples might include financing agreements made under Shariah law as compared to Western interest-bearing loans. Implementing the optimal IT infrastructure in a satellite operation involves addressing a wide array of issues. At first sight it may appear that the cheapest and easiest approach is to plug the unit into the bank's global IT systems, but this may limit the new operation's flexibility and responsiveness to customer needs. For one thing, its systems will need to meet local demands that may not fit easily into the global IT template. For another, a small satellite operation may find its IT change requests to the global hub receive much lower priority than

those submitted by an established unit in a major developed market. Such factors mean that traditional developed market-centric thinking about IT may not apply, and require careful consideration of the balance between using inhouse systems and third-party (possibly specialist local) vendors. Despite the hope generated from Emerging markets Investment banks should take into account the new regulatory environment that will have to face in their future development. Year 2019 will herald the implementation of the Basel III regime. The Basel III proposals, set a new Core Tier One ratio of 4.5 per cent, more than double the current 2 per cent, plus a new capital conservation buffer of a further 2.5 per cent, so the rule sets an effective floor of 7 per cent. Further to this, there is likely to be local variation as national regulators determine countercyclical capital requirements and additional requirements for systemically-important institutions which could potentially push this figure to 9% The Basel committee has also tightened up the rules around what can be used as core tier one capital. The potential result will cause some serious pain as banks are forced to shrink their balance sheets and assess the future viability of business lines with high capital consumption. Even if the worlds top 13 global banks did nothing to offset the impact of the new rules, their returns on equity would fall from about 20% in 2010 to about 7% before any mitigation actions were to take place. But even they were charge clients more and close down capital-intensive businesses, among other steps, returns would still dip to 12-14%, well below their cost of capital which in effect will hold back investors from buying shares of banks, especially when the new regulatory regime requires banks to recapitalize their balance sheets by selling their assets. (http://www.mckinsey.com/App_Media/Reports/F inancial_Services/McKRegulation_capital_markets. pdf) Despite that the two largest banking organizations of Cyprus, Laiki and Bank of Cyprus, might not fully reflect the business model of investment banking we have been witnessing a hesitation of potential investors willing to invest in these two banks which could be probably attributed to the lower expected returns they are faced with stemming from the potential results of the new regulatory regime which by itself outlines a future of lower returns.

The new regime would also deprive banks from using large amounts of leverage to turn unprofitable units into profitable ones. In 2007, Bear Stearns had a leverage ratio of 34:1. Goldman, the lowest of the bulge bracket, had a ratio of 26:1, according to figures from Capital IQ. Reducing their leverage to sane levels will further put on lid on most of the banks returns dampening any expectations for speedy recovery of the sector. Venturing into emerging markets can be a difficult task and can exposing the bank to a number unknown unknowns. Nevertheless every Investment Bank wishing to continue making the returns that used to do should carefully examine the possibility of such a move. Regulatory framework, culture differences, recruitment of new talent, offer of suitable products, marketing strategies, and financial capabilities should come under the microscope of the Bank wishing to expand. Its a difficult task but not one that cannot be done. After all, necessity is the mother of invention. The new rules not only for investment banking but also for retail and corporate lenders could only be considered as wise move since lax regulation of the past was one of the reasons that led to todays calamitous environment. At the same time the new rules risk constraining the supply of credit or raising its cost as banks seek to increase their returns and this kind of risk really exists and we have been already witnessing it results in Cyprus where lending to the private sector remains horribly subdued due to the increased cost.