Wall Street banks must abandon 'cottage industry' model -McKinsey

Reuters

* Banks' risk drop in ROE to 4 pct -McKinsey

* Banks must cut costs by 25 pct and raise prices -McKinsey

* Banks must decide where to focus their businesses-consultant

By Lauren Tara LaCapra

NEW YORK, Nov 20 (Reuters) - The biggest Wall Street bankshave not done nearly enough to boost shareholder returns,despite years of cost-cutting and tailoring balance sheets to amore profitable mix, consulting firm McKinsey & Co said in areport released on Wednesday.

If those banks do not take more dramatic steps to reshapetheir business models, the industry's return on equity couldfall further - to a mere 4 percent by 2019 from 8 percent lastyear, the report said.

Those figures are far short of the 12 percent return onequity banks need to meet their cost of capital, said McKinsey,which works with big Wall Street firms on business strategy.

"Banks need to decide where they're advantaged to compete,and focus on the right products, the right geographies, theright clients that they're best positioned to serve," KevinBuehler, co-leader of McKinsey's global risk practice, said inan interview. "Very few banks will continue to provide allproducts to all clients everywhere, as many aspired to do in thepast."

For the past few years, Wall Street banks have been engagedin a staring contest, betting they can outlast competitors inunprofitable businesses. Returns will sail higher, the thinkinggoes, once rivals exit, because patient victors can gain marketshare and increase pricing with less competition.

While banks have been waiting for others to blink first,profits have come under increasing pressure from new regulationsand weak volumes. In response, banks have slashed $10 billionfrom expenses and reduced risk-weighted assets by $1 trillion,said Buehler.

Banks will have to cut costs by another 25 percent -equating to $2.5 billion per firm, on average - while alsoboosting revenue by about $1 billion each, to get profit marginshigher, he said. They will have to reduce risk-weighted assetsby another 15 percent, or $60 billion per firm, on average, toboost returns to at least 12 percent, he said.

To achieve these goals, banks will have to make toughchoices about what products and services to continue offering,Buehler said. They will also need to raise prices and outsourceduplicative functions to industry "utilities" that can performindustry-wide tasks at a lower cost.

"Some real fundamental changes are necessary, and I do thinkit's partly a cultural change," said Buehler. "Capital marketsand investment banking has to change from a cottage industry -where every bank does everything for everyone - to a much morelean and focused, industrialized one."

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