How Investment Banks Can Save $2 Billion

McKinsey sees considerable scope for investment banks to cut their noncompensation costs – possibly up to $2 billion in recurring savings.
In a new survey of eight firms, McKinsey found a significant difference in noncompensation costs per head count between the top- and bottom-quartile banks.

The results suggest that the magnitude of the prize may range from $400 million to $2 billion for the institutions with the most savings opportunities.

Certain investment banks appear to have become bloated during the good times. From 2005 to 2007, only three of those in our sample managed to keep the compound annual growth rate (CAGR) of their noncompensation costs below the rate of their revenue growth. At the others, noncompensation costs either surpassed or kept pace with revenue growth. In addition, at all but three banks, CAGRs for noncompensation costs were in the double digits.

McKinsey said its experience indicates that data, printing, supplies, delivery and professional services usually yield the fastest results; restructuring real estate and IT spending may take longer but generate much larger savings.

 McKinsey said its analysis suggests that “executives can embark on this additional belt tightening without harming a bank’s culture and morale.”

Of course, morale at most investment banks is already so low that a further whack at expenses is unlikely to make it any worse.