Overcapacity and regulatory pressures in the investment banking industry will cut the number of global players from 14 down to fewer than 10 in the next 3 to 5 years, say consultants Roland Berger in a new report. Although most banks, most recently Credit Suisse and UBS, are reorganizing themselves in some way to cut costs, they have a great deal more work to do lift their €eturns to above their cost of equity.

Markus Boehme, a Singapore-based partner at Roland Berger, and one of the report’s authors, says: “In order to reach a return on equity of 12 to 15 percent under Basel 3, investment banks will have to carry out much more restructuring. They will have to cut costs by about 15 percent [€6 billion, or $7.8 billion], cut risk-weighted assets by €1 trillion or 20 percent and increase their pricing by about 10 percent — the last two would likely not happen without further exits and consolidation.”

The findings of the new report echo those of a previous one by the consultancy. Although some progress has been made at many banks in cutting costs, Boehme notes that investment banks are cutting risk-weighted assets very slowly and that they are down only 3 percent compared to last year.

While the economic environment might look unfavorable, Boehme believes that regulation and overcapacity are bigger problems for the industry than revenues. “We forecast that industry revenues will be up about 10 percent this year to around €250 billion. This is led by developed by markets rather than emerging markets and represents a normalization of the level of revenues.” Any further fall in revenues, however, would necessitate even more severe cutbacks in the industry.

So far exits have been largely related to products rather than to whole geographic regions: Both Royal Bank of Scotland Group and UBS are counted among Roland Berger’s list of 14 global investment banks, but RBS withdrew from cash equities and advisory work earlier this year, while UBS said in October it would largely pull out of fixed-income trading and, over the next three years, cut its funded balance sheet by $319 billion ­— a third of the total. UBS’s withdrawal will ease some of the pressure on its rivals, says Boehme, but they will still have reduce their balance sheets and reduce costs.