Investment Banking divisions in the last 18 months have reversed the stagnation trend that dominated the latter part of the last decade.

The underlying drivers are multiple: the return to public markets reversing years of de-listing, vast amount of debt refinancing, market volatility in all asset classes and increased client flows and portfolio repositioning in both FICC and Equities.

Investment Banks’ performance indicators have not looked this good for several years: some produced RoTEs (Return on Tangible Equity) north of 20% for several quarters now.

The question at the back of the mind of several banking executives is: have Investment Banking profits peaked?

A cursory look into the drivers for the stagnation at the end of the last decade can provide some indications on what we could expect next:

Low volatility environment: the low volatility environment that characterized markets at the end of the last decade and suppressed client activity may change. As the era of Quantitative Easing is drawing to a close we may see increased asset price volatility and a repricing of risk across asset classes. Investment Banks role in intermediating risk would be core in helping investors reposition their portfolios for the new environment.

High levels of competition: Investment Banking remains a highly competitive business with high talent attrition and high barriers to entry. It is hard to imagine scenarios in which competition eases because of, for example, sector consolidation or exits. It is also unlikely a scenario in which competition increases further, giving Investment Banks reason to continue the efficiency drive that was at the core of their strategies at the end of the last decade.

Pervasive regulatory requirements: Even if there are several regulatory initiatives in the pipeline, in particular in Europe where the adjustment to the post Brexit diverging regulatory framework has not completely reached steady state, Investment Banks can, as they did in the past, continue optimizing their business and operating models to maintain their structural efficiency.

Lack of product innovation: whilst product and more general innovation has not materially changed Investment Banks business model yet, we may be at the cusp of a radical change. We are already seeing the signs of innovations taking hold in the industry: SPACs are reversing the “private for longer” trend in Equity markets; digital assets are ripe for both regulatory recognition and the inclusion in the existing suite of services offered by Investment Banks; financial market infrastructure providers, with the support of non-regulated technology groups, are expanding their reach and furthering the “platformification” trend.

Investment Banks have built a solid expertise in improving efficiency while adapting changing regulatory requirements but will need to dust off their risk management and transformation playbooks to capitalize on these new trends.