FACED with tough post-crisis regulation, most of the biggest players slashed their investment banking units and turned to less risky activities such as wealth management. But those left are still making good returns.

And then there were two. After years of job cuts and reorganisations, most of the world’s biggest investment banks do very little investment banking today. Of the 10 largest global banks only two — Goldman Sachs and Morgan Stanley — still make most of their revenue from their investment banking operations, compared with six before the global financial crisis.

This new landscape reflects the dramatic pullback of Europe’s banking titans after they suffered catastrophic losses in the crisis and then faced regulatory pressure to back off from risky activities. They are a greatly diminished force in traditional investment banking activities like leading initial public offerings, mergers and acquisitions or selling company debt, as well as in other activities like helping clients to trade stocks and bonds and creating financial products like derivatives.

Private banking and wealth management have replaced investment banking divisions as the big profit centres in some global banks, while others are repositioning themselves as domestic lenders a world away from the risky planes of high finance

Big US banks, facing regulatory pressures and losses of their own, have also curtailed their operations in this sector, and since the crisis staff numbers have fallen by 40,000, or almost 30pc, in the investment banking units of the five global banks that disclose figures.

An analysis by the Financial Times shows the extent of the restructuring at the world’s biggest lenders, which has left them with investment banks that are far smaller and have very little in common with each other.

Private banking and wealth management have replaced investment banking divisions as the big profit centres in some global banks, while others are repositioning themselves as domestic lenders a world away from the risky planes of high finance. Both strategies demand fewer financial resources than investment banking, where capital requirements have skyrocketed after a wave of post-crisis regulation. They also have more stable earnings.

UBS, the world’s largest bank by assets before the financial crisis hit, has gone down the wealth management route as part of a radical transformation that began soon after the crisis but gathered pace in late 2012, when the Swiss bank announced a pullback from fixed income. Its investment banking business drew revenues of SFr2.4bn in the second quarter of this year — a far cry from the SFr6.2bn it made in the second quarter of 2007, a year before Lehman Brothers’ collapse triggered the crisis.

The plan is to be ‘capital light’, focusing on areas of investment banking that put less of UBS’s own capital at risk and attract more favourable regulatory treatment. Within this leaner investment bank, almost half of its second-quarter revenues came from helping clients trade equities, with another 30pc coming from the traditional investment banking activities including advising clients, equity capital markets and debt capital markets. The profile is far different to some other investment banks, which still make a lot of their money from fixed income trading fees and selling products like derivatives.

“There is no size that fits all, you can be successful in different ways,” says Andrea Orcel, head of UBS’s greatly restructured investment bank.

Others are still working to downsize their investment banks. Barclays has already made some cuts and promised more under its executive chairman, John McFarlane, as has Deutsche Bank, which is finalising a new strategic plan under its new co-chief executive, John Cryan. Credit Suisse’s new chief executive, Tidjane Thiam, is also reviewing investment banking strategy.

Though it is one of the two remaining big investment banks, Morgan Stanley has also diversified into retail brokering with the acquisition of Smith Barney. James Gorman, the bank’s chief executive, declared last year that “the investment banking industry for all intents and purposes has disappeared”.

Nevertheless, Colm Kelleher, head of its institutional securities business, says the broad investment bank will “continue to generate roughly half our earnings”. He adds: “These businesses play an important role in the functioning of the global economy and are fundamental to the creation of growth.”

JPMorgan Chase has shed almost 25,000 jobs in its investment bank since mid-2007, but the division still employs about 50,000 — more than the entire staff of Goldman Sachs or Credit Suisse, and just shy of the 56,000 employed by Morgan Stanley.

A third of JPMorgan’s revenues come from its corporate and investment banking division. About 20pc of that division’s revenue comes from traditional investment banking — the rest is weighted towards fixed income and equities. Daniel Pinto, head of the unit, says the mission is to deliver ‘a complete global banking platform to clients’. He adds: “We recognise this is an increasingly rare strategy among the leading investment banks, but JPMorgan’s size and scale put us in a distinct position to pursue this.”

At Bank of America, the 2009 acquisition of Merrill Lynch created a group that draws about 40pc of revenues from its global banking and markets units, which have a different revenue base to those of UBS and Morgan Stanley. “It’s fairly hard to have a common denominator,” Christian Meissner, head of corporate and investment banking, says. “Different regulatory, operating and business environments are pushing banks in disparate directions.”

Investment banking is more profitable than other parts of the industry, with these units generating better returns than their parent operations at seven of the eight banks that disclose figures for the segment. But the earnings advantage of investment banks should narrow when interest rates rise, since retail banking will become more profitable. Investment banking also needs higher returns than other types of banking to justify the potential for large losses.

Still, Mr Meissner reckons profits are high enough for banks to begin allocating more resources to investment banking. “The returns are still pretty attractive relative to other things you might do,” he says.

Published in Dawn, Economic & Business, August 31st, 2015

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