April 1, 2008 / 2:59 PM / 11 years ago

UPDATE 1-Fincls to see worst hit to profit in 20 yrs - report

(Recasts; adds details)

April 1 (Reuters) - Profits of the global investment banking and capital market industry look set to take the worst hit in 20 years as the sector is facing the biggest crisis in three decades, Morgan Stanley and consulting firm Oliver Wyman said in a joint research report.

Nearly six quarters of industry earnings will be wiped out due to mark-to-market losses and weaker revenues by April, the analysts estimated in their report.

This already starts to rival the 1989-through-1990 downturn, which was the most severe of the five crises in the last two decades that wiped out six-and-a-half quarters of industry earnings, the analysts said.

“The knock on effect of funding markets drying up implies that this crisis will bite deeper.”

For 2008, investment banking revenue is expected to be down about 20 percent before additional mark-downs of $75 billion, the analysts wrote.

“Investment banking revenues continue to tilt further to Europe, Middle East and Africa (EMEA), and Asia in 2008.”

Asia and Europe could represent around 60 percent of industry pre-mark revenues by the end of 2008, analysts said, while noting that the United States now represents under half of industry profit pools.

Analysts expect longer-term return on equities to fall as banks seek to delever and regulators ask banks to hold more capital.


“One of our biggest concerns is regarding the shape and earnings power of the credit businesses, which today looks in some ways like the equities business in 2000/01 — with much restructuring ahead,” the analysts said.

Firms with more diversified equities business, however, appear to be in far better health, more focused on Europe, Asia and emerging markets and with far lower staffing to revenue than at many times in history, they added.

“While on its own not sufficient, we think that firms with diverse sources of funding - with retail and commercial deposits clearly helping - and a diversified business will have a funding advantage over the coming years,” they said.

The analysts said they were cautious on the industry for the near term, but optimistic that a return to prior earnings levels was still possible in the next six to eight quarters, given global growth and the intense policy response to the current crisis. (Reporting by Tenzin Pema in Bangalore; Editing by Himani Sarkar)

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