Home Finance AI Revolution Disrupts Investment Banking

AI Revolution Disrupts Investment Banking

Tobias Taupitz landed a job in Barclays’ mergers and acquisitions (M&A) team based in London after beating thousands of other applications.

The job came after graduating from the University College Dublin with a master’s degree in management.

Even though the pay matched his expectations, the work he was doing did not. “I spent so much time updating Powerpoint slides, or hours in Excel — and I’m not talking about the funky stuff,” he said.

Upon joining the team, Tobias realized that most of his work time would be spent doing calculations for pitchbooks, sales records that held information on the main risks of both a deal and valuations data in a bid to justify why customers ought to select the services of a bank.

“I ended up sweating in the printing room at 2 am, queuing behind a line of junior bankers,” Taupitz claimed. After working for Barclays for two years, he quit his job to start his own fintech firm called Laka, which intends to reshape the insurance industry.

Back in the day, bankers such as Taupitz with limited or zero experience would have been told to consider the hard menial work as some type of apprenticeship, a vital requirement to get a promotion or more exciting work.

While investment banking entities try to retain their junior staff who are easily lured into taking up innovative technology jobs, the end of menial work is imminent.

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Transformation of an investment banker

The automation wave that swept bank tellers and supermarket cashiers hit City trading desks several years ago.

Currently, some investment banks are investing considerably in innovative technology that can carry out, in seconds, activities that would have previously taken analyst and associate teams several days to complete.

The revolutionary technology promises nothing short of a drastic transformation in the role of an investment banker, whether senior or junior.

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“There’s going to be more thinking, less doing,” said Huw Richards, JPMorgan’s head of digital investment banking.

Huw Richards assumed his current role in JPMorgan back in May, where he leads a team of about 40 senior data scientists, technologists and senior bankers seeking to automate various areas of the dealmaking process at JPMorgan.

Automation is accelerating 

Automation is not an entirely novel concept in the investment bank.

In fact, junior banking staff working in Excel at times leverage sophisticated macros, a program found within a program, that facilitates financial modeling.

Even though bringing in new technology is set to create fresh opportunities, Huw Richards’ team’s original initiatives focus on leveraging predictive analytics in helping to determine the ideal time for a given transaction as well as pitching deals to customers digitally through software that has an interactive component as opposed to static PowerPoint presentations.

“It’s on their desktop, they can do the analysis themselves,” Huw Richards said. He noted that paying associates and analysts to generate presentations is expensive.

“That’s not a good return on investment,” he said.

Fear of investment banking job losses

Goldman Sachs has also been redirecting its focus to technology, specifically in its investment bank.

The bank has 50 individuals who work within its mergers and acquisitions solutions team, which is headed by partner Steven Barg.

For about two years, the team has been creating a system dubbed Jupiter in a bid to automate sections of the bank’s initial public offering(IPO) process, model the impact of an acquisition or merger on a given entity’s share price and business and assist in assessing threats arising from activists.

“We can have a company call up and say, ‘I’m thinking about raising my dividend, how is that going to be received by our shareholders?’ Our analytical tool can provide an answer in 30 seconds,” said Barg. “It would have taken a team of analysts days to do this before.”

Other banking institutions are also taking cautious measures to automate some aspects of their investment banking advisory processes.

UBS poached Ronald Jansen from Goldman Sachs back in August to lead Lazard, a new investment bank analytics and data lab.

READ MORE: AI Could Replace 10,000 Jobs at Citi’s Investment Bank

The new independent bank has come up with a data analytics team.

Barclays is said to be employing technology in expediting client onboarding.

The bank is also using AI to assist its customers in defending themselves against activist investors and valuing companies in a bid to identify M&A targets as well.

The spokespeople for Barclays, HSBC, Deutsche Bank, Credit Suisse, Morgan Stanley, and Bank of America Merrill Lynch all either answered no to having ongoing projects in this particular sector or declined to make any statement.

Some people in the industry are afraid that automating a portion of the work carried out by junior bankers would lead to lesser jobs.

A 25% reduction of staff due to automation

Privately speaking, Bank executives are convinced that analyst classes are currently smaller and the trend is likely to continue.

One senior banker asserted that a 25% reduction is possible within the next five years.

Adrian Crockett, a former managing director of Credit Suisse, who currently advises investment banking institutions on digital strategy via his company Fingital, forecasts that analyst classes will reduce by 30%.

Publicly, bankers believe that the most important objective is freeing up the staff to allow them to pursue additional opportunities.

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“Talking about having fewer junior investment bankers is not really the point,” said Jansen. “Right now, it’s the other way around — we have more potential opportunities than the resources to be able to action them. Technology allows us to free up capacity.”

According to various sources, Goldman Sachs is striving to push additional deals into the middle market, which is considered to be $550 million-$3 billion in size, and other large banking institutions are now following suit.

Previously, bigger banks ignored deals that were not accompanied by blockbuster price tags, as they were considered less lucrative to justify the cost.

“Investment banking is a human-capital intensive business, and banks have to manage that resource where it’s going to generate the biggest fees — namely, big deals,” said Crockett.

“Technology will allow banks to increase the number of deals they do exponentially because the cost of executing a deal will go down.”

Technology leveling the playing field for smaller investment banks

Technology is set to make the situation fair, especially for smaller banking entities that lack the appropriate firepower to recruit hundreds of juniors each year.

Boutique companies including William Blair and LionTree Advisors are utilizing technology in their dealmaking process, particularly in uncovering potential sellers and buyers for their customers.

The former CEO of Citigroup Vikram Pandit, who now heads Orogen Group, said that boutique banking firms would employ technology to “scale more quickly”, enabling “smaller players to compete with large legacy banks”.

Even if banks claim that they will not require lesser juniors, the talents they are anticipated to bring to the particular job will undeniably change.

The move towards automation, especially in trading has raised the demand for recruits with programming and mathematical skills.

“It will drive a dramatic rethink of how we staff the deal teams,” said Huw Richards. “In five years’ time, it’s impossible to think that most of the junior bankers we hire won’t have some form of programming experience.”

“We are a team of investment bankers who are also data scientists,” added Jansen.

Huw Richards from JPMorgan claimed: “Many of the people interested in getting into finance are going to be computer science minors, or have joint business degrees.”

The idea behind the recruitment of “bankers who code” is quickly gaining traction.

Jansen asserted that an analysis of all the students applying for jobs within the company’s investment bank showed that up to 40 percent of the applicants had knowledge relating to the main coding languages used by banking institutions such as C, Java or Python.

“It’s really up to us to develop platforms that allow them to utilize those skills,” he said.

Crockett said: “Excel is a time-saving tool, but even assuming that juniors use Excel VBA to write macros — which the majority of them can’t — using Python is an entirely different world. The quantum of data it opens up and the longevity of that is completely different.”

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Goldman Sachs is focused on ensuring that bankers utilize its new Jupiter system, which has become a compulsory section of its graduate training programme.

The banking entity is also geared towards making sure that junior bankers get customer exposure in two years, as opposed to the current estimated five years, in a bid to augment retention rates.

“For junior bankers it means they focus on higher-quality, more value-add functions earlier,” said Barg. “We want to replace the needless repetitive work analysts and associates do, automate that, so that they can start talking to clients earlier.”

Crockett claimed: “The real challenge [for technology teams] is delivering some small package of value that impresses senior bankers. The aim, ultimately, is to change the culture to the extent that a dealmaker comes to you and says ‘I need something’.”

The current concern now revolves around the extent to which technology can go in automating a process that has widely depended on human expertise and relationships.

Goldman’s Barg is convinced that technology won’t make investment bankers obsolete in the near future.

“One can’t automate good advice and good judgment,” he said.

Original source FnLondon

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KC Cheung
KC Cheung has over 18 years experience in the technology industry including media, payments, and software and has a keen interest in artificial intelligence, machine learning, deep learning, neural networks and its applications in business. Over the years he has worked with some of the leading technology companies, building and growing dynamic teams in a fast moving international environment.
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