Thanks, but no thanks: Investment banks cull clients

* Investment banks find many clients not profitable

* Consider cheaper operating model for small clients

* Regulatory, economic, trading landscape prompts change

By Steve Slater

LONDON, Nov 17 (Reuters) - Bank customers. They aren't what they used to be.

That at least is the message coming out from investment banks, who say they want to cut the number of clients they have because a lot of them aren't profitable.

At many investment banks the top 100 clients can account for 40 percent of revenues and the top 1,000 may contribute more than 80 percent of income, leaving thousands of smaller customers who contribute little revenue but suck up resources and capital.

"A major challenge is finding a way to reprice or find a cheaper operating model for a long tail of smaller clients," said Roger Rudisuli, a partner in McKinsey's corporate and investment banking practice in New York.

Investment banks are taking a more forensic and hard-nosed approach to clients - typically small and large companies - due to a more difficult trading, economic and regulatory landscape and a shift from an obsession with revenues to profitability. It is prompting firms to cut customers loose.

Deutsche Bank (Other OTC: DBAGF - news) 's new CEO John Cryan plans to axe about half his investment bank's clients, or in his language, "off-board" them.

"In global markets and global transaction banking we expect to off-board about half of the current list of clients as the economic returns in these relationships are inadequate to us," Cryan told analysts two weeks ago as part of his bank's revival plan.

He said 80 percent of the investment bank's income came from 30 percent of clients.

Deutsche is not alone. Standard Chartered (HKSE: 2888.HK - news) 's new CEO Bill Winters this month said he is addressing a similar challenge.

"We will systematically, client by client, blocking and tackling, discuss with the clients the profitability challenge we have," Winters said.

In some cases "we'll be in a position where we're forced to exit those client relationships. We'll do that thoughtfully, but deliberately," he said.

While some banks have been quietly shedding clients for several years, the pressure to be ruthless appears to be intensifying.

HSBC's investment bank dropped 275 clients from its roughly 4,000 main client groups between 2011 and June this year, when it said it was gearing up to cut 700-950 more, or a quarter of its main clients.

Investment banks' change of tone towards clients is part of a broader shift across all areas of banking to close operations that are risky, unprofitable or lack scale.

HSBC's attempt to simplify and cut costs has seen it sell or close dozens of businesses across retail and commercial banking, leaving it with 44 million fewer customers than it had just four years ago.

TOO RISKY, TOO COSTLY

At investment banks, there are two reasons for the cull of clients - conduct and capital.

Banks continue to cut customers where there are compliance risks regarding sanctions or anti-money laundering rules in the wake of massive fines on banks for any breaches.

Separately, investment banks are dropping customers because new rules require them to hold more capital, which raises the costs of handling many trades.

A repurchase or 'repo' trade, for example, used to be a low cost transaction carried out by banks daily for dozens of customers. Under new rules a bank may need to hold five times more capital for the trade - making it unprofitable unless charges rise or it gets clients to take more products, which Deutsche Bank is trying to do.

The changes have prompted many big companies to reduce the number of banks they have a relationship with, possibly from a handful to two or three banks, who access more of the client's wallet as a result.

The shift also raises the threat of 'adverse selection', where banks that are worst at assessing clients may be left with the least profitable customers, bankers and analysts said.

That is encouraging banks to improve their scrutiny of what clients do, which many bankers admit has been lacking in the past.

One senior investment banker, who asked not to be named, said his staff now had to break out time spent on each client and product every week, and the bank had dropped clients where it was spending too much time for too little revenue.

Estimating costs typically proves most difficult, as it needs to include not just sales, research and trading, but also a share of middle and back-office operations and the cost of capital the client uses.

"The first challenge is having good information, but sometimes the bigger challenge is making sure the people on the floor in New York or London implement it. There's a cultural change that is needed," said McKinsey's Rudisuli.

Banks tread carefully to handle unwanted clients. Rudisuli said most will try to reprice products or push them towards lower cost options, such as an electronic trading platform, or being handled by staff in lower cost locations.

"Clients can vote with their feet if they want to accept the new pricing or not," he said. (Additional reporting by Anjuli Davies; Editing by Susan Fenton)