Global investment banking revenues this year may match the buoyant levels of 2009, analysts forecast on Tuesday, easing fears of a sharp drop during what looks set to be a pivotal year for the industry.

Underlying industry revenues are likely to drop 10-15 percent this year to about $280 billion, but will be flat to modestly up once lower markdowns for credit losses are factored in, according to a report by Morgan Stanley and Oliver Wyman.

In a linked note, Morgan Stanley said the new backdrop favored banks with big market share and Barclays , Bank of America , JPMorgan and Credit Suisse looked best value for the next two years.

Revenues had been expected to drop more sharply from levels seen in 2009, when income soared early in the year as capital markets bounced back from the financial crisis.

Looming regulatory changes and a fragile economy will challenge profitability and reshape the industry, the report said. This will reinforce the need for players to compete hard for share and improve trading efficiency.

Banks will need to reposition around regulatory change, compete on scale, build outstanding risk management, and take clear decisions on reshaping the business, the report said.

NEED TO BE BRAVE ON PAY...

Harsher regulation will force banks to hold more capital and is likely to wipe 4 percentage points off industry returns, with a material risk of a worse outcome, the report said.

We believe a punitive outcome would create an 8 percent drag on ROE (return on equity), resulting in dramatic industry downsizing and margin expansion, it said.

Banks have reined in payouts to staff in the face of stiffer regulation and compensation averaged about 35 percent of revenue last year, from a historical average of 45 percent. The ratio needs to stay near 35 percent to offset the capital and funding drag on returns, the report said.

A good number of players could become far less profitable without brave decisions, it said.

Return on equity across the industry is likely to drop to low to mid teens, compared to an average of near 18 percent between 2002 and 2007 and about 14 percent in 2009, it said.

Underlying fixed income, commodities and currencies trading (FICC) revenues could drop 20-25 percent this year, the analysts forecast. But lower writedowns will make good much of the drop.

Equity trading revenues should rise 5-10 percent and income from advising on mergers and acquisitions (M&A) and the rest of the investment banking sub-sector should rise 5 percent, the report said.

(Reporting by Steve Slater; Editing by Antonia van de Velde and Sharon Lindores)