Wall Street revises budgets and plans more lay-offs

US securities firms have revised down their own internal budgets for the year and are now preparing to lay off more staff, according to analysts following the sector.

Cutting their own internal budgets and admitting that their initial projections for a recovery this year were over-optimistic is one of the most concrete signs that the firms are resigned to more redundancies.

The internal downgrades come as Morgan Stanley fired another 150 investment bankers, according to senior sources at the firm, amid speculation that it will lay-off thousands more staff worldwide. Morgan Stanley declined to comment.

Goldman Sachs is understood to have told analysts that its decision to cut more than 1,500 from its headcount in the first half had "right-sized" the firm, based on its revenue forecasts at that time.

Now that it has revised these forecasts downwards, it will need to cut more staff. Merrill Lynch, Morgan Stanley and Citigroup are also understood to have cut back their forecasts and staffing projections for the second half of 2002.

Marc Rubinstein, European banks analyst at CSFB, and his team met senior managers at US securities firms at the end of July. He said he was "nervous about the prospects for profitability" as a result.

In a note last week, he wrote: "Companies concurred that they had been overly optimistic when establishing budgets at the beginning of the year. Most are now ready to downgrade their revenue projections."

He said that most firms had budgeted for a back-ended recovery in 2002 and "most firms recognised the existence of excess capacity".

"Clearly, in light of recent market development, these assumptions are currently being questioned. Several firms said they are in the process of revising their budgets," said Rubinstein.

The analysts themselves have also sharply cut their forecasts for the securities firms, according to Multex.com.

In the past three months, Merrill's third- and fourth-quarter consensus earnings estimates have been cut by more than 11%, while the equivalent numbers for Goldman and Lehman are down as much as 7% and 10%, respectively.

Consensus share price targets for the sector have also been cut by between 8.8% for Lehman Brothers and 19.6% for Morgan Stanley.

The problem for many firms is that they have already cut out most of the non-compensation costs that are achievable without damaging the business, leaving headcount and pay as the only remaining options.

The CSFB team concluded that revenues for the securities industry were likely to come in this year at around the levels last seen in 1997 or possibly 1998.

Financial News reported last week that if headcount dropped accordingly to 1998 levels, a net 66,000 staff in the industry would have to be fired to bring staffing into line.

The other big problem for securities firms is trying to establish what constitutes a normal year's activity. Lehman was the most bullish US firm the CSFB team met, arguing that 2000 was not necessarily a peak year, while Morgan Stanley thought 2001 levels were sustainable.

One unnamed firm said 1998 was a "normal" year.