Six reasons why investment banks will be making redundancies again in the fourth quarter

People are talking about redundancies, and it's not just us.

This doesn't mean they'll definitely happen, but there is a certain logic to making redundancies in Q4, and it goes as follows.

1) The bonus pool is taking a hit from risk aversion

Goldman analysts think sales and trading profits fell 19%, investment banking profits fell 20%, and that capital markets profits (specifically) fell 40% q-on-q in the second quarter.

Today, Huw Van Steenis at Morgan Stanley forecast a 40% q-on-q reduction in profits at UBS and Credit Suisse in the second quarter, blaming weaker markets and client risk aversion.

If this continues into Q3, it will not be pretty for bonuses.

2) Salaries are dangerously high

In the old days, banks would have been able to cut variable pay (AKA bonuses). They can still do this, but with salaries now as high as 380k, room for manoeuvre has been reduced.

3) There are lots of guarantees out there

The past two months have seen a substantial amount of hiring in London, much of it involving guarantees. They may not be for two years, but they do represent a drag on the 2010 bonus pool. Non-guaranteed staff may be trimmed as a result.

4) Things may not get better

Van Steenis spoke to Brady Dougan, CEO of Credit Suisse, and to Ulrich Korner, COO of UBS, as well as others. He says his conversations suggested banks think, 'sovereign risk will cast a long shadow into future years.'

5) Regulation is not off the table

Banks may have got off comparatively lightly at the G20, as well as from the UK banking levy, and from the phased introduction of the new Basel rules, but that doesn't mean they're off the hook totally.

As Simon Johnson, business professor at MIT, notes here, a lot of hard talking about capital adequacy standards, leverage, and liquidity ratios has simply been postponed until the next meeting in Seoul.

6) FICC may never be as good again

At some point, M&A and ECM markets will recover. Analysts at Bernstein now think this may happen in 2011, or maybe even later. However, while FICC revenues may be given a fillip from widening spreads and continuing low interest rates, things are unlikely to get much better than 2009. Van Steenis is predicting that FICC revenues will be down 25-30% at Swiss banks in the second quarter. This presents an interesting predicament for UBS, which has been hiring enthusiastically for its FICC build out.