Trading and Profit Falloff Threatens Layoffs and Shrunken Bonuses

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The reality of weak top-line performance at the largest investment banks is belatedly sinking in, raising concerns staff cuts could hit late this year if industry-wide volume and profits from trading don't pick up within a few months.

Over the past 12 months, many global institutions aggressively rebuilt trading and investment banking teams they had cut back during 2007 and 2008. They were rewarded with healthy profits in the second half of last year and early in 2010. But the past quarter's soft capital markets and continued sluggish pace of deal activity suggest the future will be less bright than the recent past. That portends shrinking bonuses and possible job cuts unless revenues rebound soon.

Stephane Rambosson, managing partner of London and Paris-based search firm Veni Partners, told Financial News:

Some banks are thinking about whether to cut in the second half. In light of the Q2 results, it is clear the bonus pool will not be as sweet as last year, so the question really becomes: when do banks let people go, rather than if.

An unnamed institution's UK investment banking chief told the paper "there will absolutely be cuts unless there is a dramatic turnaround." He predicts banks could cut 15 - 20 percent of staffing, with emphasis on debt and equity capital markets and M&A advisory, where the largest shortfalls occurred.

Revenue Down 15.3 Percent From 2009-Early 2010 Pace

At Goldman Sachs, second-quarter revenue from trading and principal investments shrank 36 percent from the first quarter and investment banking revenue fell 23 percent. At JPMorgan, investment banking fees dipped just 3 percent from the first quarter, but fixed-income markets revenue dropped 35 percent and equity markets revenue dropped 29 percent. While Morgan Stanley's second-quarter trading results were widely described as a paragon of stability - flat equity revenues and a 16 percent sequental decline in fixed income - after subtracting gains attributable to the widening of the company's own credit spreads, its trading revenue came in down 9 percent and down 36 percent, respectively.

Financial News estimates that last quarter's revenues were 15.3 percent below the average of the previous five quarters, among the six big investment banks in the U.S. and Europe that have reported second-quarter results through Monday. Sales and trading revenues were down 20.4 percent on average. Meanwhile, those banks that provided data had raised their headcounts 5.1 on average in the 12 months ended June 30. And that doesn't include "some of the most aggressive recruiters over the period," including Barclays Capital, Deutsche Bank and Nomura, which have not yet reported second-quarter results.