Second half redundancy risks, bank by bank, business by business

Redundancies are both here and coming.

The New York Post said yesterday that BarCap, JPMorgan, Goldman, Morgan Stanley are all preparing to cut staff.

The horse has already bolted. Barcap has already eliminated 50 underperformers in equities, Credit Suisse made 25 equities cuts in April. Nomura and HSBC have already made some cuts too.

None of this is unexpected. As Nomura analyst Glenn Schorr's helpful graph made clear back in December 2010, banks hired a lot of people last year and didn't have much to show for it.

Equally, a March report from Morgan Stanley and Oliver Wyman predicted that banks would need to cut 20,000 people, mostly in the middle and back office.

It doesn't help that revenues weren't strong in the first quarter. Equities sales and trading revenues at major banks were down 3% year on year; FICC sales and trading revenues were down 14% and ECM revenues were down 2%. Only M&A and DCM were up on Q110, with increases of 19% and 12% respectively.

"There are reviews going on everywhere because revenues are down. Everyone's reviewing everything, but the businesses being targeted for cuts vary from bank to bank," says one headhunter who's been helping benchmark people for redundancy. "In some business areas the revenues are still there."

Here's where the cuts could happen on a bank by bank basis.

UBS Investment Bank

Compensation ratio: 45% in Q111

Revenue change Q111 vs. Q110: -14%

Headcount change Q111 vs. Q110: +1,265 people

Redundancy risk: High

UBS's compensation ratio looks manageable, but the bank is still seen as a significant redundancy risk. The big issue is the FICC business and whether the current level of staff following last year's FICC build-out is sustainable given that it was based on a revenue target which now appears to have been unrealistic.

Last month, senior UBS bankers reportedly said the FICC targets were "aspirational" and would be "extremely difficult to achieve." If this is the case, the implication is clearly that headcount will need to be trimmed.

In February, Oswald Grubel said that if revenues don't come through, they will have to cut expenses "very quickly."

In the first quarter, FICC revenues at UBS were down 17%, ECM revenues were down 33% and DCM revenues were down 1%. M&A (up 31%) looked good, as did equities (up 4%).

UBS's predicament isn't helped by the strength of the Swiss franc, which is increasing its Swiss cost base measured in dollar and sterling terms, or by yesterday's admission that it needs to pay more in Asia and the US, where it will be offering multi-year guarantees. If staff are guaranteed elsewhere, the clear danger is that Europeans could bear the brunt of cost reductions.

UBS is, however, hiring junior and mid-ranking M&A bankers.

BarCap

Compensation ratio: 43% in 2010, but up from 33% in 2009.

Revenue change Q111 vs. Q110: -14%

Redundancy risk Moderate to high

Alongside this week's elimination of equities underperformers, Barcap cut 600 people globally and 200 in the UK in January. Headhunters claim more reductions are imminent, particularly in fixed income.

BarCap has cost issues. Pay per head was up 20% last year and costs at the bank are close to the target maximum of 65% of revenues. There's some room to cut bonuses, but not as much as there would have been once: 60% of compensation costs at BarCap are now fixed.

Nomura

Compensation ratio: 46% for the year ending March 2010. A big improvement on 157% in 2009.

Revenue change Q111 vs. Q110:+11%

Redundancy risk: High

Nomura had a very good first quarter of 2011. It says it aspires to increase its wholesale banking revenues by 35-40% and in its recent investor presentation it said it wants to elevate European ECM and M&A to the "next level."

However, this doesn't mean everything's great. Nomura's overseas operations generated a pre-tax loss of 9.7bn yen in its fiscal fourth quarter, more than triple its loss in the third quarter. Net income in its wholesale division fell 96.2% for the year ending March 31st 2011.

Accordingly, Nomura's April wholesale division banking update made it clear that this is a year of "transition" in which profit will be the focus.

Underperforming areas are being identified; equity derivatives have been singled out as an area of weakness and in EMEA, Nomura said it wants to "re-energise and monetise" equities. Globally, the bank said it's on a long term build in FX and securitised products and that it wants to fill coverage gaps in rates.

Nevertheless, Nomura's already made redundancies this year in equities, M&A and prime broking, although in equities it's allegedly preparing for upgrading.

And as the Financial Times pointed out last week, this is a crucial year for Nomura. It both needs to find new revenues and to curtail costs. With investment banking revenues as a whole stagnant, that could prove challenging. The risk of redundancies remains relatively high, particularly in equities where revenues were down 16% year on year in the first quarter.

Morgan Stanley

Compensation ratio: 42% in Institutional Securities during 2010; 54% in Q111.

Revenue change Q111 vs. Q110: -33% (Institutional Securities).

Redundancy risk Moderate to high

As we reported yesterday, Morgan Stanley is cutting costs, but not necessarily in the investment bank. In a presentation this week, it said it still wants to increase its market share by 2% in fixed income and that it's focused on pushing into fixed income electronic trading.

However, Morgan Stanley's fixed income trading operations performed particularly badly in the first quarter, with revenues down nearly 35% year on year. Redundancies are a clear possibility, if only to make way for upgrading.

Goldman Sachs

Compensation ratio: 41% in Q1.

Revenue change Q111 vs. Q110: - 7%

Headcount change Q111 vs. Q110: + 2,300 people

Redundancy risk Moderate

Goldman conducted its ritual elimination of the bottom 5% of performers in the first quarter.

The New York Post is predicting further cuts to come.

Although Goldman's compensation ratio looks manageable, this may make sense. The bank added 2,300 people between Q110 and Q111, but revenues fell 7% over the same period.

The biggest reduction was in FICC (-28%), which is likely to be at the forefront of cuts in the second half.

Bank of America Global Banking and Markets

Revenue change Q111 vs. Q110: -22%

Redundancy risk: Moderate in markets

BAML did a lot of markets hiring last year, but performed atrociously in the first quarter: fixed income trading revenues fell 34% year on year; equities trading revenues fell 18%. This was offset by an outstanding performance in M&A, were BAML is focusing this year's recruitment push.

There's a clear danger of redundancies unless markets revenues pick up in the remainder of 2011. Markets employees in the US are likely to be most at risk: this year's strategic priority is building the international business.

Credit Suisse Investment Bank

Compensation ratio: 46% in Q111

Revenue change Q111 vs. Q110: -6%

Revenue change Q111 vs. Q110: + 800 people

Redundancy risk Low

Credit Suisse has already made some 25 equities cuts. Brady Dougan has been less explicit than Oswald Grubel about the need to trim costs unless revenues come through and the bank's 1,300 hires last year paid off in the first quarter. Credit Suisse says it's still hiring in commodities, FICC and emerging markets, but that numbers aren't dramatic.

The bank did far better than rivals in Q1 and is seen as less of a redundancy risk overall. M&A revenues in particular soared 74%.

JPMorgan Investment Bank

Compensation ratio: 39% Q111

Revenue change Q111 vs. Q110: +1%

Headcount change Q111 vs. Q110: + 1,583 people

Redundancy risk: Low in the front office

JPMorgan also had a good first quarter. It's compensation ratio also looks eminently manageable. However, it is cutting costs.

At JPMorgan's February Investor Day it said it wanted to cut 3,000 jobs in the back office but to build in prime brokerage.

Deutsche Bank Corporate and Investment Bank

Compensation ratio: 35% Q111

Revenue change Q111 vs. Q110: -3%

Headcount change Q111 vs. Q110: -300 people

Redundancy risk: Low in the front office

Deutsche is trying to get the cost ratio in its Corporate and Investment Bank down from 69% to 65%. It also has ambitious plans to achieve a pre-tax RoE of more than 20% even after 2013.

In the short term, Deutsche is cutting €1.8bn of back and middle office costs in a 'complexity reduction initiative.'

Citigroup

Revenue change Q111 vs. Q110: -25%

Redundancy risk: Low.

Citigroup is in rebuild mode. Redundancies are not anticipated in the second half., At least, not at this stage.