Q&A: A former head of German fixed income at Goldman Sachs-turned headhunter, predicts the future
Sina Schahram-Nia has studied at Berkeley and the London School of Economics. In 1991 he joined the fixed income sales and trading department at Salomon Brothers. Later he moved to Goldman Sachs and Bank of America, where he acted as head of fixed income sales for German speaking countries. Several years ago, he started his own executive search firm, Everest Principals in Frankfurt.
We asked him what he thinks is coming next for banking.
Q: Regulatory changes and Basel III suggest big changes are coming for investment banks. Do you agree?
A: Yes. The cost of capital for banks is going to increase significantly. In 2010, McKinsey calculated that US and European banks had a return on equity of 7-7.9%. It currently looks like the capital cost for banks will be 12%. At this level, banks are going to struggle to be profitable and their business model will need to change.
Q: What will be the impact on employees? Are you expecting a lot of redundancies as banks seek to reduce their cost base?
Absolutely. You should not forget that compensation expense represents the largest cost for banks. You only have two screws on the personnel side costs: job cuts or a reduction in average staff costs per employee.
Q: Does this mean people won't earn big money in banking any more
No, there will still be people earning a lot of money in banking in the future. However, the times when you could get paid very well by simply working in a particular area of banking have disappeared.
This will have implications for the industry's attractiveness. In the past, graduates who've had the choice of investment bank or strategy consulting have chosen banking. In future, they may put a career within strategy consulting first.
Those who do go into banking will not be tempted solely by the carrot of earning big money any more.
Q: What happens if you lose your job in this downturn? Is the industry going to come
back?
There have always been cyclical ups and downs in banking. In the past, if you lost your job and were unemployed you could almost always find a new job once your area of expertise rebounded.
However, this time the situation could be very different. For example under Basel III, large parts of the business could become unprofitable. What we are seeing now is potentially a fundamental industry change. Some departments are likely to be closed permanently. Similar to the dinosaurs which became extinct, some areas of banking might also be heading in this unfortunate direction. The option to move simply from Bank A to Bank B has disappeared for now.
Q: So what do you do?
You need to face some big questions. If you want to remain in the financial world, what else can you do? What competencies do you have that could be used on the buyside?
Losing your job in this environment can be a real challenge: many financial services professionals have a skillset which is barely relevant outside the financial industry. For example, most bankers are financial experts, not business management generalists.
Really, there are two options: you can go into complementary areas within the financial industry or you can move into something completely different and end with this chapter in your life. I suspect many will opt for the latter option.
Q: What do you think banks' business model will look like in future?
You can say with certainty that businesses which don't require a lot of capital will increase in importance. This includes all areas in which fees are earned, like for example asset management or corporate finance. If you work in banking you need simply to understand that the world has changed. You have to adapt to the new paradigm, or go the way of the dinosaurs.
