“White elephant” i-bankers who aren’t generating enough revenue are still vulnerable to redundancies

After a recent wave of redundancies, Australian investment bankers are bracing themselves for what may be another turbulent few months.

Last week nine staff were cut from the equities sales and trading division at Bank of America Merrill Lynch, with a total of 40 redundancies expected across Asia Pacific. Deutsche Bank has also announced global staff reductions, and there is talk of downsizing at UBS, Nomura and Macquarie Group.

“The equities and fixed income sectors are under the most pressure because of the low volume in the markets, but well-stocked investment banking and research teams will also be under severe scrutiny,” says a senior headhunter who asked not to be named. There is still a lack of confidence in the market, specifically in the struggling areas, like derivatives, as seen by the recent cuts at BoA-Merrill. These sectors are not making money globally so there is both revenue and shareholder pressure to reduce costs, he says.

Joel Whyte, principal, Carmichael Fisher, agrees: “With ECM activity and equity trading volumes remaining soft, there are a number of employees at the bulge-bracket investment banks that may face redundancy before the end of 2012.”

Many of the finance professionals at risk were strong performers historically; they generated large revenues, and were rewarded with high base salaries and bonuses, says Whyte. But constrained by the ongoing uncertainty in global equity markets, they have not been able to deliver this year. “Unfortunately, although exceptionally talented, the current economic climate has meant these employees may have become white elephants to their employers. If there is to be another round of redundancies, these people will be the most susceptible to potential job cuts,” says Whyte.

Chris Cook, lead consultant, Jon Michel Executive Search, says it has been hard for investment banks to make money this year. “They have had to look carefully at their return on capital, and are reducing headcount in specific businesses that are less profitable, or, in some cases, asking management to reduce costs indiscriminately across the whole firm.”

Fear for the future

The hope is that the bulk of redundancies have already occurred, but there may well be more on the way. “As front-office headcount is cut, there is a correspondingly reduced requirement for the back- and middle-office functions that support those businesses, so the impact trickles down into the corporate infrastructure,” says Cook.

These redundancies have been across all levels, and decisions are specific to the construct of the team in question, he says. “The only overriding theme seems to be an appetite to reduce headcount at director level and give correspondingly more responsibility to AD- and associate-level staff.”

Redundancies are often made in the fourth quarter to preserve the bonus pool. Given profitability challenges, bonuses, if given, will probably be lower than last year – at least in investment banking.

“Last bonus season, many employees were either ‘zeroed’ (no bonus) or received a very low percentage of their base salary,” says Whyte, who predicts the same pattern at bulge-bracket firms this year.

“Prospects may be a little better at the big four banks where retail portfolios help with capital adequacy and there is less reliance on traditional institutional revenue streams,” says Cook.

However Whyte believes there is more positive sentiment in the market now, than at the beginning or even half way through 2012. He says that despite indifferent recent data out of China, Europe and the US. “I have seen increased activity, particularly in the equities investment management space (both fundamental and quantitative), with a number of prominent investment managers looking to attract quality senior staff both in Australia and across the region.”