The future may be mired in uncertainty and government debt, but one thing is at least certain: 2013 will not be a year in which investment banking revenues go through the roof. At best, 2013 will be a kind of sedate stroll through a complex and yet barren landscape of regulation and stagnation. At worst, 2013 will involve excitement of all the wrong kinds.
Analysts at JPMorgan are predicting stagnant revenues for investment banks over the next 12 months: growth of 2% is possible, they say. Morgan Stanley and Oliver Wyman think 2013 will be a time of stasis for investment banks. Separately, the analysts at Morgan Stanley have pointed out that the deleveraging and restructuring process at European banks is by no means complete: we’re only four years through a ten year cycle. Whatever's wrong, it’s not over yet.
Doing a UBS/RBS
If you work in investment banking, the worst fear for 2013 must be that another bank will follow UBS and RBS and lop off an entire limb.
UBS is lopping off a lot of its FICC business. The Swiss bank intends to make 10,000 redundancies over the next three years following its euphemistic and unexpected announcement of a ‘strategic acceleration from a position of strength’ in October.
Meanwhile, RBS closed its equities business in the first quarter of 2012, resulting in 3,500 redundancies.
At both UBS and RBS, these dramatic moves were the result of a sudden change of strategy. And if it's happened once, it could happen again – particularly in view of investors’ approval of slash and burn approach at UBS, whose share price has risen nearly 20% since the 'strategic acceleration' was announced.
Even though 2013 will be a year of stasis for revenues, it may therefore be one of big changes for individual banks. With top lines under pressure and higher costs and capital requirements squeezing returns, analysts at Morgan Stanley and Oliver Wyman say many banks will be forced to make “fundamental decisions” about the markets they operate in. In other words, dramatic RBS/UBS-style exits from entire businesses are possible.
These are our suggestions for good and bad outcomes at some key banks in 2013:
Barclays Investment Bank:
2013 has the potential to be a monumental year for Barclays Investment Bank. In February, Antony Jenkins – the CEO appointed to replace Bob Diamond, will present his plan for the future.
There have been fervent hopes that Barclays will ‘do a UBS’ and make dramatic changes. As we reported in early December, analysts at Goldman Sachs suggested that Barclays as a whole would be better off it spun out the investment bank, which is generating poor earnings and poor returns. But who would buy it? No one, says Goldman. Instead, Goldman analysts recommended either that Barclays cuts investment banking pay by 30% or that it makes 3,500 redundancies and pulls back from equities and investment banking in Asia.
This is the worst case scenario. In fact, it looks like the strategy day will be comparatively benign. A senior banker told us there will be ‘no major changes’ when Jenkins takes to the podium in February. However, Jenkins' inaction carries dangers in itself: analysts at Goldman point out that the market is in favour of dramatic restructuring at Barclays. If Jenkins doesn't deliver the goods in February, the stock may plummet and restructuring may need to be rescheduled for later in the year.
Best outcome: February will come and go. Jenkins will make a few minor job cuts to mollify investors. Investors will indeed be mollified and all will continue as before. There will be no big withdrawals from entire business areas.
Worst outcome: February will come and Jenkins will announce a near-total withdrawal from cash equities and the closure of Barclays' Asian M&A and capital markets business. All bonuses at Barclays will henceforth be based upon social value (this seems to be a real possibility), prompting Barclays' investment bankers to leave. Alternatively, Jenkins will announce very few changes in February, leading Barclays' share price to plummet, leading to dramatic changes in the bank's structure in June or beyond.
Unlike Barclays, Deutsche has already laid out its stall. Deutsche CEO's made a series of strategy presentations last September. Theirs is a policy of adjustments instead of wholesale alterations. The bank is aiming for a return on equity greater than 12% by 2015.
Deutsche wants to preserve its successful fixed income flow trading business, to invest in equities in the US and in corporate finance in Latin America. It wants to invest in flow trading in Asia, and to deepen its presence in India, China and the ASEAN countries.
In the midst of all this, Deutsche will be making redundancies. It aims to remove €1.1bn of costs per annum from the corporate and investment bank by 2015. Cuts will come in infrastructure, equities and corporate finance. However, Deutsche is trimming, not slashing: no business areas will be cut.
The real danger facing Deutsche in 2013 is not that it will abruptly decide to cut an entire business area, but that its joint CEOs will be unseated by scandal. In particular, it remains unclear how Anshu Jain will deal with the Libor-fixing issues which proved fatal to Bob Diamond and which have resulted in a $1.5bn fine at UBS. Unlike Sergio Ermotti, the CEO of UBS, Anshu Jain was in a senior position at Deutsche Bank at the time the bank’s alleged involvement in Libor-fixing. Jain was co-head of the corporate and investment bank from 2004 and Deutsche is alleged to have manipulated Libor rates between 2005 and 2007. As Spiegel points out, ’Libor rates were determined in the global markets division, which Jain formerly headed.’
This looks bad for Jain. So far, he has sought to distance himself from the Libor allegations. In November, he declined to attend a German Libor hearing. However, if Deutsche is implicated in Libor manipulation in 2013 and if emails similar to those sent by traders at UBS and Barclays surface in relation to Deutsche, Jain could find it far harder to remain aloof. “Jain is being weakened by the Libor investigation,” analyst Andreas Plaisier at Warburg Research in Frankfurt, tells us: “If he is seen as being responsible for any Libor fixing it could make it very hard for him.
While Jain risks serious reputational damage from Libor-fixing allegations, his co-CEO Jürgen Fitschen is himself facing an investigation for ‘severe tax evasion’. Deutsche is also accused of tax evasion related to the trading of emissions certificates. As the bank falls into a swap of scandal, one or both of its new CEOs could be compelled to stand down. And if this happens, Deutsche Bank's strategy may yet change.
Best outcome: Libor and fraud investigations will fade into obscurity, Deutsche will retain its joint CEOs and will continue to win market share from rivals who pull back from the fixed income business.
Worst outcome: It becomes apparent that Deutsche was a key player in the Libor fixing scandal. Anshu Jain is forced to resign in the manner of Bob Diamond. Deutsche's investment bank loses a key champion and Deutsche's management board decides upon a dramatic change in direction, seriously paring back the investment bank and focusing solely on the successful fixed income business.
Like Barclays, Credit Suisse faces some serious challenges in the year to come. Analysts are pressuring the bank to trim its fixed income currencies and commodities (FICC) business in the manner of UBS. So far, this hasn't happened.
“We would like to see CS take a more decisive approach to closing businesses in FICC,” said analysts at Berenberg in a note from July. UBS and Credit Suisse made similar mistakes in building up their fixed income businesses after 2008, they suggested.
Morgan Stanley also detected similarities in Credit Suisse and UBS’s fixed income businesses. “CS and UBS struggle to position themselves in this [fixed income] market segment,” they said in November. - “The investment that both CS and UBS put into this business post- 2008 appears to have resulted in little return on investment.”
While UBS has taken an axe to fixed income, Credit Suisse has so far satisfied itself with tinkering around the edges. Within fixed income, it’s cutting a few select areas: namely CMBS origination, EM FX trading, and parts of its repo business.
This may not be the end of the matter. Analysts at Bernstein point out that Credit Suisse’s share of fixed income sales and trading is just 3.8% and falling. There are rumours that Gael de Boissard, the fixed income banker recently appointed as co-CEO of Credit Suisse investment bank, has plans to cut the business heavily in 2013.
Best outcome: Gael de Boissard acts as a defender for Credit Suisse's income business. Everyone takes a little pay cut, but Credit Suisse uses its success in electronic equities trading and its new(ish) Onyx fixed income algorithm to build an amazing fixed income electronic trading platform which saves the day.
Worst outcome: Gael de Boissard kills his darlings, lynches the fixed income business and retains a core of electronic trading specialists.
Morgan Stanley may also have to face some harsh realities in 2013. Much like Credit Suisse and UBS, the bank has invested in heavily in fixed income but has little to show for it. According to Bernstein’s analysts, Morgan Stanley’s fixed income market share is a stable 4.6%, which doesn’t exactly put it in the same league as the market leading ‘flow monsters’ like JPMorgan, with a share of 11.4%. Nor does Morgan Stanley appear to have captured much of the increase in FICC revenues during 2012. Morgan Stanley is also struggling against a poor credit rating after it was downgraded to two notches above junk by Moody’s in April, creating a danger that some institutional investors would be blocked from using Morgan Stanley as a counter-party. .
Like Credit Suisse, Morgan Stanley has got a strategy to address its FICC problems. However, its approach is a little confused. Come 2015, it intends to reduce risk-weighted assets in its fixed income division by 20%. However, it also wants to simultaneously increase its FICC market share to 8%. Morgan Stanley’s fixed income strategy is predicated on these contradictory aims: cutting risk weighted assets and yet increasing market share.
The aim to increase market share may be one reason why Morgan Stanley has shown no appetite for big staff cuts. There have been rumours of a ‘radical downsizing’ of the bank’s fixed income business, but widespread redundancies have yet to manifest themselves. Instead, Morgan Stanley has promoted Colm Kelleher, a former fixed income trader, as sole head of its investment bank. Analysts at Bernstein point out that Morgan Stanley CEO James Gorman has emphasized his intention of sustaining the bank as a, "flow trading house in credit and rates, facilitating customer trades.”
2013 will be a make or break year for Morgan Stanley’s fixed income business.
Best outcome: Morgan Stanley defies gravity, cuts risk weighted assets and miraculously achieves a big increase in fixed income market share.
Worst outcome: Morgan Stanley falls down to earth. A lot of fixed income professionals are made redundant.
Finally, UBS’s fixed income dismemberment may not be the end of the bank’s woes. There have been questions over the bank's willingness and ability to pay bonuses this year. Very poor bonuses could lead to low morale and staff exits (assuming there are places for disaffected staff to go) in 2013.
As we pointed out in November, UBS also wants to pull back as a market maker in fixed income and yet maintain a presence in primary debt capital markets. Various pundits have suggested these two aims are incompatible. Dirk Becker, an analyst at Kepler Capital Markets, says UBS’s DCM business will die a slow death and be “marginalized quarter by quarter,” as it loses clients to banks which are still trading fixed income products in the secondary markets and can therefore offer a better perspective on market events.
UBS has argued that this won’t happen and that it will be perfectly able to support its DCM business with a dedicated trading team working only with the debt UBS issues for clients.
Best outcome: UBS's share price keeps rising. Cash bonuses aren't great, but everyone's very happy to work there because the equity component of bonuses keeps appreciating. UBS's DCM business keeps winning business from primary issuers who are ambivalent about the bank's lack of secondary trading capability.
Worst outcome: UBS pays atrocious bonuses and starts hemorrhaging staff from mid 2013 onwards. The DCM business shrivels slowly on the vine, dies, and everyone loses their jobs.