Bank by bank, here's where costs look dangerously high now

With the exception of RBS, which is due to report tomorrow, most big banks with big investment banking operations have now reported their third quarter results.

Blame the Federal Reserve, blame the weather, blame regulation, blame unfavourable comparators thanks to the European Central Bank, but fixed income salespeople and traders had a bad three months. This has affected margins. At some banks, costs have risen substantially as a percentage of revenues.

Not all banks are in the same situation, however. Our research reveals that U.S. banks have mostly done a good job of managing costs in the third quarter and throughout 2013 to date. European banks mostly haven't.

These are the banks now in the danger zone, and the banks that look nice and safe.

1. Credit Suisse's Investment Bank:

Costs=90.8% of revenues in the third quarter, up from 84.6% in Q3 2012.  

At Credit Suisses's investment bank, costs rose to 90.8% of revenues in the third quarter, up from 84.6% of revenues in the third quarter of 2012. In the first nine months of 2013 costs were 84.6% of revenues, up from 82.9% of revenues in the first nine months of 2012.

Credit Suisse's investment bank needs urgent attention. The bank is pulling back from parts of rates trading and making 65 redundancies in London.

It's a start, but still seems a little timid given its cost issues.

2. BNP Paribas' corporate and investment Bank, advisory and capital markets business 

Costs=81.6% of revenues in the third quarter, up from 67.8% in Q3 2012.

In the advisory and capital markets business of BNP's corporate and investment bank, costs rose to 81.6% in the third quarter, up from 67.8% the year before. In the first nine months of 2013 costs were 75.1% of revenues in the business, up from 69.6% of revenues in 9M 2012.

BNP's costs are less fearsome than Credit Suisse's, but they are rising fast.  For a French bank which has prided itself on its cost control in the past, this looks a little scary. BNP's 'simple and efficient' cost cutting programme looks a little tame.

3. Barclays' Investment Bank 

Costs=77% of revenues in the third quarter, up from 63.8% in Q3 2012.

Costs at Barclays' investment banking accounted for 77% of revenues in Q3, up from 63.8% in Q3 last year. In the first nine months, costs were 65% of revenues, up from 63% in the first nine months of 2012.

If you work at Barclays, there are reasons to be worried. No one mentions Bob Diamond nowadays, but one of Bob's adages was that costs in any business should never rise significantly above 65% of revenues. New CEO Antony Jenkins hasn't achieved that in the investment bank in the third quarter (although he has - just - in the first nine months of the year).

A new 'Transform' initiative is due to be unveiled at Barclays in February 2014. Barclays' investment bankers need to watch out. 

4. Bank of America Merrill Lynch's markets business 

Costs=85.5% of revenues in the third quarter, up from 78.6% in Q3 2012

Costs at BAML's markets business accounted for 85.5% of revenues in Q3, up from 78.6% in Q3 last year. In the first nine months, costs were 70.2% of revenues, down from 76.96% in the first nine months of 2012.

Bank of America's markets business isn't in the same quagmire as Credit Suisse's investment bank, but it is in a puddle. Costs last quarter were worryingly high.

Less worryingly, Bank of America has improved the efficiency of its markets business during the first nine months of this year taken as a whole. BofA has been cutting a lot of jobs, but mostly in mortgage banking.  Its markets bankers need to hope that the last quarter was an anomaly.

5. UBS's investment bank

Costs=85.3% of revenues in the third quarter, down from 95.3% of revenues in the third quarter of 2012

Costs at UBS's investment banking accounted for 85.3% of revenues in Q3, down from 95.3% in Q3 last year. In the first nine months, costs were 70.3% of revenues, down from 90.3% in the first nine months of 2012.

UBS's investment bank has done a good job of cutting costs, but needs to do a lot more if it's to get out of the danger zone entirely. Fortunately, it recognizes the problem. UBS has a plan to cut 10,000 jobs from its investment bank. So far, it's only trimmed 2,414.

 

6. Citigroup's institutional clients group, securities and banking business

Costs=70.9% of revenues in the third quarter, down from 71.8% of revenues in Q3 2012.

Costs at Citi's securities and banking business accounted for 70.9% of revenues in Q3, down from 71.8% in Q3 last year. However, in the first nine months, costs were 56% of revenues, down from 68% in the first nine months of 2012.

Citi's investment bankers look safe: the bank has done a good job of controlling costs and is in good shape to hire in 2014.

7. JPMorgan's corporate and investment bank

Costs=61% of revenues in the third quarter, down from 64% of revenues in Q3 2012.

Costs at JPMorgan's corporate and investment bank accounted for 61% of revenues in Q3, down from 64% in Q3 last year. However, in the first nine months, costs were 60% of revenues, down from 63% in the first nine months of 2012.

Say what you like about Jamie Dimon, but he runs a tight ship from a cost perspective. Like Citi, JPM looks ready and able to hire for its investment bank in 2014.

8. Goldman Sachs 

Costs=67.8% of revenues in the third quarter, down from 72.5% of revenues in Q3 2012.

Costs at Goldman Sachs accounted for 68% of revenues in Q3, down from 73% in Q3 last year. In the first nine months, costs were 72.5% of revenues, up from 72.3% in the first nine months of 2012.

Like JPMorgan' Goldman Sachs has done an admirable job of cost control in a challenging market. Both US firms make European banks look like lax spendthrifts. Bankers at Goldman look set to keep their jobs. However, they will almost certainly take a big hit to their pay, with overall compensation cut 35% year-on-year in the third quarter.