Despite the recent optimism around recruitment within investment banks, there remains a sense that 2014 could bring further gloom. Most major institutions are still in a state of flux, preparing to pull out of certain countries, pare back business areas or withdraw from sectors where they can’t gain a market leading position.
The bleak prognosis from Deutsche Bank analysts earlier this month that 20,000 more jobs were set to be eliminated from investment banking globally has distracted away from the fact that they are predicting a 5% uptick in revenues in 2014. The problem is that revenues are likely to be down by 6% on 2012 this year, following an average 18% decline in revenues within bank’s traditional profit powerhouse, FICC. What’s more, the cuts next year are not likely to be casual trimming in order to pare back costs, but exits of entire business lines where banks can’t “truly be a top-tier competitor”.
Where’s the pain likely to occur?
1. G10 rates
Banks are likely to hit their rates teams harder than any other divisions, suggest Deutsche analysts, due a combination of reduced profitability and a move towards electronic trading. As the chart below from Coalition shows, rates was a huge money-maker for banks in 2007-09, but has been increasingly squeezed over the past four years and is getting smaller. This year has been terrible, in particular, as liquidity has dried up and tapering is back on the agenda and revenues look set to slip by 42% on last year. What’s more productivity per head, which scored an average of 5.1 out of ten from 2008-2012, slipped to 3.1 this year, according to analysis by research firm Coalition. Credit Suisse has already said it's pulling back from rates, so expect some big cuts.
2. Easily commoditised back office jobs
Of the 20,000 job cuts predicted by Deutsche analysts, 14,000 are likely to come from the back office – after all, if the front office is shrinking, there’s less need for support functions. Shifting back office jobs to lower cost destinations is nothing new, but ‘vanilla’ processing roles like reconciliations and settlements are likely to be downsized next year, or moved away from major financial centres entirely, says Mike Hartwell, managing director of specialist operations recruiters Hartwell Buck.
“In the next five years there will be very, very few operations functions carried out in the City or New York,” he says. “Trade support and assistants, which have been more actively recruited this year, are now falling under front office headcount to avoid being offshored.”
3. European banks
Fixed income divisions of European banks have already felt more pain than their U.S. counterparts, with headcount falling by 12% and 8% throughout 2013, according to Coalition data. When it comes to market share in FICC, the global ‘powerhouse’ banks like Citi, JPMorgan and HSBC have grabbed an extra 7.4% since 2006, suggest Deutsche analysts, at the expense of European firms and traditional investment banks. What does this mean? In an environment when banks start focusing on their strengths the likes of SocGen and UBS, who are gaining in equities, could pull back from FICC even further – the latter could even exit the business area entirely, suggests Deutsche.
An obvious choice, considering the number of investment banks who have put their commodities units on the block in the past few months. JPMorgan is looking to offload its physical commodities business, as is Morgan Stanley, while Deutsche Bank eliminated 200 jobs when it shuttered its division earlier this month. There are some rays of sunshine – Goldman has hired two new senior people, Charles McGarraugh and Don Casturo, for its commodities and metals business, Wells Fargo is making a few hires, so is ABN Amro in Asia. However, banks have yet to trim back their businesses in line with the decline in revenues – commodities have slipped by 14% across the 10 major investment banks this year, says Coalition, but employee numbers have fallen by just 4% on last year. This, combined with the prospect of more banks pulling out, makes for a challenging 2014 for commodities professionals.
5. The new ‘specialist’ firms
Assuming that this genuinely is the year that investment banks bite the bullet, ditch the ‘Premier League’ syndrome of trying to be the best in every business and actually choose a specialism, anything outside of the tier one businesses – or the global powerhouses – will have to rebrand. This means, according to a report in May from Boston Consulting Group, either being a ‘haute couture’ bank, providing structuring advice, a relationship expert or an advisory specialist. In other words, should this option be chosen, anyone in a non-core business will be cast out. This is, however, a worst case scenario and no banks have yet taken such drastic action.
6. ECM bankers
After a much improved year, around 10% uptick in revenues in 2013 within the major firms, equities (and equity derivatives) is the new darling of investment banking where hiring will almost certainly happen next year, according to senior Barclays and Morgan Stanley bankers. This increase in activity will inevitably lead to busier times for equity capital markets bankers. Will this mean more hiring? Unlikely. Instead, suggest Deutsche analysts, investment banks should ‘sweat’ their existing headcount harder, rather than over-hire, and then have to fire again, as they did in 2010. So, while ECM bankers are unlikely to be laid off next year, they could be made to work decidedly harder.