Morning Coffee: The worst career choice you can make in investment banking, and SocGen’s squeeze

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It’s beginning to look like a structurally doomed profession.

One of the things we do know about the investment banking industry is that things move in cycles – one year it’s tech IPOs that are hot, a few years later it’s CDS trading, then it’s Delta One derivatives and then it’s wealth management, and so on.  It’s never the greatest of fun when your own specialty is one of the ones that’s experiencing a downturn, but you can usually expect that the wheel will spin round again.

Sometimes, though, business lines do die. It’s not likely that you’ll see CDO-squared trading come back, for example.  Exotic FX and rates derivatives used to be a huge and high-paying industry in the 1990s, before a few big scandals blew the category away.  And when you look at sell-side equity research right now, there are plenty of reasons to detect a similar smell of long term decline.  With big clients like Blackrock cutting their spending on research by as much as 60%, the overall quality and extent of coverage is beginning to be seriously affected, according to a survey carried out by the CFA Institute.

In career terms, this means that today’s star analysts with long track records are becoming more and more expensive compared to the revenues they bring in.  The incentives are substantial for the banks to “juniorise” equity research, either moving the high-earners into investment banking where they can use their knowledge and relationships more profitability, or engineering them out of the bank entirely.  Although this might seem like good news for ambitious young researchers, they may find that when they get the coveted head-of-team role, the money isn’t anything like as good as it used to be and the resources far tighter.  They’ll certainly be very lucky to get juniors of their own.

And that’s at the bulge bracket franchises with a full complement of bankers, derivatives desks and internal clients to support.  In the small-cap space, profitability is always marginal and driven by IPOs rather than trading revenues.  In a market of falling research spend but no corresponding IPO boom, consolidation is seemingly inevitable and fewer franchises and coverage names are viable.

This was all expected as a result of MiFID2, of course, but the expectation was also that independent research firms would come in to fill the gap, and that the buy-side would spend more on hiring their own analysts. So far, that doesn’t seem to have happened. It looks like the prospects for pay and hiring in the research space are dependent on one thing that could take a very long time if it happens at all – the possibility of a regulator admitting they were wrong.

If that does happen, of course, or if an IPO boom returns, or if banks find an alternative way to monetise equity research, the survivors of the current lean times might find themselves very much in demand. The culling of teams and coverage universes is in the process of creating a “Lost Generation” in the hiring pool.  But it looks like there might be a lot more pain to bear before any good news comes around.

Separately, did you know that after Deutsche Bank, SocGen was the next worst performing European bank stock over the last 11 years? The statistic comes from a Financial Times comment piece. The reason they picked that time period to calculate it is that 11 years is the period since Frédéric Oudéa took over as CEO.  Oudéa is the longest surviving chief executive of a European bank, and it’s an interesting question as to why SG doesn’t get anything like as much coverage (and shareholder pressure) as DBK.

It’s hard to really say that Oudéa has done a bad job. Unlike Deutsche, SocGen makes money – a 7.1% RoE is not particularly impressive, but it’s within hailing distance of the cost of capital and represents significantly higher profits than SG made when he took over.  The French bank has also stayed notably clear of multi-billion dollar conduct fines; even its settlement for US sanctions-busting was a fraction of what BNP Paribas paid.  But the share price numbers don’t lie – it’s a weak investment banking franchise, attached to a domestic retail franchise that’s fairly stagnant, and in the context of a capital base that looks thin relative to peers. The corporate and investment banking staff in particular should count themselves lucky if a Barclays-style activist investor doesn’t turn up in the next twelve months with a plan to cut jobs.

Meanwhile ...

Even without activists, the big French banks are pulling in their horns and cutting jobs in trading (Financial News)

HNA, the Deutsche Bank investor which John Cryan famously refused to meet, contributing to his dismissal, continues to sell down its position.  It turns out that its vote of confidence in the supervisory board was less than total – it had taken out hedging positions at a considerably higher price, significantly reducing its loss on sale (Bloomberg)

U.S. banks are slowly staffing up their European offices in preparation for Brexit – less than a thousand jobs have moved so far, but as many as 5,000 could be going in the long term (New York Times)

Although Blackrock have slashed the sell side research budget, their own fund managers are doing all right, with ten of them named to the FE Analytics “alpha list” (Financial News)

Apparently Solium Capital, the wealth management tech firm bought for $900m by Morgan Stanley, used to let a craft brewer pay for its stock option administration services in beer (FT)

One of the great disagreements on trading floors and banking offices everywhere – does listening to music help you work?  The experimental answer appears to be that this is a genuine “two types of people” issue – if you’re boredom-prone, loud and complex music can help but if you’re not, it’s a distraction (BPS Research Digest)

Stepping into big shoes is always difficult; Platinum Asset Management’s new CEO has seen the share price halve since he took over from the company founder, but is trying to keep up morale (and maintain a value-stock approach) (Bloomberg)

And Citi is testing out an AI system in Hong Kong for approving commercial loans based on machine learning analysis of corporate accounts. (SCMP)

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