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J.P. Morgan’s 14 predictions for investment banking revenues and jobs in 2016 and beyond

Investment banking jobs in 2016

The forecast from J.P. Morgan doesn't look good

Will 2016 bring a resurgence in banking jobs and banking revenues? Nope. – Not according to the European banking research team at J.P. Morgan, led by Kian Abouhossein.

Abouhossein and colleagues have just issued an epic report on the outlook for investment banking revenues over the next 12 months and in years to come. It doesn’t look entirely clement, particularly if you work in the back and middle office, or at Credit Suisse.

The charts below summarize Abouhossein’s verdict.

1. FICC revenues are not coming back

2009 to 2012 were anomalous years for fixed income currencies and commodities (FICC) revenues. Don’t assume they’re coming back (or that the level of FICC headcount associated with those revenues is sustainable long term).

JPMorgan revenue chart

2. Equities and IBD divisions are therefore going to become more important 

As FICC flounders, so equities and IBD are becoming more important. These are the divisions to work in between now and 2018.

JPMorgan Equities and IBD revenues

3. Within FICC, you don’t want to work in structured credit trading, credit trading, emerging markets debt trading, or commodities. You do want to work in rates trading, or FX trading. Within equities, you don’t want to work in equity derivatives

Not all areas of FICC are bad, however. As the chart below shows, rates and FX revenues (and by implication, jobs) are expected to benefit from increased macro volatility.

JPMorgan revenues by product

4. The investment banking industry is stuck back where it was in 2005 and 2006

Overall, however, the investment banking industry is in stasis. This is not a growth sector.

JPMorgan 2005 and 2006

5. Credit Suisse looks particularly over-exposed to low growth credit trading 

Credit trading is not expected to thrive in the coming years. Unfortunately, Credit Suisse has many eggs in this basket.

JPMorgan FICC

6. Cost income ratios at European investment banks have spiraled out of control, with BNP and Credit Suisse the worst offenders

If you thought European investment banks have been cutting costs, you were wrong. BNP Paribas especially has a big cost problem in its corporate and investment bank.

JPMorgan cost income ratio

7. European banks’ cost cutting targets are inadequate. In the case of Credit Suisse, they’re also based on unreasonably optimistic revenue predictions 

Credit Suisse thinks it can cut costs by just 3% and increase revenues by 7%. J.P. Morgan’s analysts think this is unrealistic and that Credit Suisse (along with other European investment banks) will need to upscale its cost reductions in future.

JPMorgan cost cutting european banks

8. Credit Suisse has done most to cut compensation in the investment bank since 2009. UBS has done most to cut headcount. So far, however, most cuts have been due to the ‘juniorisation’ of front office jobs

Credit Suisse has cut compensation costs in the investment bank by a massive 39% since 2009. Like most other banks, however, the emphasis so far has been on clearing out expensive senior bankers rather than addressing structural cost issues.

JPMorgan compensation cuts

9. The big issue now is cutting costs in the middle and back office 

The real issue for 2016 and onwards is the dramatic increase in infrastructure costs, driven by regulatory and IT spend. Unless banks can get this under control, they will never achieve the sort of return on equity investors are looking for.

JPMorgan control costs

10. Deutsche Bank especially needs to cut infrastructure staff

In 2011, Deutsche Bank had 1.7 infrastructure staff to every front office banker. In 2015 it had 2.4. Unsurprisingly, the bank’s new strategy is focused on cutting complexity in the back and middle office.

Deutsche bank infrastructure

11. In fact, Barclays, Deutsche Bank, BNP, SocGen, and to a lesser extent, Goldman Sachs, need to make some enormous cuts to their back office headcount to maintain a low double digit return on equity 

J.P. Morgan thinks Deutsche needs to cut 25% of its back office headcount to get its return on equity back to 12% after regulations. Barclays needs to cut 30%.

Header back office cuts

Back office cuts again

12. Revenues per head are far, far, higher at US investment banks than at most Europeans

Staff at US investment banks are far more productive than staff at Europeans. At Goldman Sachs, revenue per head is $1.2m. At Barclays Investment Bank it’s $595k.

Header revenues per head

Revenues per head

13. If you work in fixed income now, you should be at Bank of America, Deutsche, Citi, J.P. Morgan or Goldman Sachs

J.P. Morgan predicts that the winners in sales and trading in future will be those which already enjoy a top five position in terms of market share. This applies to both equities and fixed income, as depicted by the charts below.

Where to work in fixed income

14. If you work in equities now, you should be at J.P. Morgan, Goldman Sachs, Credit Suisse, or Bank of America

Where to work in equities


Photo credit: Moodboard/ by Moodboard/Thinkstock

Comments (4)

Comments
  1. Just wondering, what is the sources of these prediction. I try to locate this report, but cannot find it. Would you be so kind as to provide the name of the report? Thanks!

    • Hi Gabriel. Sorry – the full report isn’t publicly available.

  2. Very useful,
    I understand that the report is not publicly available: Who can get access to this report ?

  3. You mention to avoid structured credit trading, credit trading, and emerging markets debt trading. What if you’re just starting out your career and are genuinely interested in those products – should you still avoid them? I’m more considered about things like employability and exit opportunities down the line (2017-2020). I’m not considered about a weak bonus as a first or second year analyst. I know markets work in cycles, so could these areas still be rewarding careers for a young person down the line or are these areas only going to continue to decline? What products (credit, rates, etc.) and roles (sales, trading, desk analyst) are desirable or should be completely avoided – given that you’re just starting a sales & trading career? Any advice would be appreciated!

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