It seems more redundancies are coming. They've been flagged for a while. As Financial News points out today, it's not so much that these are challenging times, it's that these are challenging times and they have persisted. Banks prepared for a brief downturn need to cut more costs as a result.
In the circumstances, where should you be positioned career-wise (assuming, of course, that you have a choice)?
Stephen Jennings, chief executive of Renaissance Group, owners of Russian investment bank Renaissance Capital (which had been hiring, but has more recently made redundancies), offered some indications in a weekend interview with the Moscow Times.
"The killing zone will be in the middle [of the banking industry]," said Jennings: "The industry will end up with a barbell of a small number of these enormous, essentially commercial banks, which have investment banking operations. On the other end, you will have much smaller, more entrepreneurial, primarily private businesses, and the accent will be on relationships, reliability, high levels of service, entrepreneurialism, which harks back to an earlier era."
Jenning's verdict isn't foolproof: it suggests a Citigroup or Bank of America, or maybe even Nomura (in Asia) might be a good bet - irrespective of their downgrade last week by Moody's, a downgrade which has been mooted as the catalyst for a new banking hierarchy with those at the top (RBC, HSBC, SocGen, UBS, Deutsche) stealing share from those at the bottom (Nomura, Citi, BofA).
Death spot avoidance might be better determined by function. In this case, imminent death spots look like:
Financial News suggests traders will bear the brunt of approaching equities redundancies. Jefferies' results last week confirmed that equities has been having a hard time: Jefferies' Q2 equities revenues were down 32% year on year and 17% quarter on quarter. Equities volumes remain low, as the chart below from UBS shows (click to expand).
Here too, the going looks tough. As we've warned before, fixed income businesses are in a time of change as banks automate as much as they can. In an interview today with Finance Asia, John Hourican, head of RBS’s markets and international banking division, confirms that making money out of fixed income flow today is less easy than it seems:
"Flow business is something we all want and we are careful to manage. But the market structure is changing. Keeping flow at a level where you can monetize bid offer is hard work. Across the market, flow businesses are down a bit. Foreign exchange volumes have been impacted and interest rate derivative volumes in the corporate space are hard to find because rates are so low and expectations of them rising any time soon are relatively modest. So while the flow business is strong, it is something we are not taking for granted."
In a low revenue environment, banks are eliminating overlaps. Expect Jerry Del Missier to take a scythe to back office costs at Barclays as he strives for, "operational excellence."
During last week's conference call, Jefferies' CEO Peregrine Broadbent echoed the back office cost cutting mantra: "We are committed to optimizing our infrastructure over the coming periods through efficiency and operating leverage," said Peg.
By comparison, who will be safe from the forthcoming cuts?
Financial News suggests equity researchers who've kept their jobs so far will be spared as banks need them to work on ECM pipelines. This may be so, but ECM is down around 40% globally and in EMEA year to date compared to 2011. Unless pipelines start flowing, researchers may be cut again later in the year.
DCM isn't looking too healthy this year either. But it's healthier than equity capital markets activity. Global debt issuance was down 7% year to date in mid June according to UBS. Equity issuance was down 30% by comparison.
DCM bankers' comparative safety is more than just a function of the market this year. Long term, it's DCM bankers upon whom future European revenue growth is being pinned. Part of Goldman Sachs' enthusiasm for Europe comes from a belief that disintermediation is upon us and that as European corporates are frozen out of the loans, more will turn to the bond market for funds. In a presentation in May, Cohn said this was already happening:
"We have also started to see the shift in European debt issuance from loans to bonds. Goldman Sachs is well positioned to help our clients optimize their capital markets financing activity."
Deutsche Bank has estimated that up to $3 trillion of credit could be disintermediated as banks pull back from making corporate loans. Dispensing with DCM bankers now looks foolish if it's right.