Analysts at Goldman Sachs, Deutsche Bank and UBS have all released reports on the current state and future of the investment banking industry. They conclude that things aren't too great.
Goldman analysts in particular spoke to the great and the good of the banking world - interviewing everyone from Jamie Forese, co-president of Citigroup and chief executive officer of Citi's Institutional Clients Group, to Gary Parr the deputy chairman of Lazard, Edward Pick, the global head of equities at Morgan Stanley, as well as Tom Montag, Christian Meissner and David Sabotka - respectively the co-chief operating officer, head of the investment bank and head of capital markets at Bank of America. After conversing with these banking patriarchs, they concluded that: the 'revenue environment' is "universally lacklustre," and that the second quarter of 2013 will only get worse.
"Rigorous focus on expenses is the new normal for the industry," added the Goldman analysts; "excess capacity is still high." In other words, redundancies aren't over yet.
However, buried within the analysts' reports are all sorts of tacit suggestions for proactive steps and defensive positions that might be taken/assumed by bankers who are fearful of losing their jobs. Some have been suggested before. Some haven't.
Banks are loathe to cut people in client-facing front office roles, said the analysts at Goldman Sachs. Past experience suggests that when front office bankers are cut, revenues fall.
Fearful of losing business, banks are instead cutting their 'operational expenses', said Goldman. In other words, if you're an employee in a back office role at an investment bank, you are now more likely to lose your job than someone in the front office.
As we suggested last week, things are looking a little hairy over at RBS's investment bank: revenues are falling, pay is falling, profits are plummeting.
This situation has not gone unnoticed by banking analysts at Deutsche Bank. "There are many reasons why we think the latest [RBS] Markets result will prompt questions on whether it wouldn’t be better to exit the business altogether and to salvage as much capital from the unit as possible," Deutsche analysts wrote following last week's results.
Economists at UBS have issued a note considering the likely effect of Europe's Financial Transaction Tax (FTT) on banks' sales and trading revenues. Their implied conclusion? Stay away from any non-exchange traded over-the-counter (OTC) fixed income products - especially in European banks.
Although the proposed FTT would be levied at just 0.1% for all equity and bond transactions and at just 0.01% for derivatives, the 'chain of settlements' involved in the sale and purchase of securities could create a 'cascade effect,' said UBS economist Reto Huenerwadel.
'Assuming 10 transactions in the bond settlement chain are representative at the present time, the effective tax rate would be 100bps rather than the 10bps suggested by the European Commission,' Huenerwadel said. 'Trading would thus be reduced to order-driven, exchange-traded markets which could be accessed by investors directly. The fixed-income market would inevitably lose the majority of its products.'
2013 is shaping up to be a good year for equity capital markets (ECM) bankers, according to analysts at Goldman Sachs. By comparison, it's not so hot in debt capital markets (DCM), and not hot at all in M&A.
ECM fees were up 17% year-on-year in April according to Goldman; DCM fees were flat; M&A fees were down 39%. The charts below, from Goldman's report, show the evolution of revenues by banks' key business areas since the financial crisis. Underwriting looks good. Everything else doesn't.
Goldman's analysts are by no means the first to suggest that U.S. banks are a better bet as employers. Morgan Stanley and Oliver Wyman said much the same thing a few weeks ago.
However, Goldman's latest report illustrates the point with charts. As the charts below show, market share has been leaching away from European banks in favour of US banks for a long time now. "If the trend persists against a challenging, E.U. macro backdrop, U.S. banks should benefit," said Goldman.
In other words, U.S. banks are a good bet, Europeans aren't. The only exception is M&A, where you will probably be better off working for a boutique.