Next time you get a sales or trading job in a bank, bear in mind that it may not last. New data from research firm Tricumen underscores banks' tendencies to vacillate when it comes to their sales and trading businesses.
Unexpectedly, Tricumen found that the sales and trading units of 12 major investment banks have been profitable in every single year for the past six years. Equally unexpectedly, it says sales and trading profits almost doubled between 2007 and 2008 - in other words during the depths of the crisis - as short term interest rate trading boomed. Rates trading wasn't the only recent bubble, says Tricumen: in late 2009 and early 2010, many banks started rehiring heavily in anticipation of big opportunities in Asia.
Banks hired opportunistically as rates revenues rose. In 2009, for example, Morgan Stanley hired 350 people for its securities business and in early 2010, Morgan Stanley let it be known that it wanted to hire 'several hundred traders,' with rates an area of particular focus. However, revenues didn't materialize at Morgan Stanley and the U.S. bank has been cutting back. In March 2013 Richard Oliver, head of short term rates trading at Morgan Stanley in London, became the latest senior Morgan Stanley trader to leave the bank for hedge fund Brevan Howard.
It's not just Morgan Stanley: rates traders everywhere are the new big banking redundancy risk. In a report last month, Deutsche Bank analysts argued that rates desks have most to lose from a shift onto exchanges. For the moment, rates trading mostly takes place over the counter and is highly profitable as a result. These profits will be seriously eroded when trading is centralized. In January, Deutsche analysts predicted that rates revenues could take a 40%-45% hit from on-exchange trading.
J.P. Morgan confirmed the rates trading risk at its February 2013 investor day. Between 2006 and 2012, the U.S bank said most of its revenue growth came from commodities and rates. In future, it said rates trading revenues would be particularly affected by coming regulatory changes. If rates trading was the place to work in the past, it will not be the place to work in the future.
If rates revenues are in danger of imminent collapse, banks' other big sales and trading hope - Asia - didn't deliver in the first place.
Post-2010, few of the hoped-for Asian opportunities materialized, says Tricumen. It says banks were left, "burdened with higher staffing costs, contracting revenues - and the Eurozone crisis," as a result.
In the circumstances, banks have found themselves over-committed to sales and trading businesses. 2012 was a year of re-evaluation. Last year, banks' focus suddenly shifted from revenues to profits, says Tricumen. Non-profitable businesses were hived off. New businesses like electronic trading platforms were invested in; client coverage was rationalized.
Where does that leave banks now? As the chart below shows, 2012 wasn't a great year for profitability in banks' sales and trading businesses. Things aren't about to improve: in the first quarter of 2013, sales and trading profits fell another 20% year-on-year - and this was before the full impact of falling rates revenues became apparent.
In the new profit-focused reality for sales and trading businesses, Tricumen identifies two banks which look best placed to thrive. The first is, unsurprisingly, J.P. Morgan. According to a recent study by Coalition, a rival banking data provider, J.P. Morgan ranked first or second in eight out of ten sales and trading business areas in 2012. Tricumen says J.P. Morgan has significantly increased its share of the sales and trading profit pool since 2008. The U.S. bank is planning to make thousands of redundancies this year, but its salespeople and traders look comparatively safe.
Tricumen's second favourite bank is - surprisingly - UBS. The Swiss bank is decimating its fixed income sales and trading franchise and making 10,000 job cuts before 2015. Nevertheless, Tricumen says that working for UBS has its merits - especially if you're in equities, where the Swiss bank has proactively pushed into electronic trading. Since 2008, Tricumen says UBS has substantially increased its share of sales and trading profits.
If UBS and J.P, Morgan are safe bets for sales and trading jobs, which banks aren't? Deutsche Bank analysts recently suggested that any bank with a less than 6% market share in fixed income currencies and commodities sales and trading should be a no-go area. Tricumen is more specific. Measured in terms of profitability share since 2007-2008, it says SocGen is the key under-performer. "We estimate that SG’s sales & trading operation suffered losses in 2007, 2008 and 2009 (which invalidates indexed comparisons with peers); following a profitable 2010, the bank then again suffered a loss in 2011," Tricumen writes.
SocGen was one of the banks to build its fixed income sales and trading business in the wake of the financial crisis. In 2010, it announced plans to recruit 1,200 salespeople and traders by 2013. However, last year, SocGen cut 1,200 investment banking jobs. This year, it's cutting more - but hasn't specified how many. Fixed income revenues at the French bank fell 20% in the first quarter. If you work in fixed income sales and trading at SocGen now, you may not do so in 2014.