Banks are still adding staff with all the enthusiasm of Grayson Perry in a frock shop. But we detect reasons to be cautious.
Deutsche Bank, Dresdner Kleinwort (under the Allianz mantle), and Soc Gen were among the banks announcing their results this week. The outcome was mixed, with signs that compensation-related costs are creeping ever higher and trading revenues may prove harder to sustain.
Deutsche Bank was one of the best of the bunch. Net profit for the first three months of the year rose nearly 30% on the same period in 2006 in the corporate and investment banking unit, driven in part by a series of fortuitous fixed income prop trades on the deteriorating US sub-prime market.
However, the bank also revealed it had added 3,525 staff in the unit over the previous 12 months, driving compensation costs up 28%, while revenues rose a mere 18%.
Société Générale’s corporate and investment bank also suffered from a leap in costs which exceeded its leap in profits, as the bank primed the unit for growth in the next three years. At the same time, revenues from its new fixed income, currencies and commodities group actually declined.
Are these the dying hours of the top of the cycle and will redundancies and meagre bonuses follow? Innate pessimism and febrile foreboding suggest they might be.
Scrape the surface, for example, and there are signs that Deutsche’s successful traders have been getting more gung-ho – value-at-risk rose 11% in the quarter, to €77.5m per day. In volatile markets, that could prove easy to lose – just ask the traders at Dillon Read Capital Management, whose exploits may yet prove detrimental to this year’s bonuses at UBS.
Meanwhile, those that don’t attend the prop trading party are losing out. Dresdner appears to have got cold feet at the prospect of ‘doing a Dillon’. Allianz said trading revenues fell 30% after it “consciously decided to hold back in proprietary trading”, according to Reuters.
The good news is that not everyone shares the conviction that the end is nigh. “Most invesment banks are doing very well this year; M&A is looking staggeringly good, fixed income is having a pretty good year and companies still have big financing needs,” says one chirpy banking analyst.
Yet, fellow nay-sayers do exist. “I’d be surprised if bonuses across the board reach last year’s standards,” says Shaun Springer, chief executive of search firm Napier Scott. “The rate of profits growth in 2006 was astonishing and comparable only to the rate of growth in 2005. I just don’t see that being sustainable in 2007. We won’t see another 15-20% rise and may even see a dip.”
Might as well stop working now then.