We’ve already given our reasons for feeling perky about 2012. But what about the converse? What about reasons to feel pessimistic?
Needless to say, there are many. As Pimco’s Mohammed El Arian suggested in December, banks appear to be facing secular decline, especially in sales and trading.
The danger now is not only that the eurozone splits up, it’s that European economies suffer years of lacklustre or negative GDP growth. As Goldman Sachs pointed out in a presentation in November, GDP has a multiplier effect on banking revenues: low GDP growth means low revenue growth. Low revenue growth, means low hiring and redundancies.
Within this context, which more specific reasons are there to be depressed about what may be coming in 2012?
RBS is expected to announce the closure of its equities business next year.
At most, an equities closure could lead to 1,000 people being made redundant. Even if doesn't, a lot of RBS staff are expected to attempt escape either before or after bonuses are paid. Things seem unlikely to get much better. RBS reportedly made a gloomy presentation to its headhunters in late 2011, saying it thought it would take seven years for the market to recover. In the worst case scenario, it won't only be the equities business that goes at RBS: the Telegraph reported before Christmas that the government is pushing the bank to reduce its investment banking activities by 50%, implying a 9,000 person reduction in headcount.
Whether eurozone collapses or not, 2012 will be challenging for Europe’s banks. The European Banking Authority has said they must find €115bn of extra capital to withstand the eurozone crisis and reinvigorate investor confidence.German and Spanish banks especially need to raise rather a lot of money next year.
More pessimistically, Michael Platt, founder of the $30bn hedge fund BlueCrest Capital Management, has declared most banks inEurope insolvent and said the situation will worsen in 2012 as the region’s debt crisis accelerates. And Willem Buiter has suggested that if Spain and Italy were to exit the eurozone, there would be be a, “collapse of systemically important financial institutions throughout the European Union and North America and years of global depression.”
Both scenarios would clearly be quite bad for jobs.
RBC probably won’t be doing much in the way of hiring in 2012, which is a shame as it was a bit of a bellwether in 2010 and 2011. “This is the time to consolidate and try to make some money,” Doug McGregor, co-head of RBC Capital Markets declared in December.
We suggest that 2012 will be the year that a lot of banks attempt to engineer a reduction in their fixed compensation. To our knowledge, only Deutsche and Goldman cut base pay last year and only 20% of you said you’d had your salaries cut in late December.
There are clearly legal issues to cutting pay, but faced with that or the prospect of redundancy, some people may even be willing to sign new contracts.
What began in 2011 may continue in 2012. It seems entirely likely that fixed income job cuts aren’t yet over.
Credit Suisse’s fixed income bankers appear to have special reason to feel apprehensive. The bank appointed new heads of its fixed income business in December. They may well attempt a further clearout before bonus time.
Yes, banks cut headcount in 2011, but they didn’t cut headcount that much. Many more cuts may be necessary in order to meet return on equity targets.
JPMorgan analyst Kian Abouhossein has suggested precisely how many job cuts are likely to be necessary at each bank to maintain a return on equity of at least 13% under new regulatory conditions. If pay remains equal, he advocates the elimination of 4,228 investment banking jobs from Deutsche Bank, 4,314 from Goldman Sachs, 3,450 from Morgan Stanley and 5,061 from BarCap, among others. None of these banks cut anywhere near this number of people in 2011. They may make up for it in 2012.
The 2011 bonus round, coming in the first few months of 2012, will almost certainly be awful.
Faced with the need to cut more staff (see point 6), banks are likely to award a lot of people no bonus at all in the hope that they’ll simply leave without collecting redundancy pay. Expect a lot of zeroes at UBS and a lot of zeroes at Citigroup. Across all banks, Jon Terry, a pay consultant at PWC predicts 20% of people will receive nothing.