You’re interviewing for a job at an investment bank. What should you ask at the end of the interview when you’re invited to impress with your knowledge of the markets? A new note from the European banking team at Morgan Stanley, led by Huw Van Steenis, offers some helpful pointers.
1. You need to ask how they’re coping with the decline in fixed income currencies and commodities (FICC) revenues
Van Steenis and his team estimate fixed income revenues across the industry fell by 5% in 2015 and they think they’ll fall by another 3% in 2016. Fixed income revenues account for around 44% of investment banks’ total, so even if you’re not interviewing for a role with a fixed income desk, you may want to ask how the bank’s dealing with this.
This is especially so if you’re interviewing at a European bank with a new CEO (think Deutsche, Barclays, or Credit Suisse.) These three banks are all under big pressure to increase their return on equity, say the Morgan Stanley analysts: “New teams at DB, BARC, CS have signalled it may take until 2018 before RoEs are acceptable again, which is simply too long for most investors.” How does the bank you’re joining plan to handle this…?
2. You need to ask about the outlook for investment banking revenues in the US in 2016
IBD divisions had an excellent year in North America in 2015: it was the biggest ever year for M&A deals according to Dealogic.
Unfortunately, this means banks will struggle to match 2015 US IBD revenues in 2016. Morgan Stanley’s analysts are predicting a 6% decline, as follows:
If you’re interviewing in IBD, you might therefore want to ask what the firm you’re joining plans to do to match last year’s deal-flow. How’s the pipeline?
3. You need to ask about regulation
Lastly, you might want to ask a little something about regulation. J.P. Morgan analysts think regulatory pressure on banks’ return on equity will remain a big issue in 2016. Morgan Stanley’s analysts are not so sure. “Our out of consensus view is that the market has become too bearish on ongoing regulatory ratchet,” they write. “The fact the Basel committee failed to agree on FRTB [Fundamental Review of the Trading Book] in their December meeting signals to us further need for refinement, as we argued FRTB is inconsistent with ECB/BoE/CMU plans to restart securitisation markets.This should be a positive vs. expectations in 2016.”
[N.B. Dan Davies, senior researcher at Frontline Analysts and blogger at DSquareDigest, points out that when the delayed FRTB came out one week later it hadn’t been weakened after all. So maybe Morgan Stanley’s analysts are guilty of wishful thinking.]