J.P. Morgan’s European banks equity research team, led by Kian Abouhossein, has released a new and timely note on the future of the banking industry today. It’s not ostensibly about keeping your job in a time of turmoil, but if this is your priority there are plenty of takeaways. You just have to follow the guidelines below.
1. Cling on for dear life over the next 10 months. And then relax
If J.P. Morgan’s analysts are right, 2016 will be tough and 2017 will not. If you can last until the end of this year, you should therefore be ok.
2. Stay away from the credit desks
2016 will not be nice for fixed income currency and commodity (FICC) traders. However, 2016 will be especially horrible for credit traders. Therefore, avoid credit trading desks like the plague.
Some banks’ fixed income divisions are more exposed to the problems of credit trading than others. The chart below shows which these are. Credit Suisse is in deepest, but Morgan Stanley looks a little precarious too. J.P. Morgan predicts that both banks will likely make more credit cuts.
4. But, do work for a US investment bank
Credit trading at Morgan Stanley excepted, J.P. Morgan thinks US banks look pretty healthy now. If points out that they’re, “much better capitalised than their European peers…ahead on resolution of litigation issues…and have cleaner P&L.. and clean ROE unlike their European counterparts.” There should be less need for cost cutting and strategy shifts as a result.
5. Don’t work in the back office or on a contract basis for Deutsche Bank
Like Goldman Sachs’ analysts, J.P. Morgan’s analysts say Deutsche Bank has a real need to prove that it can actually cut costs as promised. They suggest that one way of doing this will be for Deutsche to take its middle and back office properly in hand: “DB has one of the highest back office and consultant ratios and we think these need to be addressed.”
J.P. Morgan’s analysts are less pessimistic regarding front office investment banking jobs at Deutsche, about which they have only positive things to say: “We do not believe the IB franchise of DB has been impacted by the current newsflow and spread widening…We continue to see DB as a Tier 1 FICC player and the last standing IB in Europe.”
6. Go and work for a top five bank in equities
J.P. Morgan’s analysts reiterate that trading market share in equities is becoming focused in five top players. These players are shown in the red square below.
7. Go and work for a top five bank in FICC
Trading market share in FICC is also becoming focused in five top players. Again, they’re shown in the red square below.
8. Go and work for Goldman Sachs
J.P. Morgan’s analysts are pretty excited about Goldman Sachs. “We see GS as a tier 1 player in both fixed income and equities,” they say. “Hence we expect GS to perform better than peers in the current challenging revenue environment.”
Even better, they point out that Goldman has no need of cutting jobs because it can simply cut pay – which is above the market average anyway.
9. Stay away from ECM
2016 has not started well in investment banking divisions (IBD). But, as the chart below shows, it has started especially badly in equity capital markets (ECM). If this continues, headcount cuts seem horribly inevitable.
10. Beware of Barclays
Lastly, Jes Staley is due to lay out his strategy for Barclays in a few weeks’ time.
J.P. Morgan’s analysts think Jes will almost certainly take the juice away from the investment bank. “We believe that re-allocation of capital away from the IB is the only way to sustainably unlock value,” they say, pointing out that Barclays’ investment bank generates a return on equity of less than 6%, while the rest of Barclays’ businesses have a return on equity in excess of 14%. In these circumstances, they suggest that it makes sense to cull capital allocated to the investment bank by 30%. Barclays is already cutting thousands of jobs from its investment bank; if JPM’s analysts are right there could be more cuts to come.