Sometimes, things seem a bit crummy when they were actually pretty good. Such was the case in 2010 when bank hiring seemed a little slow in relation to the glory days of 2006-2007, but when we were effectively in the grips of a hiring boomlet. That year, RBS, Barclays, Goldman Sachs, Credit Suisse, Deutsche Bank. UBS and J.P. Morgan, added a combined 10,500 people in investment banking. In 2011, those same banks cut 8,500.
Good times can sneak up unnoticed. Are we – unknowingly – in a 2010 situation again?
We’re in a ‘sweet spot’
In many ways, U.S. banks had an excellent second quarter. The combined second quarter profits of J.P. Morgan, Citigroup, Bank of America, Goldman Sachs and Morgan Stanley were at their highest levels for six years. Analysts at Goldman Sachs point out that sales and trading revenues are bouncing back: across U.S. banks, fixed income revenues were up 13% year-on-year in the second quarter; equities revenues were up an even more impressive 30-40%.
As has been widely acknowledged, Morgan Stanley’s results last week were particularly good. Brad Hintz, equity research analyst at Sanford Bernstein in New York, said the bank is now at the ‘sweet spot’ of its cycle, thanks to improving U.S economic data, stronger consumer spending, a housing rebound, strong equity underwriting activity and a good M&A pipeline.
Meanwhile, the S&P 500 is in the grips of the biggest bull market for 65 years. It really doesn’t get much better than this.
For the moment, Simon Maughan, head of the sector strategy group at Olivetree Securities says that everything is looking good. “There are still capital and costs issues but if the business is good and the profits are there, banks may be willing to invest.” Hintz agrees. “We’re coming out of a prolonged downturn and are now seeing management becoming optimistic about the outlook for investment banks,” he tells us.
No hiring, no firing
And yet, headcount numbers suggest banks aren’t taking this wonderful opportunity to recruit. Yes, there have been hiring hot spots like equities and high yield, but on the whole hiring has been quiet. Across Goldman Sachs, for example, headcount declined by 300 people in the second quarter. At J.P. Morgan’s newly combined corporate and investment bank, headcount rose by 137 people quarter-on-quarter in Q2 – but the additions may all have been secretaries for all the clarity provided by the bank.
The danger is that this proves as good as it gets for banking recruitment any time soon.
“This isn’t another boom,” says Maughan. “All that’s happening is that the crisis mode is behind us – bad debts are coming down and banks are handling low interest rates well. And you are not going to get a big run up in the equity markets without financials being at the forefront of that.”
Banks aren’t responding to higher revenues with higher hiring because they still need to increase their returns, says Maughan. “Morgan Stanley’s numbers doubled, but their return on equity is still below their cost of capital,” he points out. Analysts at Goldman Sachs said that many banks still have capital shortfalls if they want to meet Basel III leverage ratios for their holding companies.
Rate rise danger
The risk is that revenues could take another hit, maybe from rising interest rates, and that the latest recovery could be snuffed out as quickly as it came. Maughan thinks this is unlikely, saying that short interest rates are unlikely to rise significantly any time soon and that any steepening of the curve has historically been good news for investment banking revenues. However, banks seem alert to the dangers of rising rates. Earlier this year, Lloyd Blankfein at Goldman Sachs cautioned against a sudden increase in rates which could catch investors off guard. Last week, Jamie Dimon said its mortgage business could take a 30+% revenue hit in the event of a rate increase.
Meanwhile, banks are still engaged in the cost cutting commitments they entered into last year. One senior management consultant who works with banks to reduce their headcounts told us all the major global banks in London still have “major cost agendas” which will impact their staff. Avoid working in any areas that can be outsourced or off-shored, he advised.
Revenues are increasing, but costs are still being cut and jobs are still being outsourced. So, if these are the good times, what will the bad times bring for hiring when they (inevitably) return? Now may be the moment to secure a new job instead of waiting to find out.