JPMorgan, Morgan Stanley, Goldman Sachs, Bank of America, Citi and (suprirsingly) Deutsche Bank, have all announced their fourth quarter results. If you haven't kept up or have missed our coverage of their performance, this is an update on our previous strategy primer and the highly condensed version of what you need to know about investment banking-focused strategies for the coming year.
At Goldman, 2014 will be all about improving return on equity. The firm wants to maintain an RoE of at least 10%. Unfortunately, this looks like bad news for hiring and for compensation. In 2013, Goldman committed the lowest volume of revenues to compensation since 2009. In the fourth quarter, the compensation-to-net-revenue ratio was a mere 24.9% (there was a time when it was 50%). Analysts at Morgan Stanley predict that compensation will remain under pressure at Goldman in 2014 as RoE becomes the focus. The Wall Street Journal points out that Goldman's RoE was once 33% (in 2006). Last year it was 11%.
At JPMorgan, 2014 will be all about reducing exposure to future events which might increase litigation costs. Some of these costs have already been incurred. Analysts at Morgan Stanley predict that JPM will spend another $8bn on litigation between 2014 and 2016. The bank is heading off the risk of additional costs by spending $2bn on increased controls in 2014 alone. Expect compliance and regulatory hiring.
At the same time, compensation in the corporate and investment bank (CIB) may be squeezed. Although the CIB is expected to gain market share, it's likely to be a drag on RoE (say analysts at Morgan Stanley) as lower revenues and spread compression take their toll. Notably, JPMorgan has also cut risk-taking considerably in its trading business, which may make it harder for its traders to make money.
Like Goldman, Morgan Stanley wants to improve its return on equity, particularly in its fixed income currencies and commodities (FICC) business. In FICC, Morgan Stanley now has a RoE rather than a revenue focus, Ruth Porat, Morgan Stanley's finance director, said in a call last week. This is leading a rethink of some areas of the FICC business and to an accelerated reduction in risk weighted assets (RWA). Morgan Stanley had planned to reduce FICC-related RWA by more than $30bn (down from $210bn to $180bn) by 2016. Now it wants to make the $30bn cut by 2015.
Porat also said Morgan Stanley isn't expecting FICC revenues to recover in 2014. Expect some redundancies, especially in rates.
The good news, however, is that Porat confirmed that Morgan Stanley will be reducing deferred compensation and paying more cash in the interest of cutting future costs and making compensation more transparent. This is a trend from last year; other banks may follow.
Deutsche Bank will be spending 2014 pursuing its existing cost-reduction target of €4.5bn by 2015. It cut €2.1bn in 2013, which was ahead of target but has another €2.4bn to go in the next 12 months,
There's a slight possibility that Deutsche may also delicately trim Anshu Jain's beloved fixed income currencies and commodities (FICC) business, which has had two dreadful quarters in a row. However, Jain has said that the bank remains committed to the business, that it hasn't lost market share in key areas, that the recent poor performance was merely the result of implementing its de-leveraging strategy and that Deutsche will actually be investing in FICC to try and remedy its recent poor performance. 'Investment' might even intimate some hiring.
Bank of America is also expected to continue cutting costs in 2014. Morgan Stanley analysts predict another $500m in cost reductions in 2014, although these may not impact the investment bank. Instead, after a very strong fourth quarter, Morgan Stanley is predicting that Bank of America will pay its salespeople, traders, brokers, and investment bankers more and more. See the chart below.
It looks a lot like Citi needs to cut costs in its securities and banking business in 2014. Costs there rose to 72% of revenues in the fourth quarter and Citi's equities business was disappointing, with a 24% drop in revenues quarter-on-quarter. In the conference call accompanying last week's results, CEO Mike Corbat admitted that Citi under-performed in equities trading in Q4 (although he said that Citi had increased its equities market share year-on-year). This followed redundancies and restructuring in Citi's equities business in 2013.
Citi looks likely to push down compensation in the investment bank: Corbat pointed out that the compensation ratio for the institutional business was a mere 29% in 2013.
There may also be further redundancies in Citi's investment bank in the next 12 months - CFO John Gerspach said the bank has nearly, but not completely, finished 'repositioning' the securities business for the future. "There are things that we can do there, there are levers that we can pull as you put it going into 2014," said Gerspach, cryptically. Equity derivatives may bear the brunt of any changes: "I don’t think on the derivative side yet we’ve got trading where we’d like it to be," said Corbat.