These are still difficult times for investment banks. While capital markets revenues boom, sales and trading revenues are floundering. A new report from banking analysts at JPMorgan predicts that fixed income currencies and commodities (FICC) revenues will be down another 19% in the second quarter of 2014 compared to the first. Equities revenues are expected to be down another 8%. M&A revenues are expected to be down 16%. Only equity capital markets (ECM) and debt capital markets (DCM) revenues are expected to rise quarter-on-quarter, with meagre increases of 7% and 8% respectively doing little to offset the weaknesses elsewhere.
If you're going for a new banking job now, therefore, you need to make sure that you know what you're getting into. With some banks pulling back from entire business areas, it's worth asking the difficult questions upfront instead of being hit with a horror story later on.
JPMorgan's analysts flag the strategic issues facing five major banks today. If you're interviewing with Credit Suisse, Morgan Stanley, BNP Paribas, SocGen or Barclays in the next few months, it may be worth probing the areas below.
JPMorgan's analysts say Credit Suisse's investment banking strategy is unsustainable in the long term. This is because, 'the value of the private bank cannot be unlocked and the implied CoE will stay high as long as CSG does not restructure its FICC business further, consuming 34%E of group and 58%E IB capital in 2015E.' In other words, Credit Suisse needs to pull back even further from fixed income currencies and commodities (FICC) trading if its share price is to reflect the value of the entirety of its activities - including the successful private bank. Matters have not been made better by a $2.5bn fine in the U.S., which has eroded Credit Suisse's capital base.
Questions in Credit Suisse interviews should therefore centre around further fixed income restructuring. Credit Suisse is already pulling back from the rates business and is cutting risk weighted assets allocated to rates by 40%. However, despite cutting foreign exchange and emerging markets staff, there's been no indication that the Swiss bank is planning a more dramatic move away from fixed income trading. This is despite yesterday's revelation that revenues in its sales and trading businesses will be down by a 'mid-teens' percentage in the second quarter.
JPMorgan's analysts really like UBS - it's their top investment banking pick when it comes to the likelihood that the stock price will rise. However, they don't like UBS so much that they have no doubts about it whatsoever. The downside risks for UBS, according to JPM, lie in its so-called 'no-core' investment bank, which is in the process of shedding a massive $72bn in risky assets. This is down from $114bn at the end of 2012, but JPMorgan's analysts have said the disposals aren't happening quickly enough. In today's note they say there's is a risk of further markdowns on these legacy positions, and that the bank will make a loss in disposing of them. Due to the legacy asset issue, a pool of analysts are predicting that UBS will fail to meet its return on equity target of 16% by 2016.
If you're interviewing at UBS, it's worth asking (gently) abut the ROE target. How happy is the bank with the speed of asset disposals? What happens if the ROE target isn't met? Will the bank make further cost cuts (and redundancies?).
All has not been well at BNP Paribas. The French bank is facing a $5bn fine for defying Iranian sanctions and there were reports last week that it would be banned from shifting money into and out of the US. However, JPM's analysts suggest that BNP's problems go deeper than its run-in with the U.S. authorities. They claim that revenues in BNP Paribas's investment bank are particularly reliant on 'client flow and market volatility,' with BNP focused on, 'corporate demand for derivatives, hedging and structured finance products.' When flow dries up and volatility falls (as has happened in the past 12 months), therefore, BNP will be in trouble. The French bank also faces difficulties in the U.S. market (where it's been laying people off) as a result of new U.S. government requirements that subsidiaries of European banks hold more capital. And then there's BNP's exposure to the government debt of countries like Italy, which could become an issue again if concerns re-emerge about economic growth in the eurozone...
If you're interviewing at BNP Paribas it's therefore worth gently probing the capitalization of the U.S. subsidiary (particularly if you're interviewing for a FICC job in the U.S.). It's also worth questioning how the bank is dealing with lower flows and volatility and whether it expects revenues to come back. And how does it feel about the eurozone debt crisis - has it disappeared, or simply been swept under the carpet?
As per the strategy it outlined at its investor day a few weeks ago, Barclays is now pulling back from fixed income trading. Much of the fixed income business which now be grouped together in a bad bank, which is to be wound down in the style of UBS. This clearly entails execution risks (as for UBS), but JPMorgan's analysts say it also raises issues about how Barclays will manage its earnings, which are likely to be very volatile in the short term. Add to this the fact that Barclays is not the UK regulator's favourite bank and still faces judgment in the FX-fixing investigation, along with uncertainty about the UK, capital regime and the future looks cloudy for the house of Jenkins.
If you're interviewing with Barclays, it's worth asking how the bank plans to manage the transition to becoming a less fixed income-focused house. Are litigation issues now in the past? Truly daring interviewees could ask whether it make sense for Barclays to run an investment bank out of the UK, when the regime in the country seems so unfriendly to it.