Which jobs in banking will serve you well in 2014 and offer continuous employment for the next few years (at least)? Which jobs in banking are a direct route to redundancy and the strain of self-reinvention? Which jobs in banking are a euphemism for suffocation as banks try their hardest to stay in expiring businesses that offer little real future (except for the most athletic)?
Morgan Stanley's analysts have answered all these questions in their latest, 'Blue Paper Revisit.' Fundamentally, it seems the best jobs in banking are not to be found at European banks. Nor are they to be found in rates and FX.
Yes, Morgan Stanley is a U.S. bank. Yes, Morgan Stanley might be biased when it says that U.S. banks offer the best jobs now. But it has good reason to make this assertion. As the chart below, taken from Morgan Stanley's report, shows, U.S. investment banks like Goldman Sachs, JPMorgan, Citigroup and Bank of America have their costs under control. European investment banks like RBS, Credit Suisse, Barclays. UBS and Deutsche Bank don't so much. Nomura International (a Japanese investment bank headquartered in London) doesn't look too hot.
Morgan Stanley's chart does not cover Morgan Stanley itself. There might be a reason for this - in the first quarter of 2014, costs accounted for 80% of revenues at Morgan Stanley's investment bank, making it the worst placed bank of the lot in terms of cost control.
European banks are losing market share in fixed income currencies and commodities (FICC) trading. U.S. banks are gaining market share. The big issue for European banks are new European regulatory restrictions on leverage ratios. Morgan Stanley points out that U.S. banks have higher leverage ratios, but they don't face the punitive leverage restrictions that are being imposed on European banks by CRD IV legislation. European banks are being placed at a competitive disadvantage by punitive regulation.
FICC businesses need more balance sheet than most. Cutting leverage therefore means cutting FICC. You don't want to be working in Barclays' FICC business now. Morgan Stanley's researchers imply that you do want to be working for Goldman Sachs' FICC business (even though Goldman is also said to be contemplating a few FICC layoffs). This runs counter to a report from analysts at Bernstein Research last week, which showed that Goldman Sachs has been losing market share in FICC.
FICC market share:
Source: Morgan Stanley
Morgan Stanley's analysts point out that you don't want to be working in FX or rates now. By the end of 2014, they predict that FX/rates revenues will have fallen by 70% compared to 2009. The good news is that the rate of decrease is expected to slow in the second half of 2014. The bad news is that this is only because the second half of 2013 wasn't good for rates and FX and so the comparable period last year isn't very favourable.
Nowadays, banks like to benchmark themselves by the returns they can generate for their investors (rather than the amounts they can pay to their staff). From this perspective, you want to work for a bank that's generating a health ROE and won't experience a crisis of confidence followed by a big restructuring in an attempt to hike its ROE in future. The chart below, from Morgan Stanley, shows which investment banks have a healthy ROE now and which banks expect to have one soon.
U.S. investment banks mostly generate a higher ROE. However, there are exceptions (UBS).
JPMorgan and Deutsche Bank had excellent second quarters in debt capital markets. Bank of America Merrill Lynch had a bit of a disaster compared to the second quarter of 2013.
Goldman and Bank of America were among the market leaders in ECM in the second quarter. JPMorgan was up there too, but while GS and BofA increased their market share, JPM lost out...
Goldman Sachs' M&A team had a great second quarter (see chart below). Long term, Morgan Stanley's researchers are also pretty partial to Moelis, whose stock they predict will rise as M&A activity picks up.