If you have even half an eye on current affairs, you'll have seen the charts. The ones showing the divergence between median pay and productivity over the past few decades. Until recently, front office bankers were an exception to this trend. Front office bankers' pay kept rising even as productivity increased. In the words of French economist Thomas Piketty, they were 'super-managers.' Not any more.
Banks have finally learned from their past mistakes, say Deutsche Bank's analysts in a new report on the future of the investment banking industry. These days, they're not rushing to hire new people the moment revenues start picking up (as they did in 2009). Nor are they rushing to pay people more as they make productivity gains. Instead, banks are keeping a lid on costs and suppressing headcount and pay even as revenues rise. Front office bankers are becoming a part of the, 'squeezed middle.'
"In 2014 YTD, banks are continuing to cut front office headcount even as asset prices perform well," say Deutsche Bank's analysts. "We think banks are determined to keep bringing front office costs down, irrespective of the cycle," they add. "This has to be more positive for shareholders than the previous strategy of adding heads for every cyclical upturn."
There's some upside to this. Deutsche Bank thinks that banks' share prices will rise and bankers are paid a portion of their bonuses in shares. European banks' share prices are especially likely to (Europeans are suddenly not losing market share to American banks any more and are underpriced). In other good news, although investment banking revenues (sales, trading, advisory) are expected to fall 4% this year, Deutsche thinks that they'll hit a CAGR of 5% per annum over the next decade, placing banking in the top 50% of growth industries in the years to come. Even so, banking revenues in 2024 are only expected to be 5% ahead of their 2007 peak.
The additional bad news, however, is that front office bankers (especially salespeople and traders) won't be sharing any of this joy. Especially if they're based in the U.S. And especially if they work in fixed income. Deutsche thinks growth will be driven by 'financial deepening' in China and maybe in Europe. Meanwhile, fixed income bankers especially will be squeezed by technology, leverage requirements and new rules concerning the capital treatment of trading books.
This sounds bad, although it won't come as news to fixed income bankers who've been bombarded with dire prognostications over the past 12 months. Where should you work in banking if you want to avoid the squeeze? This will come as no surprise either: Deutsche's analysts think M&A and equity capital markets bankers are going to be just fine. "Perhaps beyond the ten-year time horizon, advisory businesses will be commoditised, but at least for now we think that human advice and underwriting (which is essentially a capital and distribution charge) will see stable pricing," they predict. In plain language, this means M&A and ECM bankers will keep on getting paid. Everyone else will find themselves working for the man.