Brexit aside, the real question regarding the figures on banks' London headcount released by J.P. Morgan this week, is why they're not higher. After all, the London offices of global investment banks are among the most profitable in the world (Barclays excepted).
As shown in the chart below, J.P. Morgan estimates that investment banks have anything from 9% (SocGen) to 50% (Barclays) of their global employees located in the City of London. This could clearly be a headache if worst case post-Brexit regulatory scenarios come to pass.
For the moment, however, it's worth wondering why global banks haven't had even more of their employees in the City of London. In stark contrast to the productivity gap elsewhere in the UK, our research suggests that banks' London operations are considerably more profitable than their operations globally.
At Goldman Sachs International in the City, for example, pre-tax margins were nearly 50% higher than at Goldman Sachs worldwide last year. The differential wasn't quite as pronounced at UBS, but it still existed. And at Credit Suisse, the London business was unprofitable, but far less so than Credit Suisse's consolidated investment banking operations everywhere else.
The only available exception to the London-is-more-profitable rule seems to be Barclays' investment bank, which was marginally more profitable globally than in the City of London in 2015. This looks like a testament to the strength of the U.S.-based IBD and equities-focused ex-Lehman business bought by Barclays in September 2008.
Barclays excepted, what makes London such a cash cow? It might have something to do with the fact that UK businesses have traditionally been skewed towards front office employees rather than support staff, or that London is a big sales and trading centre and that banks' trading businesses were historically more lucrative than the rest. At Goldman Sachs International, for example, sales and trading accounts for around 65% of revenues in London, compared to around 45% globally.
In this sense, the historic profitability of the City of London could also be its undoing. As trading businesses are hit by rising capital requirements, banks have been busy cutting staff and automating trading processes. Coalition estimates that fixed income sales and trading headcount fell by 5% between 2011 and 2015, compared to cuts of just 1% in investment banking divisions (IBD). London staff might be the best and most profitable, but they're also located in the business area most exposed to cost cutting. Brexit or not, the City was already on its way down.