Remember those gentle layoffs in investment banking divisions? Those little cuts to the junior ranks? The peripheral trimming in IBD at Goldman Sachs? The mini snips at Credit Suisse? Things could be about to get a lot harsher.
Under Donald Trump, political risk is back with a vengeance. As Morgan Stanley strategist Andrew Sheets wrote in a weekend report, no one knows what Trump is going to do. No one knows whether the mother of all fiscal stimuli will be enacted, whether U.S. government debt will go through the roof, whether trading partnerships established over the past two decades will be torn up. And it’s not just Trumpland: there’s also the uncertainty surrounding Brexit in the UK and the danger that right wing populists will be elected across Europe. The old certainties have disappeared.
In a world of uncertainty, there’s not going to be much in the way of equity issuance and M&A deals. As senior M&A bankers told Financial News last week, clients who might have done deals will now want to “take a breather” as they assess Trump’s policies.
Unfortunately, this breather couldn’t have come at a worse time for equity capital markets and M&A bankers. As Dealogic notes, US IBD revenues are at their lowest level since 2012. In ECM, they’re at their lowest level since 2003.
With dealmaking non-existent and the year-end looming, both M&A and ECM look like bad front office banking jobs to be in right now. The outlook for debt capital markets (DCM) jobs is less clear – it’s quite possible that primary debt issuance could temporarily increase as clients rush to tap markets before interest rates rise further.
In ECM and M&A, however, it seems increasingly likely that banks will want to cut costs before January. IBD divisions as a whole are well-staffed. Unlike in fixed income, research firm Coalition says there have been hardly any job cuts in IBD since 2013. Employees in both businesses could therefore be in for a shock. The extent of that shock will likely depend upon two things: the ability of the bank they work for to cross-subsidize its M&A/ECM businesses with revenues from a resurgent fixed income business, and the current level of costs as a proportion of revenues across the bank.
As the charts below show, Goldman Sachs and Morgan Stanley (but particularly Morgan Stanley) look exposed on both measures. At Citi and Bank of America Merrill Lynch, fixed income sales and trading revenues are over six times higher than combined M&A and ECM revenues. Citi and BAML should therefore easily be able to cushion their IBD colleagues against a few lean quarters. At Goldman Sachs and Morgan Stanley, by comparison, the discrepancy is much (much) smaller.
Equally, BofA and Citi look better placed in terms of costs as we go into the fourth quarter. Citi’s Mike Corbat has kept a far tighter rein on costs as a proportion of revenues, for example, than Morgan Stanley’s James Gorman.
If you work in M&A or ECM now, therefore, Citi and BAML look like the places to do it. Of course, there may be mitigating circumstances elsewhere: Goldman Sachs’ fixed income traders have been carried by other areas of the bank since 2013, now it’s their turn to do the carrying instead.