Last week J.P. Morgan issued a guide to banks – and by implication to banking jobs after the Brexit referendum. This week, it’s the turn of the banking analysts at Deutsche Bank.
The dust has settled ever so slightly since J.P. Morgan’s analysis, but the big issues remain. Will the UK leave the EU in a way that will damage the banking sector? Will banks make preemptive arrangements whether it does or not? – Are revenues about to fall off a cliff – and if so, in which businesses, and for how long?
Here’s Deutsche’s analysts’ attempt at answering them.
1. Right now, you want to work in rates and FX trading
Like J.P. Morgan’s banking analysts, the analysts at Deutsche think macro businesses have had a pretty good second quarter. For the moment, it’s a good time to work in rates and FX trading – or for a bank whose fixed income business is skewed towards rates and FX. Think J.P. Morgan or BNP Paribas. Avoid banks like Credit Suisse, which are more focused on credit.
2. U.S. banks are about to see an increase in the cost of operating in Europe [which will likely affect the amount they pay]
In future, Deutsche Bank’s analysts think it unlikely that European financial activity will be concentrated in the City of London (see point 4). As activity disperses across European financial centres, the economies of scale that come from a single hub will be lost.
The loss of economies of scale will, “necessitate investment in EU platforms,” says Deutsche.
European banks with existing platforms in mainland Europe will be less impacted than US banks, which will need to build platforms from scratch. This will raise costs and banks are likely to cut compensation as a result [our inference].
3. Don’t underestimate the impact this will have on the City
The end of the so-called ‘passporting’ model is going to be critical for the City of London, say Deutsche’s analysts. Under passporting, banks authorized in London have been able to, ‘provide crossborder services on a non-discriminatory basis in other Member States, without the need for additional local authorisation.’ This has allowed London to develop as a ‘centre of excellence.’
4. Don’t assume MiFID 2/MiFIR regulations are an alternative to passporting, and that they’ll allow London banking jobs to persist
Deutsche’s analysts lay out the regulatory options for a City of London excluded from the EU in the chart below. They predict that passporting will come to an end and that the UK won’t opt for the EEA or ATA options shown.
Instead, they predict the UK will go for the ‘Third-country regime’ arrangements. These should enable the UK to gain access to EU financial markets if UK regulations are exactly the same as the EU’s and EU banks are allowed reciprocal access to the UK.
However, Deutsche’s analysts point out that the third-country regime is far from ideal. It means the UK will have to adhere to EU standards indefinitely and that the EU could suddenly withdraw the UK’s access at any time. There are likely to be problems because the UK is perceived as a direct competitor to EU financial centres. Once the UK is outside the EU it won’t be covered by the non-discrimination legislation which is a key part of the EU passport, allowing EU countries to skew financial regulation in their favour. There’s also likely to be a long period of uncertainty while the availability and extent of the passporting regime is established.
“All of these draw-backs would point to wholesale banks with significant London hubs will likely expand their EU platforms, notably for €-denominated products,” say Deutsche’s analysts.
The regulatory options for the City of London:
5. All banks will need to increase their regulatory spending in Europe as a result of Brexit. This will increase the cost of doing business on the continent [and by definition will reduce pay]
Banks have been subject to rising compliance costs ever since 2008. When Britain leaves the European Union, compliance costs are likely to rise again. “This will serve to reduce the efficiency of the European investment banking model at a time when most banks have struggled to generate returns above cost of equity,” say Deutsche’s analysts.
Expect more automation, lower pay.
6. It’s a bad time to work in equity underwriting and equity trading
Deutsche’s analysts think equities businesses will have a worse 2016 than fixed income businesses. Across equity and debt capital markets, they’re expecting a 20% drop in revenues, with equity underwriting significantly worse off.
7. This is probably a bad time to work for Credit Suisse and UBS
You don’t want to work for a bank with a heavy equities exposure, or for a bank with heavy exposure to wealth management businesses which are likely to suffer in a ‘risk off’ environment. Deutsche’s analysts like Barclays and BNP Paribas, whose fixed income trading businesses are significantly exposed to macro. They don’t like Swiss banks like Credit Suisse and UBS (even though Credit Suisse has a big FICC business, it’s mostly credit).