If you're wondering what each bank will be up to in 2014, then wonder no more. We've put together a brief bank-by-bank strategy primer for the coming 12 months so that you know what you're getting into before you get into it. (Caveat: these strategies apply only to the investment banking businesses of each respective organisation.)
Main themes: Cut costs hard, reduce leverage
2014 finds Barclays' investment bankers in a slightly tricky spot. The investment bank has leverage problems and it has cost and revenue problems. As Deutsche Bank analysts pointed out in October, revenues at Barclays' investment bank fell £899m quarter-on-quarter in Q3 while costs were down a mere £75m. Cost ratios at Barclays were disappointing in Q3, say Deutsche analysts: "comp/income and cost/net operating income ratios were 47% and 78% versus 2015 strategic targets of 35% and 60%."
If this continues, hard choices will clearly have to be made.
Unfortunately, Barclays is warming to a possible cost cutting agenda. In February 2014, CFO Tushar Morzaria will present the results to a strategy review. They are unlikely to be favourable for Barclays' investment bankers. Analysts at Berenberg are predicted further "right-sizing" of Barclays investment bank. Analysts at Deutsche are predicting a further £100-150bn of deleveraging by 2015 and additional 'rationalization plans.' In other words, expect redundancies - particularly in fixed income sales and trading. At the same time, however, there might be a tiny bit of hiring in equities - Jonathan Beebe, Barclays' head of equities, has predicted that hiring in his business will pick up in 2014.
At worst, Berenberg analysts suggest Morzaria could decide to split out the investment bank. "Barclays should re-address whether the universal banking model is best in the long term," they say. "We see ring-fencing in 2019 as potentially providing the catalyst that Barclays needs to separate the businesses and believe that this could have a positive effect on valuation as the non-IB parts are re-rated."
Main themes: Investing in technology, cutting staff in consumer banking
Bank of America Merrill Lynch is midway through its 'New Bac' restructuring programme, under which it plans to cut annual costs by $2bn by the end of 2015. In December, chief executive Brian Moynihan said the bank was already 70% of the way towards this goal. Ominous as this cost cutting sounds, investment bankers and markets professionals at Bank of America look reasonably safe - Bank of America cut 24,000 people between the third quarter of 2012 and the third quarter of 2013, most of them from its consumer businesses. Nonetheless, costs in the markets business look dangerously high, making some sales and trading redundancies probable. At the same time, however, BofA has been doing a little 'upgrading' in London and Moynihan said the company will continue to invest in its trading systems.
Main theme: International expansion, 'efficiency' at home (and possibly in London)
BNP Paribas is in the middle of a cost cutting plan known as 'Simple and efficient', which aims to make €2bn of gross savings by 2015. In theory, most of the French bank's 1,400 corporate and investment banking redundancies were completed in 2012, meaning its investment bankers should be safe in 2014.
However, questions have been raised about the effectiveness of BNP's efficiency savings - particularly in light of the French bank's poor performance in sales and trading since 2007. Analysts at Deutsche Bank point out that BNP has a strategy day coming up in March, where the bank's cost saving plans may be clarified.
In the meantime, BNP is also hiring - just not in France or London. In 2012 it announced plans to hire 1,300 people for its corporate and investment banking business in Asia over the next three years. It's also said to be recruiting M&A bankers in the U.S.
Main theme: Increase RoE
Goldman's big purpose next year, as explained in Lloyd Blankfein's November presentation to the Bank of America Merrill Lynch Banking and Financial Services Conference in November, is to boost its return on equity (RoE). As analysts at Bernstein Research point out, Goldman's RoE has averaged 9.2% since 2010, compared to returns averaging 19.7% in the years between 2000 and 2006. How does Goldman plan to amend this situation? Loosely, it wants to maintain its position in M&A and equity capital markets (ECM), to maintain its position in equities and fixed income whilst investing in electronic trading, to cut capital committed to its fixed income business, and to cut compensation costs. The Wall Street Journal points out that assets devoted to Institutional Client Services (the market making trading business at Goldman) fell 14% in the first nine months of 2013. Meanwhile, Goldman bankers are being paid less and more jobs are being shunted to low cost centres like Mumbai and Salt Lake City.
On the plus side, widespread redundancies look unlikely at Goldman next year: the bank has repeatedly stated its commitment to staying in challenging markets (fixed income sales and trading) until rivals drop away. Goldman has also committed to hiring 14% more junior bankers into M&A next year.
Less promisingly, seasoned Goldman staff can expect to be paid less.
Main theme: Continued integration of wealth management, maintenance of equities and investment banking, continued restructuring in fixed income
Morgan Stanley had a good 2013: by December, the bank's shares had appreciated 62%. Chief executive James Gorman is evidently doing something right, so 2014 is likely to involve more of the same. Bernstein analysts expect continued focus on Morgan Stanley's equities sales and trading business, which strengthened its position in 2013.
By comparison, Morgan Stanley has pulled back from its fixed income currency and commodity aspirations and accepted revenues in its fixed income business might not reach the $6bn target it set a few years ago. At the start of December 2013, Colm Kelleher, president of Morgan Stanley's institutional securities business, told the Goldman Sachs financial services conference that fixed income revenues are likely to be flat next year and that the bank was only halfway through the 'renovation' of its fixed income business. Physical commodities trading is being exited after Morgan Stanley's commodities revenues plummeted from $3bn in 2008 to $700m in 2013.
Like Goldman Sachs, Morgan Stanley will be heavily focused on return on equity in 2014: Kelleher said this was his "number one priority" for next year, particularly when it comes to the RoE of the fixed income business. There will be a lot more cross-selling and a focus on key products in fixed income. Equities professionals and investment bankers at Morgan Stanley are likely to be protected and well-paid - Kelleher said competition for them is 'acute.'
Main themes: Reduce expenses, improve returns, discreet and selective hiring
Like most other US banks, Citi has a cost and efficiency target. As set out by CEO Mike Corbat in March 2013, it aims to meet a 50% efficiency ratio and a 10% return on tangible common equity by 2015. The bank has been working towards that, particularly in its securities and banking business, where efficiency and returns improved dramatically in 2013, as per the charts below. Citi's chief financial officer, John Gerspach, said Citi had reduced headcount in some areas of securities and banking whilst 're-prioritizing' its coverage teams. The emphasis on efficiency seems likely to continue next year - Gerspach said opportunities for revenue growth look 'modest' and expenses in securities and banking could be cut further to meet Corbat's target.
At the same time, however, it's worth noting that Citi's European office was a big recruiter of sales and trading talent in 2013 and recruiters remain optimistic that the bank will keep hiring opportunistically in the next twelve months. In particular, Citi is building its commodities sales and trading business as rival banks retreat.
Main themes: Big, big spending on controls. Cost cutting elsewhere
At JPMorgan, the next 12 months will be all about control spending. As Jamie Dimon explained in December, 2014 will be all about the 'control issue'. Accordingly, the US bank will be spending an extra $2bn on controls in 2014 as it attempts to get a grip on its business and avoid the huge litigation costs that beset it at the end of 2013. This sounds like good news for anyone working in risk, compliance, legal, finance, technology, oversight or control roles, but like very bad news for anyone working in front office investment banking - despite spending heavily on controls, JPMorgan has promised to cut its costs overall and seek further 'efficiencies'. More promisingly, Dimon said the odds are that investment banking revenues will rise in 2014. Less promisingly for current salespeople, he forecast that more and more trading will be executed electronically.
Main themes: 'Efficiency' improvements, fewer front office investment banking redundancies, cuts to the back office, big hiring in IBD
2013 was the first full year of UBS's bold 'strategic acceleration from a position of strength' (AKA pulling out of fixed income and making 10,000 people redundant.).
In October, UBS chief executive Sergio Ermotti said UBS had completed half its planned 10,000 job cuts and finished making the necessary 'structural changes' to the investment bank - implying the fixed income pullback is over. Ermotti said 2014 will be about 'efficiency changes' in wealth management, asset management and less risky investment banking units. Back office redundancies are also expected.
The good news is that as UBS cuts staff and improves efficiency, it seems to be paying people more. It also appears to be doing some covert hiring in fixed income and wants to recruit 24 senior bankers in IBD. These new senior bankers will be allowed to build new teams. However, UBS will reportedly be paying anything from 30% to 50% below market rate for them.
Main themes: Cost cutting, withdrawal from the rates business, hanging on in fixed income
In the third quarter of 2013, costs at Credit Suisse's investment bank rose to a critical-seeming 90.8% of revenues. You might think this would have encouraged a dramatic restructuring plan in the style of UBS. You would be wrong: Credit Suisse blamed its poor performance on the under-performing rates trading business, which it promised to exit forthwith whilst winding down legacy businesses with non-Basel III compliant assets.
Credit Suisse is also engaged in a cost cutting programme, which will continue in 2014. The bank wants to save CHF4.5bn annually by the end of 2015. At the end of 2013, it said it was on track to save CHF3.2bn meaning the pace of cuts will need to intensify over the coming 12 months.
Which jobs are most at risk in investment banking? Aside from rates, the following chart suggests FX and commodities traders are on shaky ground. Credit Suisse also wants to increase its return on Basel III equity to an unprecedented 23%, suggesting low RoE businesses could fall by the wayside. Notably, Credit Suisse cleared out some of its London emerging markets team in November 2013.
Source: Credit Suisse
Main themes: Wishful thinking, de-leveraging, de-risking
Rather like Credit Suisse, Deutsche Bank has a cost problem stemming from its fixed income business . Lke the Swiss bank Deutsche plans to tinker around the edges rather than make any monumental changes.
In the third quarter of 2014, costs at Deutsche's corporate and investment bank accounted for 86% of revenues (up from 72% of revenues in the third quarter of 2012). Revenues from fixed income sales and trading at DB fell 48% year-on-year - more than at any other bank, despite Deutsche's huge fixed income business (whose size was supposed to offer shelter from the worse of the storm). Return on equity in the corporate and investment bank fell to a mere 5%.
Deutsche co-chief executive Anshu Jain said the bank's performance in the third quarter was unacceptable and that the bank is on a "strategic journey". In 2013 that journey meant making 2,457 people redundant of whom only 562 were front office investment bankers. If fixed income revenues don't recover in 2014 Deutsche may need to a little stricter about cutting costs. Like Morgan Stanley and others, Deutsche is pulling back from commodities trading. Maybe it needs to pull back from some other areas too?
Deutsche also needs to spend 2014 de-leveraging. As European regulators have tightened leverage requirements, Deutsche has found itself on the wrong side of the fence. It slashed €100bn from its balance sheet in the first half of 2013, and has promised to slash another €250bn by 2015. 70% of the proposed €250bn cuts will come from corporate banking and securities, with the rates business a particular target. Even then, analysts at Berenberg say Deutsche's leverage may be a too high. Fixed income jobs look at risk. Rates traders should be especially concerned.
It's not all bad news at Deutsche, however. The German bank will also be hiring 700 cash management staff in Ireland sometime soon.
Main themes: No more cost cutting, big hiring in U.S. M&A, consolidating strong position in fixed income
Nomura looks like a good place to be in 2014. Despite very challenging conditions in 2013, the Japanese bank managed to increase its fixed income revenues by 7% during the year. It even managed to do this whilst simultaneously reducing risk. Nomura has more than doubled its market share in fixed income in recent years. In the fourth quarter, it was hiring salespeople from from RBS (former home of Steve Ashley, Nomura's head of markets). We expect more of this in 2014.
Nomura has also let it be known that it will be building up its American M&A business next year. It reportedly wants to hire around 20 senior M&A bankers in North America after hiring a new co-head of Americas M&A, along with five other senior U.S. M&A bankers in late 2013.
Unlike most of the other banks on this list, Nomura has also finished cost cutting.
Theme: Uncertainty, followed by possible doom
Lastly, there's RBS. Like Barclays, the Royal Bank of Scotland has an important strategy day scheduled for February. Also like Barclays, the outcome of this strategy could be very bad for RBS's investment bank, which is not the division favoured by RBS's largest shareholder (the British government).
“If you’re working in the markets division of RBS now, you should be very worried,” Chris Wheeler, a director at Mediobanca told us in November. “The aim of RBS is to focus on UK corporate banking and retail, and to significantly cut risk-weighted assets.”
RBS has already made thousands of investment bankers redundant, but it needs to do more to cut costs in 2014. Big investment banking redundancies and substantial costs to risk weighted assets look fairly inevitable.