Surprise! If you work in banking, 2015 isn't turning out as well as it might have. After a promising start, banks are in a new period of flux. It's all about efficiency and strategic change and the removal of surplus employees. Various houses are making redundancies.
What does this mean if you work in banking? How concerned should you be for your future? Based on Q2 results, here's who's safe and who is not.
European banks are at the forefront of cost reduction. Barclays, BNP Paribas, Deutsche and RBS are already cutting jobs. RBS is cutting 100 investment banking jobs every single month.
The new watchword is, 'efficiency' - a euphemism for extracting costs. At Deutsche Bank, for example, new CEO John Cryan said it's impossible for the bank to move forward because its cost income ratio of 85% leaves no flexibility "to make working capital investments."
In Q2 investor calls, Sergio Ermotti at UBS was the only CEO to reference hiring, saying he's "continuing to invest to attract the right people to the bank." But even UBS is in the process of extracting $1.4bn from its cost base. "As our competitors regroup and focus on rebuilding capital, we've seen an environment where cost will become a key battleground," said Ermotti.
Efficiency is an issue too for US investment banks (Goldman Sachs, for example, is hiring almost exclusively in low cost cities like Salt Lake City and Mumbai), but it's less of an issue than for Europeans. Cryan mentioned 'efficiency' four times during Deutsche Bank's investor call. Tidjane Thiam mentioned it four times during Credit Suisse's. Harvey Schwartz didn't mention it at all during Goldman Sachs's.
That said, J.P. Morgan is quietly cutting $2.8bn of costs from its corporate and investment bank by 2017.
Some of the hottest people in finance now are strategists. Barclays' executive chairman John McFarlane, is hiring someone to execute strategy before he hires a CEO. At European banks, it's all about 'optionality', or the lack of it. In the past, banks could afford to keep their options open. Now they can't and entire businesses will have to be closed down as banks simplify and focus on particular areas.
Deutsche, Barclays, Credit Suisse, and BNP Paribas are engaged in serious strategic reviews. At Deutsche Bank, for example, Cryan said he will be taking a "long hard look" at the "current condition" of businesses and their future development before making, "an assessment of the operational risk, the likely change in regulation," and deciding whether to continue in that business. At Credit Suisse, new CEO Tidjane Thiam stressed his cost-cutting credentials and said he's planning to "take out activities or lines of activities or locations."
Most banks had a good second quarter in Asia. As the Chinese IPO market remains closed and Chinese stocks continue to plummet, this may not last. However, most banks remain enthusiastic about the potential in Asia. This is especially the case at Credit Suisse, but applies equally to banks like J.P. Morgan.
Most banks had a good quarter in macro products (FX and rates). Compared to last year, macro trading was up - although Deutsche noted that it was flat quarter on quarter. At Barclays, finance director Tushar Morzaria said that, "in macro, that business has gone through substantial restructuring" and is now in "steady-state" performance. This is the case at most other banks too. Costs have already been cut in macro and revenues are stable; jobs look safe. Deutsche is even hiring for its rates team.
While macro jobs are secure, credit jobs are not. Most banks had another bad quarter in credit trading. Credit Suisse, for example, noted that credit trading revenues fell in the past quarter as a result of the slowdown in US leveraged finance activity.
Banks have already invested billions in compliance and regulation, but this doesn't mean the policing function is fully staffed. Both UBS and Credit Suisse complained about the "regulatory cost burden" and the need to invest more in compliance and monitoring activities.
This is the warning flag: if you work in a business whose long term cost of capital is greater than its returns on that capital, forget it.
Thiam at Credit Suisse is typical of the new mood: "Going forward, our focus should be on businesses that constantly exceed the cost of capital. Our business models should ultimately be capital light, be cash generative and produce less volatile resource than today."
It's been a massive year for North American M&A. At Goldman Sachs M&A revenues were up 62% year-on-year in the second quarter. At Credit Suisse, CFO David Mathers said the, "healthy M&A pipeline in the Americas, signals positive momentum for the remainder of the year."
While M&A bankers in the US are fine, leveraged finance bankers in the US are not. UBS blamed its 50% year-on-year decline in debt capital markets revenues on the poor state of the US leveraged finance market. Credit Suisse complained of slowing US leveraged finance underwriting activity too.
No matter which bank you work at, you will be assured of future employment if you're staffed on a project which is designed to simply existing IT systems or to automate manual processes. This is the holy grail. At UBS, Sergio Ermotti said that of the CFH3bn he's spending to restructure the bank between now and 2017, over 50% will go to investments in technology. At Barclays, the IT platform is being 'optimized' and processes 'automated'. At Deutsche Bank, Cryan repetitively stressed the need to make the business more technological and end a 'reliance on manual processes.'
(Photo credit: Kevin O'Mara)