2018 has the potential be a big year. As Robert Mueller continues to probe the U.S. election campaign, as Theresa May teeters through Brexit with Jeremy Corbyn waiting in the wings, and as North Korea tests its missiles, banks face a series of changes and challenges that could alter the world for their employees.
This time next year, banks will likely be in a different universe.
By December 2018, MiFID II will be 12 months old. We will know by then whether star researchers will indeed have had their pay re-rated to reflect their "franchise value," whether third party algo providers will really have come into their own, whether systematic internalizers will have displaced existing exchanges, and whether clients will continue to demand contact with sales traders who can help them understand and navigate the new landscape.
Russell Clarke, founding partner of search boutique Figtree, says strategists and economists are set to become more important under MiFID II: "Platforms are investing more in strategy under MiFID II and economists in particular are going to become more branded," he predicts. "It will be like 2005 again - individual economists will be the brand of the house and the clients will choose who to use on the strength of that brand."
By this time next year, we'll also know a lot more about Brexit. Whatever happens, there will not be passporting: U.S. banks will no longer be able to have a branch in London and to use it to operate across the EU. They will need to have licensed businesses in EU countries instead. Accordingly, Goldman Sachs is going to Frankfurt and Paris (whilst also building up in Warsaw), Morgan Stanley is going to Frankfurt, Bank of America is going to Dublin and Paris, and Citi is going to Dublin and Frankfurt.
What remains to be seen is precisely how many jobs will move.
Much depends on the nature of the deal that is done with the EU. One senior banker recently told the Financial Times that if the UK “pulled a rabbit out of a hat 10 minutes before midnight” on March 31, 2019, then banks including his own would reverse their decisions to shift jobs overseas. Barclays' experience suggests there's a staffing advantage to staying in the UK: the British bank says staff at its investment bank aren't leaving as much as usual because they're more confident of staying in London if they remain working there.
2017 will see the return of the banker-on-the ground. In Europe, Goldman Sachs is shunting 40 people out of London and into Milan, Frankfurt, Paris, Madrid and Stockholm. In the U.S., it's moving people to Toronto, Atlanta, Dallas and Seattle. Goldman isn't the only one. Bank of America has also indicated that it will be getting closer to local clients this year. Being in with big-name CFOs will still get you a senior banking job in 2018, but it might count for less than before.
2018 could also see the continued erosion of Goldman Sachs' fixed income trading business as a place to aspire to work. Goldman was the worst performer in fixed income currencies and commodities (FICC) trading in the first nine months of 2017, with revenues declining 23% year-on-year. The firm has a plan to remedy this. Among other things, it wants to chase corporate clients and long only asset managers. However, there's some skepticism that this will work: corporate clients tend to work with banks with balance sheets, and Goldman will struggle to compete with the likes of Citi and Bank of America.
There's also the possibility that Lloyd Blankfein, a former commodities trader, will leave Goldman in 2018. Co-COOs Harvey Schwartz and David Solomon are already jostling for position. Blankfein himself has indicated that the two men could replace him and that the CEO role could be split. Either way, it would be the end of an era.
There's also the possibility that Barclays' investment banking resurgence might fall apart. While chief executive of the investment bank Tim Throsby preaches the virtue of a return to risk taking and hires in traders, group CEO Staley is under investigation by the UK's Financial Conduct Authority for attempting to unearth the identity of a whistleblower The FCA's judgement is due soon. If Staley goes, Barclays investment bank (which achieved a return on equity of just 5.9% in the third quarter) could come under scrutiny. The new CEO may decide that cuts rather than growth are the path to glory.
One headhunter notes that people at Deutsche Bank have been "remarkably loyal" after last year's bonus disappointment, when performance pay was cut to almost nothing. Nor have Deutsche's people left as a result of the share price, which is still 37% below the €23 it needs to reach if the German bank's compensatory "retention packages" are to be worth anything. This might be because Deutsche's people feel there's nowhere else to go. It might also be because Deutsche's salaries are higher than elsewhere, or because people at the bank are feeling optimistic after the recent rush of big name hires.
Either way, bonus time at Deutsche Bank in 2018 will be revealing. After a weak 2017, Deutsche can't really afford to pay big bonuses. If it pays them all the same, it will confirm the ongoing ability of employees to hold banks to ransom. If it doesn't (and people still don't leave), other banks might get ideas.
When banks discussed their third quarter results with investors, one thing cropped up repeatedly: margins.
After years of investing in technology and control staff, the new hope is that costs will plateau or fall in 2018 and margins will increase. Credit Suisse, for example, expects to do away with 45% of its control staff due to "digitalization."
James Gorman's comments on margins were typical of big banks: "I think what you're going to see with every $1 of incremental revenue, you will still see a higher incremental margin," he told investors in October. As big banks garner more profits on past investments, they stand to corner the market on hiring and pay.
In theory, machine learning will transform jobs in investment banks. Just listen to Sergio Ermotti: the CEO of UBS thinks 30% of jobs at the Swiss bank could be displaced by intelligent machines in future. In reality, it's not so simple - especially for markets jobs. Although J.P. Morgan has had some success with the likes of LOXM, an intelligent algorithm that trades equities, complaints are being voiced about the problems applying artificial intelligence to markets data, which can often be misleading. For the moment, cleaning data remains a work in process and machine learning is likely to be most successful in areas like compliance, accounting, law and preliminary customer contact - where the emphasis is on the interpretation of language rather than historical trading information.
Will 2018 be the year that bitcoin jobs come to investment banks? Despite disparaging bitcoin as a "vehicle for fraudsters", Goldman Sachs is reportedly looking to set up a bitcoin trading operation of its very own. Goldman juniors already quit for bitcoin-related firms in 2017 and the firm invited a pierced bitcoin trader in to give its people a talk in September. This could be the start of something new.
2017 could also be the year that bankers in New York and London sacrifice a higher proportion of their incomes to the state. Tax changes in New York could see bankers there go from paying 50% to 55% of their income in tax. In London, the Labour Party's proposed Chancellor, John McDonnell, has promised to create a new tax bracket for people earning between £80k and £150k and has said that the top 5% of earners will need, "to contribute more in tax to help fund our public services." It's not clear precisely how much more high earners will need to contribute under McDonnell's plans, but he hasn't ruled out a marginal rate of tax of 50%. While this alone is unlikely to dissuade anyone from putting in an 80 hour week, the attitude to taxation is changing. Under a Labour government with a large majority, a marginal rate of 50% could just be the start.
After years in the dark, people are starting to say the C word again. Capital controls (so-called "exchange controls") were abolished in the UK in 1979. In recent history, they were introduced by Cyprus in 2013, Greece in 2015, China in 2016 and Argentina in 2011, but it's been a while since they were present in a country with a major financial centre. Ever since McDonnell said that he had been "war gaming" a run on the pound if Labour gets elected, there have been suggestions that capital controls could make a comeback under a Corbyn government in the UK. Their introduction could disrupt liquidity in the FX market and deal a further blow to a banking sector already reeling from Brexit.
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