After the cheerful good news stories of the past few days and the revelations of quiet hiring, today is another day of bad news.
Firstly, UBS is making its inevitable redundancies. Secondly, a report has surfaced from strategy consultants Roland Berger, which says investment banks will need to get rid of another 75,000 people before 2017.
Roland Berger, bringer of bad news
The authors of Roland Berger's report say investment banks face two big problems: revenues and return on equity.
Like Sergio Ermotti and Rich Ricci they think investment banking revenues are going back to the past. But while Ermotti thinks we're heading for a mid-90s revenue environment and Ricci thinks we're going back to 2009, Roland Berger's consultants think we're heading back to 2006.
This doesn't look so bad, given Roland Berger thinks 2006's investment banking revenues were higher than 2010's or 2011's. However, it's worth bearing in mind that in 2006 Goldman Sachs only employed 26,500 people while JPMorgan's investment bank only employed 23,800. Nowadays, they employ around 32,000 and 26,000 respectively.
Source: Roland Berger
The real problem, however, is ROE. Last week, Deutsche committed to pursuing a 15% ROE in its investment bank. Roland Berger's consultants suggest this is out of the question:
"Even when factoring in the stream of restructurings and lay offs already announced, the industry will only return to single digit post tax RoEs on average. Our base case scenario envisions a 9% RoE and in our bear case, a mere 5% RoE."
This being the case, they produce the following chart on how investment banks can achieve an even 9% RoE by 2017. 15% of the 500,000 jobs still in existence in investment banking globally must go. Compensation must be cut 10%. And capital allocation must fall 30%.
Kian Abouhossein, bringer of good news
While the consultants at Roland Berger paint a picture of doom, another report out today from analysts at JPMorgan is a partial antidote. Echoing Anshu Jain's suggestion last week that the third quarter is turning out quite well, Kian Abouhossein and his team of banking analysts at JPMorgan have revised their forecasts upwards.
The future still doesn't look good, but it doesn't look as bad as it did. JPMorgan is now expecting growth by business area as follows:
In particular, Abouhossein et al suggest there are three areas where redundancies won't happen in the fourth quarter, or at least shouldn't: rates, equity derivatives and DCM.
Rates businesses have benefited from, "high client activity driven by net new money in Fixed Income funds." They will continue to benefit from QE3 and "basis risk gains."
DCM is having an excellent year. Dealogic pointed this out last week when it said that European Corporate DCM is at its highest year to date level since 2009 and that UK corporate DCM is up 75% on last year and at the highest ytd level on record.
And equity derivatives appear to be doing well on the back of the alleged corporate equity derivatives boom and "slightly improving margins."
Interestingly, many of the hires made by Bank of America and Unicredit in recent months seem to have been for rates or equity derivatives roles. It seems that revenues are indeed still healthy in these areas and that banks remain open to both expansion and upgrading. The 75,000 job cuts may fall elsewhere.