Will 2016 bring a resurgence in banking jobs and banking revenues? Nope. - Not according to the European banking research team at J.P. Morgan, led by Kian Abouhossein.
Abouhossein and colleagues have just issued an epic report on the outlook for investment banking revenues over the next 12 months and in years to come. It doesn't look entirely clement, particularly if you work in the back and middle office, or at Credit Suisse.
The charts below summarize Abouhossein's verdict.
2009 to 2012 were anomalous years for fixed income currencies and commodities (FICC) revenues. Don't assume they're coming back (or that the level of FICC headcount associated with those revenues is sustainable long term).
As FICC flounders, so equities and IBD are becoming more important. These are the divisions to work in between now and 2018.
Not all areas of FICC are bad, however. As the chart below shows, rates and FX revenues (and by implication, jobs) are expected to benefit from increased macro volatility.
Overall, however, the investment banking industry is in stasis. This is not a growth sector.
Credit trading is not expected to thrive in the coming years. Unfortunately, Credit Suisse has many eggs in this basket.
If you thought European investment banks have been cutting costs, you were wrong. BNP Paribas especially has a big cost problem in its corporate and investment bank.
Credit Suisse thinks it can cut costs by just 3% and increase revenues by 7%. J.P. Morgan's analysts think this is unrealistic and that Credit Suisse (along with other European investment banks) will need to upscale its cost reductions in future.
Credit Suisse has cut compensation costs in the investment bank by a massive 39% since 2009. Like most other banks, however, the emphasis so far has been on clearing out expensive senior bankers rather than addressing structural cost issues.
The real issue for 2016 and onwards is the dramatic increase in infrastructure costs, driven by regulatory and IT spend. Unless banks can get this under control, they will never achieve the sort of return on equity investors are looking for.
In 2011, Deutsche Bank had 1.7 infrastructure staff to every front office banker. In 2015 it had 2.4. Unsurprisingly, the bank's new strategy is focused on cutting complexity in the back and middle office.
J.P. Morgan thinks Deutsche needs to cut 25% of its back office headcount to get its return on equity back to 12% after regulations. Barclays needs to cut 30%.
Staff at US investment banks are far more productive than staff at Europeans. At Goldman Sachs, revenue per head is $1.2m. At Barclays Investment Bank it's $595k.
J.P. Morgan predicts that the winners in sales and trading in future will be those which already enjoy a top five position in terms of market share. This applies to both equities and fixed income, as depicted by the charts below.
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