By the end of this month, Deutsche Bank will have finished laying people off at investment bank. So says CFO James Moltke. Any surviving DB staff should be safe; they may even get a retention bonus to help cheer them up. Unfortunately, as things start looking-up at Deutsche Bank, other banks may need to start looking down at their own bottom lines.
It does help that the second quarter did not go well. Banks like J.P. Morgan have said that trading revenues in Q2 were flat on the previous year in the second quarter. Flatness may be manageable if you're J.P. Morgan, but if you're a more marginal bank with high costs predicated on ever-increasing revenues, it's an issue.
Banking research company Tricumen suggests there may be several banks with issues. Deutsche Bank is one of them, but it is not alone.
The big French banks have big cost issues too
The chart below from Tricumen shows how banks' operating cost/income ratios (in US$ terms) compared globally for all their capital markets (investment banking and sales and trading) activities in the first quarter of 2018 .
It suggests that J.P. Morgan and Citi are the safest investment banks to work for right now: the two big banks are far out-performing the rest in efficiency terms. By comparison, Deutsche Bank, SocGen and BNP are the most vulnerable: they are each far less efficient than the rest.
Deutsche has a plan to deal with its cost issue, but what about BNP and SocGen? The former has been cutting costs and jobs in its investment bank, but is still hoping to grow to glory under "Strategy 2020', whereby it intends to achieve compound annual revenue growth across the corporate and investment bank of 4.5% over the three years to 2020. SocGen is also promising "strict control on costs" and has been lightly trimming staff in the corporate and investment bank (CIB), but it too is focused on "growth initiatives" and plans to expand particularly in rates, FX and corporate equity derivatives trading.
The chart below suggests both French banks may want to focus less on growth and more on cuts.
This doesn't mean jobs at the biggest banks are categorically safe. Both Daniel Pinto (head of J.P. Morgan's corporate and investment bank) and Michael Corbat, Citi CEO, remain highly focused on efficiency. Corbat said last month that Citi's focus is on using technology to, "hold costs". Pinto said J.P. Morgan also wants to use technology to cut costs and lower expenses, but that the "low hanging fruit" has already been taken out and things will get harder from here on in.
Operating cost/income, Q118 (US$, all capital markets)
Barclays, UBS and Credit Suisse need to cut some investment bankers (as do BNP and SocGen)
If Tricumen's chart for overall costs across trading and investment banking divisions suggests French banks most need to cut heads, its chart for "banking" (defined as debt capital markets bonds and loans, securitisation, equity capital markets, and M&A (ie. the traditional investment banking division or IBD), suggests that Barclays, UBS and Credit Suisse were also in trouble in the first quarter. All had elevated costs compared to revenues.
Some are trying to do something about this. Barclays, for example, cut around 100 managing directors and directors in January 2018. Credit Suisse plans to eliminate CHF550m of costs from across the bank in 2018 and was said to be quietly laying people off earlier this year. UBS has started demanding that its its investment bankers attend mandatory client meetings and was seen trimming senior staff in the first quarter.
Tricumen suggests all three have further to go. Meanwhile, bankers at J.P. Morgan and Morgan Stanley look pretty safe by comparison.
Operating cost/income, Q1 2018, (US$, investment banking division)
SocGen's fixed income traders need to be super-afraid
If everyone at SocGen needs to be wary of the comparatively high cost ratio in the CIB (admittedly when stated in US$), the French bank's fixed income traders need to be especially wary. As the chart below shows, SocGen's fixed income business is crazily inefficient. Curiously, this is also the business SocGen most wants to grow. In the event that the bank does actually merge with Unicredit, fixed income could be where the cuts happen: Unicredit has a big fixed income derivatives business in Germany under HypoVereinsbank.
Operating cost/income, Q1 2018, (US$, FICC trading)
Deutsche Bank's equities business deserves to partially die. Maybe Wells Fargo's too
The last chart from Tricumen helps explain why it is that Deutsche Bank is cutting 25% of staff from its equities trading business. Worryingly, it suggests Wells Fargo might want to do the same. There's little sign of this happening, although Wells Fargo did reportedly cut 10 (or so) U.S. equities professionals in April.
As ever, JPM and Citi staff are sitting comparatively pretty - in equities as elsewhere. Did someone say safe harbour?
Have a confidential story, tip, or comment you’d like to share? Contact: firstname.lastname@example.org
Bear with us if you leave a comment at the bottom of this article: all our comments are moderated by human beings. Sometimes these humans might be asleep, or away from their desks, so it may take a while for your comment to appear. Eventually it will – unless it’s offensive or libelous (in which case it won’t.)