Hundreds of bankers will lose their jobs over coming weeks, victims of what senior bosses say is likely to be an industry-wide culling of staff in response to a sharp downturn in demand for trading and investment banking services.
After more than two years of hiring and robust activity, some are now predicting the biggest investment banking lay-offs since the credit crisis, as managers pare back their headcounts in preparation for what many see as a possible prolonged slump in activity.
Credit Suisse, Goldman Sachs, Lloyds and RBS have been the first to move, slashing hundreds of banker positions in recent days. But the consensus seems to be growing within the industry that more banks will soon follow as falling revenues make cost-cutting more urgent.
"Nobody is really prepared for what might come," said one senior capital markets banker at a US firm in New York. "You can't even fill gaps in the business anymore because investors expect you to be more disciplined; they are expecting a real focus on the short-term costs."
So far, however, cuts have been small. Within its investment bank, Credit Suisse has launched a cross-business consultation. The bank could shed up to 600 jobs, according to some estimates, with insiders at the bank saying that no part of the business would be immune.
With the worst cost-to-income ratio among its peers, Credit Suisse has been feeling the pressure for some time to slash jobs. It also needs to maximize profit in order to boost its core Tier 1 capital from a current 13 percent to the 19 percent required under new Swiss rules. As revenues fall, maximizing profit will depend on how deeply the firm can cut costs.
"We continue to be proactive about monitoring the size of our business relative to client opportunities and market conditions," the bank said in a statement. "This involves realigning resources to growth areas and adjusting capacity to meet client needs and to manage costs across the business."
Concerns over "client opportunities and market conditions" were also echoed by Wall Street behemoth Goldman Sachs last week, which wrote to the New York Department of Labor to say that it intended to cut 230 positions in the city as a result of economic circumstances.
Following the culling of 5 percent of its traders back in March, Goldman's latest decision strikes a somber note about the prospects for the industry. The Greek situation in particular has cast a shadow over trading and financing activity. Although last week some of those clouds cleared with the passing of austerity measures, many expect Greece worries to resurface shortly, further damping activity.
"Greece is going to hang over the markets all year," said one banker involved in making redundancies last week. He assumes that Greece has no realistic possibility of fulfilling the actions it committed to last week and that fact will spark a crisis each time the IMF and European institutions report on its progress.
He was also pessimistic about the prospects for 2012 when the effects of the ending of the second round of quantitative easing in the U.S. begin to be felt, just as banks increase their efforts to build capital levels and therefore withdraw money from the financial system.
Declining revenues will only heighten the need to cut jobs — and fast.
Many firms have been nursing high cost-to-income ratios and low returns-on-equity for some time now, having beefed up hiring in the hope that the global economy would rebound, creating an investment banking boom. That boom hasn't come, and the global economic rebound has been short-lived.
Firms have already begun looking intensely at costs - JP Morgan has been asking bankers to fill in time sheets in the US, for example — and as revenue drops they will doubtless put into action their findings. All eyes will now be on the more inefficient firms that haven't yet announced job cuts — in particular UBS, Morgan Stanley and Deutsche Bank.
"We are starting to let go of our underperformers," said the head of investment banking at one firm toward the lower end of the cost-to-income range. "We need to be aggressive with those that aren't performing. We need to be better at managing the top-down efficiencies of the business."
Ongoing restructuring at bailed-out firms will also continue. RBS is slashing 200 positions, with bankers last week being told which jobs would get the axe. Lloyds Banking Group, meanwhile, announced 15,000 job cuts of its own on Thursday and a paring back of the UK firm's global presence. It isn't clear how many of those redundancies will fall on the wholesale bank.
There is one silver lining to the dark cloud hanging over the industry. Activity in Asia remains — for the moment at least — buoyant, and the lack of supply of decent — and cost-efficient — local bankers may prompt some firms to shift some U.S. and European jobs to growth regions, as happened during the financial crisis.
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