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.
1. FICC revenues are not coming back
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).
2. Equities and IBD divisions are therefore going to become more important
As FICC flounders, so equities and IBD are becoming more important. These are the divisions to work in between now and 2018.
3. Within FICC, you don’t want to work in structured credit trading, credit trading, emerging markets debt trading, or commodities. You do want to work in rates trading, or FX trading. Within equities, you don’t want to work in equity derivatives
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.
4. The investment banking industry is stuck back where it was in 2005 and 2006
Overall, however, the investment banking industry is in stasis. This is not a growth sector.
5. Credit Suisse looks particularly over-exposed to low growth credit trading
Credit trading is not expected to thrive in the coming years. Unfortunately, Credit Suisse has many eggs in this basket.
6. Cost income ratios at European investment banks have spiraled out of control, with BNP and Credit Suisse the worst offenders
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.
7. European banks’ cost cutting targets are inadequate. In the case of Credit Suisse, they’re also based on unreasonably optimistic revenue predictions
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.
8. Credit Suisse has done most to cut compensation in the investment bank since 2009. UBS has done most to cut headcount. So far, however, most cuts have been due to the ‘juniorisation’ of front office jobs
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.
9. The big issue now is cutting costs in the middle and back office
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.
10. Deutsche Bank especially needs to cut infrastructure staff
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.
11. In fact, Barclays, Deutsche Bank, BNP, SocGen, and to a lesser extent, Goldman Sachs, need to make some enormous cuts to their back office headcount to maintain a low double digit return on equity
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%.
12. Revenues per head are far, far, higher at US investment banks than at most Europeans
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.
13. If you work in fixed income now, you should be at Bank of America, Deutsche, Citi, J.P. Morgan or Goldman Sachs
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.
14. If you work in equities now, you should be at J.P. Morgan, Goldman Sachs, Credit Suisse, or Bank of America
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