Now that most banks have reported their results for the third quarter of 2019, their strategic priorities for the next three months and after are clear. Yes, it's mostly about cuts. Yes, pay looks compromised, but there's also investment - and not just in technology.
This is the situation on a bank-by-bank basis.
Bank of America: Hiring bankers and client-facing staff, investing in technology
Bank of America has spent 2019 repairing its investment banking franchise, and it seems to be working. After hiring 50 senior bankers in total, including 27 new managing directors in the year to October, M&A fees earned by the bank increased 72% year-on-year in the third quarter. Nor is hiring over yet: BofA is building out a new private sales and divestitures team which has already grown from four to 17 bankers and is due to hit 30 by the middle of next year.
Speaking during the bank's third quarter investor call, BofA CFO Paul Donofrio said the bank is investing in client-facing staff and technology. BofA isn't exactly cutting costs overall - it's on target to hit its $53bn cost target this year and says it will hit $53bn again in 2020, but it's squeezing spending to invest in new technology. CEO Brian Moynihan said costs of the bank's "backbone" have been cut by around 40%, or $2bn a year. The bank has built its own internal cloud and now runs on 70,000 servers, instead of the 200,000 it ran on two years ago. It's also reduced its data centers to 23 from 67. The plan now is to start migrating to external cloud providers once their cost-efficiency and safety is confirmed.
There was no mention of pay, but BofA's bankers will surely expect to be rewarded.
Barclays: Layoffs seemingly done but costs and pay likely to be squeezed to meet targets
A few weeks ago there were claims that Barclays was getting ready to make mutiple fixed income redundancies after a handful of treasury layoffs in New York. So far, however, there's little sign of this. Barclays' fixed income salespeople and traders had an excellent third quarter, with revenues increasing 15% year-on-year (compared to reductions of six per cent at UBS and 7.5% at Deutsche) and its bankers had their third best quarter ever for fees, with a particularly strong performance in the U.S.. The equities business did less well, but CEO Jes Staley remains insistent that he "likes" the equities sales and trading franchise and is in no hurry to cut it in the style of Deutsche Bank or HSBC. - Much of the publicly proclaimed investment at Barclays this year has gone into rolling out the existing Barx electronic trading platform into the equities space.
Barclays already cut 3,000 people earlier this year, so does this mean layoffs won't happen in the fourth quarter? Unlikely. Although the investment bank is performing well, Barclays is a long way from achieving its 9% return on equity target for 2019 (5.7% in the first nine months of the year). Bonuses already appear to be being squeezed, with accruals down 23% in the first half. Staley and CFO Tushar Morzaria have been giving mixed messages on bonus payments, with Staley seeming to take a stricter approach to reaching return targets.
BNP Paribas: €100m of costs to cut this year, €1.5bn to cut in 2020, investing in Deutsche Bank's unwanted businesses and 'robots'
Like Barclays, BNP Paribas is doubling down on the investment banking business. Despite a miserable result from its equities trading franchise in the third quarter, the French bank is ingesting Deutsche Bank's prime brokerage and electronic equities trading businesses and up to 800 of DB's staff. Ultimately, BNP wants to be a top four prime brokerage house and to hold $300bn of hedge funds' deposits, says Bloomberg. This effort is likely to dominate 2020.
At the same time, though, BNP has costs to cut elsewhere. In February 2019 the bank announced an additional €350m of cost cuts across the bank by 2020 (on top of the €500m of recurring cost savings planned) and €100m of these are yet to come in 2019, with another €1.5bn due next year. There's no mention yet of additional layoffs in the corporate and investment bank, but BNP is unlikely to be lavish with bonuses. It's still focused on 'industrialisation' and says it's invested in 300 'robots.' There's unlikely to be much hiring next year, what with all the new joiners from DB.
Citi: Investing in treasury and trade solutions, intimations of higher bonuses
Citi spent August and September trimming 'hundreds' of jobs from its investment bank and sales and trading businesses, especially from equities, which saw revenues fall 13% year-on-year in the third quarter. Overall, however, Citi's investment bank (it's institutional clients group) was one of the few to see revenues and profits rise in Q3 (by a marginal 2.9% and 1.6%). Things aren't great at Citi, but they're not awful either.
Citi CFO Mark Mason said the bank is investing in its treasury and trade solutions (TTS) business and compensation costs have risen due to performance - which suggests bonuses might be up.
Credit Suisse: Restructuring is done in global markets but questions remain over Asia and investment bankers
Credit Suisse's global markets (sales and trading) business turned in some excellent results in the third quarter, which CFO David Mathers said were the outcome of "three years of deep restructuring from 2015 to 2018." However, not all is well in the Credit Suisse business: the investment banking and capital markets division made a loss of CHF100m in the first nine months of the year, and revenues in M&A, ECM and DCM fell 30%, 19% and 20% respectively. In Asia, the markets business made a CHF34m loss in the third quarter.
Does this mean more restructuring is required? You might think so, but CEO Tidjane Thiam says not. The investment banking business is experiencing "cyclical" issues and brings unquantifiable benefits to the business according to Thiam, as does Asian global markets. If anything, Credit Suisse wants to hire healthcare and technology bankers, and to double-down on Asian securitisation, Thiam added.
More will become apparent at the bank's investor day in December. In the meantime, Credit Suisse continues to "in-source" technology jobs that were previously contracted to third parties, and this is increasing headcount.
Average pay per head in global markets and investment banking and capital markets was down 7% and 6% respectively in the first nine months of the year.
Deutsche Bank: 4,000 cuts made across the corporate and investment bank already, a hiring freeze, but record numbers of graduate hires
In the past year, Deutsche has cut 3,800 people from what used to be its investment bank (now split between the investment bank and the capital release unit), and another 177 people from its corporate bank. As part of this process, 2,543 front office people have disappeared from the capital release unit alone. However, in the call accompanying the third quarter results, CFO James Von Moltke said only 500 of the people who've left the investment bank were "involuntary leavers", suggesting most people quit of their own accord.
In theory, cuts in the investment bank are now over, although a weak third quarter means this may not be the case. Deutsche's recent appointment of a new head of 'transformation' and CEO Christian Sewing's avowal that cuts are a marathon not a sprint, means there could be more in store. The bank is promising an 'investor deep dive' in December at which more could become apparent. There were reports in October that the rates trading business, which has new management, could see further job cuts of up to 10%.
Until then, the German bank is particularly focused on growing its debt capital markets franchise and a new private placements business under David Costa from Goldman Sachs. Deutsche has a virtual freeze on hiring, with all new recruits having to be signed off by Sewing himself or his deputies. However, the bank seems to be compensating for this with some unusually heavy recruitment of graduates.
Goldman Sachs: Waiting for the January investor day, investing in platforms
At Goldman Sachs, all eyes are on the firm's first ever investor day on 29 January, when CEO David Solomon is due to outline the bank's plan for the next five years.
It's already clear what's coming: Solomon's plan is to make Goldman all about 'platforms' that can generate additional revenues at minimal marginal cost. In the short term, this means investing heavily in technology talent, a transaction banking platform and racking-up costs more quickly than revenues. This is exerting a 60 basis point drag on Goldman's return on equity. In the long term, it should mean that revenues start increasing a lot faster than costs - should.
For the moment, then, Goldman is spending heavily on things like its Marquee platform, which makes its risk and pricing tools directly available to clients and now has over 50,000 monthly users. The firm has created a new 18 man team 'multi-asset platform sales' team in London under Kene Ejikeme, which is tasked with bringing in 'thousands of new trading clients' using Marquee. It's also working at trading an increasing proportion of credit products systematically, without human intervention.
Goldman's new focus doesn't look good for old-fashioned bonuses: average pay per head was down 15% to $246k in the first half of the year, although this may reflect an influx of cheaper retail bank staff.
HSBC: Nasty rumours, waiting for cuts to be announced
HSBC bankers and traders are also waiting for a new strategy announcement, although theirs is likely to involve a lot more pain. Interim CEO Noel Quinn is promising to make "material" cuts and take "decisive action" under a new strategy to be divulged when HSBC announces its fourth quarter results in early 2020.
Quinn is being intentionally vague about what the new strategy will entail, but his vagueness has not precluded suggestions that senior bankers in London will be targeted and claims that HSBC might pull back from equities sales and trading in Europe and the U.S.. Instead, Quinn says he wants to reallocate resources to Asia.
JPMorgan: Revenues and profits both falling in the investment bank, investing in technology
If JPMorgan plans to make fourth quarter cuts in its corporate and investment bank (CIB), it isn't saying so. However, it could definitely benefit from some trimming. - In the first nine months of 2019 revenues fell 1% and profits fell 8% in the unit.
There was no mention of further cost cutting in the bank's third quarter results, though. Instead, CEO Jamie Dimon just talked up the, "deployment of technology in automated trading algorithms in swaps and FX and equities." Meanwhile, quants in JPMorgan's “Analytics, Automation & Optimization” are being armed with trading licenses, suggesting a reduced need for non-quant traders in future, and JPMorgan is investing heavily in a new artificial intelligence team in Silicon Valley.
Morgan Stanley: No cuts planned, but technology spending may make them necessary. Get to know Rob Rooney
Morgan Stanley is in a position similar to JPMorgan: revenues at its investment bank are shrinking, and profits are shrinking faster still.
In the first nine months of 2019, revenues at Morgan Stanley's institutional clients unit fell 8% while profits fell 20%. This might be expected to encourage some heavy cost-cutting, but CEO James Gorman isn't saying much on that.
In the bank's third quarter investor call, Gorman instead acknowledged that costs are increasing faster than revenues and assured analysts that he is "maniacally" focused on ensuring this isn't the case in future. Like Goldman, Gorman said Morgan Stanley is all about developing "scale economics," especially in equities trading.
If you're in the institutional securities unit at Morgan Stanley, you want to be working with Rob Rooney, the ex-head of Morgan Stanley's international business who's been executing a new technology strategy since 2018. "Rob Rooney is leading a major reformation of our technology platform internally," declared Gorman in the recent investor call. Under Rooney, Morgan Stanley wants to invest in new technology to replace inefficient legacy systems, added Gorman.
Gorman didn't say so, but if costs are not to keep rising faster than revenues in the short term, all this technology spending will surely mean more cuts elsewhere.
UBS: Big cuts, possibly getting bigger still
After a miserable third quarter UBS is unequivocally in cost-cutting mode. The Swiss bank has committed to taking CHF90m out of its investment bank, which CFO Kirt Gardner said will be almost entirely be comprised of reduced headcount costs, mostly senior staff. CHF90m is only a net figure, after allowing for investment in areas like technology, so the actual cuts could be higher still.
UBS is already shedding big names. Global head of equity capital markets Javier Martinez-Piqueras left last week, as did Philippe Pillonel, the chair of investment banking. There have also been cuts to the investment banking division in London. Back in September, the Swiss bank promised to trim divisional co-heads.
Given that profits in UBS's investment bank fell 63% in the third quarter, there are suggestions that CHF90m of cuts may not be enough. Deeper cuts are a possibility, particularly after CEO Sergio Ermotti declared a week after the Q3 results announcement that, "nothing is really untouchable.”
Like most banks, UBS is cutting and investing in technology. Ermotti said the CFH90m cuts are part of a program to allow reinvestment in digital transformation and focus resources on profitable growth and better serving clients.
Average pay per head in the investment bank fell from CHF484k in the first nine months of 2018 to CHF 400k in the first nine months of this year.
Have a confidential story, tip, or comment you’d like to share? Contact: firstname.lastname@example.org in the first instance. Whatsapp/Signal/Telegram also available.
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.)