Given the rate of staff cuts in the investment banking industry, one might be forgiven for wondering if there will be anybody around to answer the telephone when the markets finally stage their long-anticipated recovery.
Banks have an almost pathological aversion to looking beyond the top of the curve. So it was in the halcyon days, from 1996 to 2000, when the capital markets were on a roll and investment banks worldwide added more than 100,000 people to the payroll, bringing the total headcount up to around 627,000. This is without taking into account the mega-mergers put together during this period, such as UBS and SBC Warburg, JP Morgan and Chase, and Deutsche Bank and BT Alex Brown. “When faced with such over-capacity in the past, investment banking firms have often resorted to mergers and acquisitions,” says Ray Soifer, head of Soifer Consulting.
The investment banks of Wall Street, the City, Frankfurt and Zurich are all undergoing a painful process of adjustment from the glory days, when even eight-figure bonuses could not keep up with income growth. By the end of 2001 the joyride was well and truly over. Total numbers had plummeted to 593,000, with Merrill Lynch axing 20% of its workforce, while Goldman Sachs and Lehman Brothers sacked 9% and 5% of their bankers, respectively, and Morgan Stanley lost nearly 10% of its global workforce. For the overall market, the industry has shed at least 12% of its workforce since 2000 and, as Soifer points out, the bloodbath is far from over.
The Centre for Economics and Business Research adds its voice to the gloomy forecasts. It estimates another 20,000 job losses in the City by the year-end – this is after a reduction of 18,000 since 2001. The think tank fears another 58,000 jobs may have to go in London over the next few years, at least until the recovery is consolidated.
“While US securities firms have cut more than 30,000 jobs since the end of 2000, and comparable numbers are expected in London by mid-2003, operating figures show that far larger cuts may well be ahead,” says Soifer.
Mid-cap corporates that traditionally rely on the non-bulge bracket segment, such as BNP Paribas, ABN Amro or Dresdner Kleinwort Wasserstein, may find it harder to do business with their bank in a few months time, simply because it has withdrawn from a raft of activities, primarily on the equities side.
ABN Amro shut down its US and Japanese equities businesses last year.
It claims this was done to focus on areas that can add greater value to its client. The bank has also cut its staff numbers from 23,000 to 21,000 with another 500 or so redundancies expected by the year-end.
However, ABN Amro was one of the luckier ones, in that it began swinging its scythe ahead of the curve, having launched its re-structuring two years ago. Dresdner Kleinwort Wasserstein, on the other hand, has taken a beating in so many areas that it’s effectively pulling out of most markets except Europe, with a 20% reduction in its staff numbers.
“If the slump continues long enough I think we’ll see second-tier players start to consider getting out of non-core sectors of the business,” says John Hitchins, partner at PricewaterhouseCoopers. “The question is how much longer people can maintain non-core businesses. The big end of the market is dominated by the bulge bracket players, and there’s no sign of any reduction in capacity. But other houses that had global ambitions are struggling with costs. For corporates, there will be a reduction in choice of the number of houses.”
Anything to do with the equities market is most vulnerable, largely because of the expense involved in maintaining a team and the almost total lack of confidence in an early recovery. This is despite the attempt to talk it up before the end of last year. With little if any primary market activity around, there’s no worthwhile profitability for banks in the secondary market.
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It’s a buyer’s market for corporates, if for instance anybody is looking to launch a rights issue or an IPO. Over-capacity in the industry and the depressed state of the markets means that fees can be negotiated down to the bone. The problem is that nobody wants to buy into this buyer’s market. The other side of the coin is that low share prices have put a premium on the cost of raising equity funding. “Most FDs are worried about price, as you need to issue a lot more shares to get the money that you want,” says PwC’s Hitchins.