Chillin' out till it needs to be funded
In 2007, Sub prime mortgages started falling apart and became common knowledge. The constant media attention and the frequently changing regulation has since accounted for a lot of revenue shrinkage esp as Bank get ready to close Trading business in 2011 according to the Dodd frank regulations. Even otherwise, the rising cost of capital, the breakdown of structured finance mechanisms and above all the changing of compensation structure s at bank s have had banks reconsidering job cuts since
Yesterday’s pronouncements by the Vickers’ committee disalllowing any capital to flow through from retail to corporate lending or even probably SME lending will further obstruct the earning capacity of banks in the UK. Subsidiarisation will be introduced globally , in full measure by 2016 and even later, however the path till then is mostly about reorganising capital and restructuring banks according to the new rules
As Bloomberg BW reports, Banks are now paying up to 75-80% of the compensation as fixed and with revenues reportedly shrinking by 30% again in the September quarter, the Cost to Income ratios have crawled up to even 80% at UBS and Credit Suisse
Costs on Rise
Compensation cost as a percentage of net income at the 20 largest investment banks will increase for a second year to 65 percent in 2011 from 55 percent in 2009, Barclays Capital analysts said in an Aug. 10 report. It could be more than 80 percent at the investment-banking units of UBS and Credit Suisse, both based in Zurich, and Tokyo-based Nomura Holdings Inc., the analysts said.
Banks are struggling with slower economic growth and a spreading debt crisis that is sapping confidence in Europe’s financial institutions. Combined revenue for the 20 largest global investment banks was down 8 percent in the first half, after a 23 percent drop in the same period last year, the Barclays analysts said.
The 46-company Bloomberg Europe Banks and Financial Services Index has fallen 38 percent this year.
Deal Income at the Top 10 investment banks is not more than $ 1 bln each in the current quarter. For India ( as example) deal revenues for the year are more than $483 mln in the 8 months till date, less than half expected in a growing Asian franchise as PSU mandates that have to be under bid to $1 fr a $10 bln flotation take a toll on the toplines and effectively eliminate bottomlines in a business powered by compensation alone. Most of the compensation at stake is now converted into fixed at the start of the year to comply with government mandates on amount of bonuses which still remain in excess of $10 bln in 2010 but will come down by a third in 2011 yet again
In August for example, the no. of deals in M&A rose to more than 1000 from 900 in July but deal volumes went down to one third from $600 bln in July.
Fixed-compensation costs, which include salaries and deferred bonuses, rose to 82 percent of total pay at Credit Suisse in 2010 from 66 percent in 2009, according to a JPMorgan Cazenove report in June. At UBS’s investment-banking division, fixed compensation rose to 65 percent from 55 percent in 2009, according to the report.
Average compensation at banks have been dropping steadily since 2009, compensation at Goldman Sachs down from $660,000 in 2007 to $430,000 in 2010
Total compensation for investment-bank employees has decreased since 2007. Workers at UBS’s investment-banking division were paid an average of 399,940 Swiss francs ($454,790) in 2010 compared with 474,968 francs in 2007, according to the annual report. Average pay at Credit Suisse’s investment bank fell to 388,067 francs in 2010 from 494,708 francs in 2007.
This weeks developments in the UK alone have been estimated to increase cosst by more than $11 billion for banks operating in the UK. Many headhunters also believe that if compensation is now reduced, talent will leave with UBS and Credit Suisse itself and then Deutsche Bank and Citi being the first few to have absorbed attriting talent from Top Investment banks circa 2007
Job cuts have been proposed this time asking for a paticular Dollar SAvings number at each bank to cope with the situation. (See our article on Goldman Sachs earlier) GS is requesting $1.5 bln savings this year and investment banks like UBS and Credit Suisse could be reconsidering discarding investment banking businesses where they have made no headway. In the case of Nomura, they are planning a 5% reduction in Trader headcount. Goldman Sachs could still go ahead with rseparating out trading units as it bids goodbye to its best traders with restrictions on hedge fund ownership and proprietary trading operations
Still job cuts at Barclays and HSBC for example would lead from their monolithic retail operations. even as without the Vickers report too other retail competitors like Llloyds continue selling off their retail and wealth brbanches to comply with Government Aid conditions
(ARS/Dealbook) JPMorgan’s investment bank is more than halfway through a five-year plan to save about $1.3 billion a year by consolidating its trading operations — a move that will involve shedding as many as 3,000 workers, some of whom will be employed elsewhere in the bank.
The Dealbook lead mentions a 8% drop in JP Morgan’s trading revenues in the September qtr and 47% at Citibank (Credit Suisse note)
Other banks may see a similar fall-off in trading. Citigroup, which has a giant fixed-income business, could see core trading revenue drop 47 percent from a year ago, according to Credit Suisse research. Overall trading revenue at Morgan Stanley is expected to fall about 1 percent from a year earlier, while revenue at Bank of America is expected to rise about 11 percent. Both banks had relatively weak third-quarter results in 2010.