London workers at Credit Suisse are set to become the latest casualties of the rout that has left analysts poised for another round of poor results from top investment banks in the US and Europe.
The Swiss bank will this week tell up to 1,800 London staff their jobs are at risk, following through on a cost-cutting commitment made last October, bank insiders said.
The pressures forcing Credit Suisse into action were evident in last week’s fourth-quarter results from JPMorgan Chase and Citigroup, where revenues from the core fixed income, currencies and commodities (FICC) businesses were a weak spot among broadly positive numbers.
At JPMorgan, FICC revenues slipped 3 per cent to $2.57 billion (CHF2.58 billion). Citi’s FICC revenues rose 7 per cent from a strikingly weak period a year earlier, but still capped a nine-month run of consecutive falls from a volatility-boosted first quarter. Morgan Stanley and Goldman Sachs report their numbers this week.
“Fixed income continues to be a hard-hat area,” said Huw van Steenis, London-based banks analyst at Morgan Stanley.
A pre-results season note from Société Générale’s European banks’ research team singled out Credit Suisse for the “riskiest overall profile” of the world’s investment banks because of its outsize exposure to FICC. Deutsche Bank also has a heavy exposure to the area.
Both European banks announced major cuts to their fixed income businesses in October as part of new strategic plans, but those initiatives are too recent to have had much impact on the fourth quarter’s results.
Tougher rules on capital and compliance, patchy client activity and a shift toward electronic trading have crimped margins in key FICC markets since the crisis, forcing banks to pull back and cut staff. Data from Coalition, a London-based consultancy, shows that aggregate FICC revenues across 10 of the top investment banks dropped by 26 per cent between 2010 and 2014, and were expected to drop another 5 per cent last year.
The falls in revenue have been sharper at some banks than others. Credit Suisse’s FICC revenue in the third quarter of 2015 was 55 per cent lower than a year earlier.
US banks have tried to keep margins respectable by capping costs. JPMorgan trimmed pay to 26 per cent of net revenues within its corporate and investment bank in the fourth quarter, from 27 per cent a year earlier, while Citi lowered its equivalent expenses by 1 per cent, despite a rise in pay.
European banks have announced major cost-cutting programmes, including Credit Suisse’s promise to cut gross costs by CHF3.5 billion within three years and Deutsche Bank’s vow to achieve cost savings of €3.5 billion by 2020.
John Gerspach, Citi chief financial officer, told the FT that he considered the FICC business “right-sized to satisfy clients’ needs”, noting that the interest rates and currencies units showed year-on-year revenue growth of 4 per cent. However, he added: “We constantly recalibrate the resources we allocate to the fixed income business as we see client needs shifting in relation to markets.”
Analysts say heavier cost cuts could be coming. According to Coalition, the average pay per front-office FICC staffer at the top 10 banks was almost flat between 2010 and 2014, moving from $857,000 to $875,000. That clash between variable revenues and relatively fixed costs means that profits may remain too volatile for investors’ liking.
The big banks thought they were building “Panzers” after the crisis, said Brennan Hawken, analyst at UBS in New York. But the businesses still look “closer to the American tanks in World War Two, where the armour gets pierced with the first shell”.
Morgan Stanley said last month that it would cut about one-quarter of its FICC staff, along with hundreds of back-office support workers. Under James Gorman, chief executive since 2010, it has aggressively pared back the FICC business in pursuit of the bank’s target of a 10 per cent return on equity.
“The cuts are in the spirit of creating a more efficient franchise,” said Glenn Schorr, analyst at Evercore ISI in New York. “It’s an unfortunate but necessary thing.”
Meanwhile, Goldman Sachs may cut more than the usual bottom 5 per cent of its fixed income traders and salespeople during its annual cull in March, said a person familiar with the situation.
Analysts say that more banks – particularly in Europe – should be taking similar action.
“At the end of the day banks are committing to return-on-equity targets,” said Mr Van Steenis. “Deutsche Bank and Credit Suisse, among others, have signalled that it may take until 2018 to get an acceptable return on equity. The challenge will be to keep investors patient.”
Copyright The Financial Times Limited 2016