Traders face an anxious final three months of 2022 as investment banks face mounting pressure to cut costs after falling fees and costly hiring over the past year.
Wall Street banks JPMorgan, Morgan Stanley and Citigroup kicked off a third-quarter reporting season where falling trading fees weighed on earnings.
“We’re obviously looking at headcount,” Morgan Stanley chief executive James Gorman said on his third-quarter call with analysts. “You have to consider the rate of growth we’ve had over the past few years and we’ve learned some things during Covid about how we can operate more efficiently. That’s something the management team is working on from here. at the end of the year.”
The top 10 investment banks face a $25 billion hole in fees for the first nine months of 2022, according to data provider Dealogic, with European firms expected to post steeper declines than their Wall Street rivals in the coming weeks.
This time last year, banks were bidding for top dealmakers in a bid to upstage their rivals, with staff numbers rising on Wall Street and the City and salaries hitting levels not seen in the United States. pre-crisis peak. Now the banks face more questions about when they will start making bigger cuts.
The 63% drop in Citigroup’s investment banking fees to $631 million was a bigger drop than the 50% drop reported by Chief Financial Officer Mark Mason in September. JPMorgan’s 47% drop was at the top end of previous forecasts by corporate and investment banking boss Daniel Pinto at an industry conference, while the 55% drop in Morgan Stanley’s fees weighed on overall profit.
LILY Citigroup dealmaker fees slide 63% amid hiring spree
Morgan Stanley has 81,567 employees worldwide, an increase of 11% over the same period last year. The bank has cut compensation costs by just 15% in its institutional securities unit despite a 50% drop in investment banking fees so far this year. JPMorgan’s 71,797 employees in its corporate and investment bank represent an 8% increase over the previous year and payroll costs within the unit have risen so far in 2022.
Jamie Dimon, chief executive of JPMorgan, said the deal outlook does not appear to improve over the next few months. He told analysts they should brace for “a decline in investment banking revenue next quarter versus this quarter based on what we’re seeing today,” on a call to results.
LILY JPMorgan’s investment banking fees drop 47% as deal boom falters
Some banks have already pulled the trigger. Goldman Sachs’ decision to reintroduce its annual 1% to 5% staff cut in September meant few dealing teams were spared, while equity markets and leveraged finance teams suffered. been the hardest hit in London. But the cuts remain relatively light for an industry that wields the ax at the first breath of a downturn. RBC Capital Markets cut just 10 jobs at its US investment bank – or 1% of its workforce – in September, while HSBC cut some UK traders in recent months.
Others have been reluctant to cut back. Bank of America Chief Financial Officer Alastair Borthwick said in September that the bank would continue to bring in dealmakers to meet its ambitions. JPMorgan’s Pinto, chief executive of its corporate and investment bank, warned of deep cuts to dealmakers at an industry conference in September and Citigroup signaled a continued appetite for bringing in bankers seniors.
“We’ve hired, filled gaps in healthcare, technology, energy…and we feel good about it,” Citi’s Mason said. “We are seeing the benefits of having made these hires.”
The main negotiators said Financial News that after a recruitment frenzy in 2021, when bankers were recruited with guaranteed bonuses and salary increases reached 30-40% for top talent, banks are reluctant to implement deep cuts. Appetite for deals remains high, they say, but market conditions are unfavorable.
Negotiations have been hampered by fears of recession, rising inflation and geopolitical unrest, such as Russia’s invasion of Ukraine. Meanwhile, choppy markets have stemmed deals and rising interest rates have led to the drying up of funding for big deals through leveraged loans.
Gorman said the deals have been postponed, but “people keep” announcing deals. “There will be many more deals as we get closer to economic clarity,” he said.
However, the longer this lasts, the more it will test bank executives who decide to make deeper cuts. But Wall Street CEOs have so far resisted.
“We’re obviously cautious, but we see no reason to take big, drastic measures,” Gorman said when asked by analysts.
Meanwhile, when asked by analysts if JPMorgan should wait to increase its workforce during uncertain economic times, Dimon simply replied, “No.” He added that while compensation “will go up and down dramatically”, the bank “is making heavy investments and we have some of the best margins in the business”.
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