Investment banks and the scourge of pre-Christmas job cuts
It happens every year, but this Christmas especially there are a lot of people in banks staring at their screens, dreading an unexpected invitation to a meeting with line manager, at which a member of the HR team also happens to be in attendance. In the words of one Citi trading insider, the next few weeks could be "brutal."
The chart below, showing the cost income ratio at Barclays International and at Deutsche's investment bank, explains why. Although revenues in some investment banking divisions (M&A, ECM and DCM) are tracking up in the fourth quarter compared to the nadir of last year and although attendees at Goldman's financial services conference have been reflecting on the improving outlook, costs are consuming an increasing proportion of revenues. Banks are under pressure to do something about it.
Action is being taken. As we reported today, Santander is cutting from its UK technology team. Barclays is cutting 900 people in the UK, albeit mostly in support functions at the moment. Citi has put London staff at risk and is cutting globally. Wells Fargo yesterday set aside up to $1bn for "unanticipated" severance costs.
"Underperformers are going to be swept out of everywhere in the next few weeks," says the head of one London search firm, speaking on condition of anonymity. "It's all about cutting people before bonuses so that you're just paying them out of their salary. What you don't want to do is to pay a cash bonus and then to have to pay them a chunk of their new deferred bonus when you let them go."
Most US banks pay people at the end of January, giving them a few weeks yet to cut heads. European banks typically pay in February and March and have longer to get their houses in order. Citigroup is expected to cut people before the third week of January; Wells Fargo is booking its severance costs in the fourth quarter, suggesting the run-up to Christmas could be harsh.
When Barclays announced cuts to its support roles last week, one British trade union declared it "disgraceful" to let people go before Christmas. Bankers and traders, however, say they're used to it. "It's always difficult sending colleagues home before Christmas," said one senior equities professional at a European bank. "But we are slap bank in the middle of the point when people are "put at risk" and asked to go."
However, he said this year isn't as bad as it might have been. "Business is picking up. ECM activity is improving and banks won't want to be underweight in the first quarter when hiring them back would be expensive." Instead of letting people go, he says it's far more likely banks will pay a lot of people zero bonuses instead.
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