Leaders of the world’s biggest banks touted the virtues of austerity at the World Economic Forum in Davos -- for themselves, not just for over-indebted governments.
Many arrived in the Swiss Alps following a year marked by weak revenue, declining stock prices and cuts in jobs and compensation. The finance and banking industries remain the “least trusted” for the second consecutive year, according to a 20-country survey released earlier this week by public relations firm Edelman.
“Last year every bank thought they could grow their way out of trouble,” Huw van Steenis, who oversees European bank research for Morgan Stanley (MS) in London, said between meetings with investors and policy makers in Davos. “Now they realize they have to shrink their way out of trouble.”
Financial companies, mainly in Western Europe and the U.S., have announced more than 238,000 job cuts since last year’s meeting in Davos, according to data compiled by Bloomberg. Bank of America Corp. (BAC), Deutsche Bank AG (DBK), and HSBC Holdings Plc (HSBA) are among banks selling businesses and slimming down as they adapt to capital requirements approved by the Basel Committee on Banking Supervision, new national regulations and a slowdown in economic growth in Europe.
“Challenging times for the financial-services industry overall, so it’s hard not to be cautious,” Anshu Jain, 49, who takes over as Deutsche Bank’s co-chief executive officer in May, said in an interview with Bloomberg Television. “There’s going to be, and is, powerful consolidation within our industry.”
Deutsche Bank, the biggest German lender, is considering a sale of its asset-management unit as it raises capital to adapt to Basel rules. The Frankfurt-based lender is reducing costs globally and said in October it will cut 500 jobs from its corporate banking and securities unit by March 31.
A year ago, bankers in Davos were trying to persuade regulators to relax new regulations, arguing that banks that held less capital and were subject to fewer restrictions would be an aid to economic growth. Those arguments weren’t successful, said Barclays Plc (BARC) CEO Robert Diamond in an interview before a private meeting of finance executives yesterday. Barclays announced 422 U.K. job cuts earlier this month.
Striking a Balance
“In 2011, as we left Davos, there was optimism about making real progress on the regulatory environment,” said Diamond, 60, co-chair of last year’s finance executives’ meeting. “In striking the balance between a safer and sounder financial system and jobs and economic growth, the progress has been more on safe and sound.”
Concern about European politicians’ ability to reduce government debt is the dominant discussion in Davos this year. While most bankers, including Jain and Diamond, said they are comforted by the European Central Bank’s decision last month to extend three-year loans to the region’s banks, no one expressed certainty about what will happen next.
“The European overhang is real, and while the sentiment has improved a lot, it’s still with us,” Citigroup Inc. (C) CEO Vikram Pandit, 55, said in an interview with CNBC yesterday. “We’re going to be very cautious.”
Brian Moynihan, Bank of America Corp.’s CEO, said in an interview with Bloomberg Television today that the “disruption” in the market at the end of last year appears to have abated.
“It’s behind us in the sense that it’s a new year and the business has rebounded,” Moynihan, 52, said.
Morgan Stanley CEO James Gorman, attending the conference for the first time this year, said in an interview with Bloomberg Television that bankers are “naïve” if they don’t understand why the industry has to pay less to employees.
“The banking industry has gone through a fundamental change, and we have to adjust,” Gorman, 53, said. “When we come out of this and we start re-performing, obviously compensation will reflect that. Until then, we have to respect the fact that shareholders have to get paid, too.”
Banks have to regain the public’s trust by serving clients, not themselves, Citigroup’s Pandit said at a press conference to open the meeting on Jan. 25. Citigroup, the third-biggest U.S. bank by assets, last week announced 1,200 job cuts to save $600 million in its securities and banking division this year. Reductions that began late last year eventually will total 5,000, Chief Financial Officer John Gerspach told reporters last week. That’s about 1.9 percent of the company’s 266,000 employees as of Dec. 31.
Pandit’s comments dovetailed with a report released this week by consulting firm Oliver Wyman, which found that 63 percent of people polled globally last month trust no one other than themselves to manage their retirement savings. Banks were trusted by less than 8 percent of those surveyed in the U.K. and the U.S., the study showed.
In order to regain trust, banks will have to offer simpler products that appear to offer value for money, according to the study. To do that, lenders and insurers will probably cut one quarter of their costs over the next eight years by delivering products online instead of through branches.
One of the report’s conclusions is that financial companies that aren’t banks -- the so-called shadow-banking system that includes insurers and hedge funds -- may be better suited than regulated banks to provide long-term credit to companies and homeowners. The Oliver Wyman survey found that more people in the U.S. and the U.K. said they trusted asset managers than banks to manage their retirement savings.
That may explain the choice of music at the end of a private governors meeting for investors, including Daniel Loeb, CEO of hedge fund Third Point LLC, and Louis Bacon, CEO of Moore Capital Management LLC. The group, which met for four hours yesterday and heard from U.S. Treasury Secretary Timothy F. Geithner and former Bundesbank President Axel Weber, wrapped up their session to the tune of Amy Winehouse’s “Rehab.”
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