Investment bankers in Europe are girding for a second wave of job cuts in less than a year after the euro area’s debt crisis drove fees from mergers and securities underwriting to a nine-year low.
Credit Suisse Group AG (CSGN) and UBS (UBSN) AG, Switzerland’s biggest lenders, face the most pressure to boost efficiency as that country runs ahead of others in introducing tougher capital and liquidity rules to curtail risk-taking, making some businesses unviable. The banks’ securities units had the highest costs as a proportion of revenue among a group of the 12 largest firms in Europe and the U.S. last year, Morgan Stanley analysts Hubert Lam and Huw van Steenis wrote in a May 24 note.
While the situation may be most acute at Credit Suisse and UBS, similar dynamics are at work at other firms as the debt crisis drags on, capital requirements ratchet higher and economic growth grinds to a halt.
“Bankers are really gloomy and a lot of people are worried about their jobs,” said Edward Cumming-Bruce, a partner at London-based advisory firm Gleacher Shacklock LLP who has more than 20 years’ experience. “Banks are under remorseless pressure to cut costs and balance sheets as we witness a significant change in the way the financial industry works.”
The debt debacle is roiling markets and discouraging clients from doing deals. Investment-banking fees in Europe, the Middle East and Africa from mergers, stock and bond sales and loans sank by more than a third in the first half from a year earlier to $9 billion, the lowest since 2003, according to estimates from New York-based research firm Freeman & Co.
Revenue per employee at the investment banks of Credit Suisse and UBS last year amounted to $622,654 and $612,707, respectively, down about 50 percent from 2006, according to data compiled by Bloomberg from company reports. At Deutsche Bank AG (DBK), revenue per employee at the corporate banking and securities division fell by 14 percent since 2006, and at Barclays Plc (BARC)’s investment bank by 9.3 percent, the data show. UBS is the only one of the four firms to have fewer workers at its investment bank at the end of 2011 than five years earlier.
The two Swiss companies, both based in Zurich, had combined investment-banking staffs of 38,156 at the end of 2011. They probably will have the highest cost-to-income ratios of the 12 biggest banks again this year, according to estimates by the Morgan Stanley analysts. Unless the firms boost revenue this year or next, the pressure to cut more jobs and shrink their securities units will intensify, the analysts said.
“It makes sense for them to cut the most,” said Andrew Lim, an analyst at Espirito Santo Investment Bank in London who recommends that his clients sell Credit Suisse and buy UBS.
Spokesmen for UBS, Credit Suisse, Frankfurt-based Deutsche Bank and Barclays in London declined to comment.
At least seven euro economies already are in recession and Germany, Europe’s largest, which helped the single-currency zone avert a contraction in the first quarter, also is cooling. German investor confidence dropped the most in 14 years in June, and executives grew more pessimistic. Euro-area economic sentiment slumped to the lowest in more than 2 1/2 years last month, while unemployment reached a record 11.1 percent in May.
Western European financial firms have announced fewer than 16,000 job cuts this year, compared with more than 107,000 in 2011, data compiled by Bloomberg show.
“The industry is still significantly overstaffed,” Dirk Hoffmann-Becking, a London-based analyst at Societe Generale SA, said in a note in June. “The usual investment-banking revenue cycle remains broken.”
The industry could lower costs by 29 percent by reducing pay levels, which remain 35 percent too high relative to long- term averages, and cutting headcount by 10 percent to 12 percent, according to Hoffmann-Becking’s report.
“The European banking industry must recapitalize and restructure its loan portfolio,” said Richard Bove, an analyst at Rochdale Securities LLC in Lutz, Florida. “In this process one would imagine well over 100,000 people will lose their jobs in banking” over the next 18 months.
Employment in London’s financial-services industry may fall in 2012 to its lowest level in 16 years, the Centre for Economics & Business Research Ltd. said in May. The U.K. economy is struggling to recover from its first double-dip recession since the 1970s.
Merger fees in Europe may decline further this year if Baar, Switzerland-based Glencore International Plc (GLEN) fails to complete its 16.7 billion-pound ($26 billion) offer for the rest of Xstrata Plc, the biggest takeover this year, after the target’s second-largest shareholder demanded in June that the bid be increased by 16 percent.
Initial public offerings also are being pulled as the sovereign-debt crisis weighs on stock markets. Evonik Industries AG, Germany’s largest closely held chemical company, abandoned in June what would have been that country’s biggest IPO in more than a decade.
The fee pool from European equity transactions dropped 53 percent in the first half to $1.1 billion from the same period a year earlier, data from Freeman shows. Fees earned from mergers and acquisitions fell 36 percent to $3.2 billion, while those from arranging bond sales slumped 20 percent to $3 billion.
UBS, the biggest Swiss bank, and Credit Suisse, the second- largest, said last year they will scale down their investment banks and expand other businesses to prepare for Basel III and Swiss capital rules that will require them to hold more reserves for complex and risky businesses.
UBS is cutting Basel III risk-weighted assets at its securities unit by almost half from September’s levels, and Credit Suisse is reducing them by about 37 percent. The banks are exiting or reorganizing businesses such as securitization, structured products and long-dated unsecured trades.
Credit Suisse Chief Executive Officer Brady Dougan, 52, had added about 2,000 people to the securities unit since 2009 -- a move he called wrong in retrospect -- before announcing plans last year to eliminate 3,500 positions across the company by the end of 2013. Headcount at the investment bank at the end of 2011 was 12 percent higher than five years earlier, while net revenue was 44 percent lower. At UBS’s unit, the number of employees fell 21 percent since 2006, while revenue plunged 57 percent.
Senior managers at Credit Suisse, who asked not to be identified because they weren’t authorized to speak about the matter, said they expect more staff reductions because the market environment isn’t improving. The bank trimmed the 2011 bonus pool for its securities unit by 51 percent after the division posted a second consecutive quarterly loss.
UBS also announced 3,500 job cuts last year, with about 1,575 of those at the investment bank. As of the end of March, the unit still had about 700 more positions to eliminate to reach its target of about 16,000 employees by the end of 2016.
Deutsche Bank announced 500 job cuts in October after scrapping its operating pretax profit forecast of 10 billion euros ($12.3 billion) for 2011 amid a “significant and unabated slowdown in client activity.”
Deutsche Bank’s new co-CEOs,Anshu Jain, 49, and Juergen Fitschen, 63, who took over in June, may focus on cutting costs and disposing of unwanted assets when they announce their strategy in September, Kian Abouhossein and Amit Ranjan, London- based analysts at JPMorgan Chase & Co. (JPM), said in a July 3 note.
The bank, Europe’s largest by assets, may save 2.5 billion euros, led by job reductions, cost-cutting and lower pay at the investment bank, the analysts said. The investment-banking unit could trim as much as 20 percent of its staff, Abouhossein and Ranjan estimated.
The unit has about 31,799 employees, including back-office workers, the highest among global peers, the analysts estimate. If Deutsche Bank doesn’t cut any jobs in the “weak revenue environment,” its revenue per employee at the investment bank may fall to the lowest compared with New York-based Goldman Sachs Group Inc., Morgan Stanley, UBS, Barclays and Credit Suisse in 2013, according to JPMorgan estimates.
“Headcount in the investment bank has not declined at the same pace as revenues,” the JPMorgan analysts wrote. “The current weak revenue environment may lead to further announcements on cost savings in our view.”
Leaders within the German firm’s M&A advisory unit are preparing for job cuts as they struggle to justify existing staff levels amid a decline in revenue, according to a banker within the department who asked not to be identified.
Barclays’s investment bank faces an uncertain future after the departure last week of Robert Diamond, 60, who turned the unit into a top-tier global firm before becoming CEO of the company last year. Diamond, Chairman Marcus Agius and Chief Operating Officer Jerry Del Missier quit after the bank was fined a record 290 million pounds for trying to rig the London interbank offered rate, or Libor.
Barclays had already eliminated 3,500 jobs across the company by October and planned further reductions, Diamond said at the time. The bank was cutting more than 200 support jobs at its investment-banking division to reduce costs, a person with knowledge of the reductions said in April.
Barclays is one of at least 12 banks, including UBS, Credit Suisse and Deutsche Bank, being probed for manipulating Libor.
While further cuts “at the margins” are likely, making major decisions without a new CEO and management team will be difficult, said Gary Greenwood, a banking analyst at Shore Capital Group Ltd. in Liverpool. “They would have to be careful about how deep they cut if they do cut,” he said.
Royal Bank of Scotland Group Plc, Britain’s biggest state- owned lender, said in January it would eliminate 4,800 jobs, including 3,500 at the investment bank, citing volatile markets and increasing U.K. regulation. The Edinburgh-based bank said it would sell or close units including cash equities, mergers advisory and equity capital markets.
UniCredit SpA (UCG) is closing its securities unit in Russia and will cease to carry out cash-equity business for Central and Eastern European shares in New York and London, according to a statement in June. The Milan-based bank is retrenching after it needed 7.5 billion euros in fresh capital.
Even if banks don’t announce new job-cutting programs, they will probably reduce staff levels quietly, said Christopher Wheeler, a London-based analyst at Mediobanca SpA.
“Since 2008 there has been a massive uplift in regulation, and banks need to manage their staff appropriately,” he said. “Everybody is doing job cuts. There is constant trimming.”
Barclays may cut 5 percent to 10 percent of employees at its investment bank in Europe, and about half a dozen investment bankers in Germany have left the firm, according to people familiar with the cuts. In London, JPMorgan will eliminate 20 investment-banking jobs as market conditions weaken, a person with knowledge of the matter said in May. The New York-based bank trimmed additional jobs in Europe over the past few weeks, said another person, who asked not to be identified.
“More cuts are inevitable,” said Philip Keevil, a partner at advisory firm Compass Advisers Group LLC, which has offices in London and New York. “And sooner rather than later.”
To contact the reporters on this story: Ambereen Choudhury in London at firstname.lastname@example.org;