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Wall Street’s Biggest Job Cuts Yet to Come, Whitney Says

Commuters near the New York Stock Exchange. Photographer: Scott Eells/Bloomberg
Commuters near the New York Stock Exchange. Photographer: Scott Eells/Bloomberg

July 25 (Bloomberg) -- Wall Street firms must cut more jobs to boost their return on equity and satisfy shareholders, said Meredith Whitney, a banking analyst and founder of Meredith Whitney Advisory Group LLC.

“The biggest layoffs are ahead of us,” Whitney said in a Bloomberg Television interview today with Tom Keene, Sara Eisen and Scarlet Fu. “It’s no fun, it’s painful but you have to downsize dramatically, get more efficient on every single line of business.”

The six largest U.S. banks reported $43.3 billion in total first-half profit, the most since 2007, as revenue climbed for the first time in four years. Lenders including Citigroup Inc. and Morgan Stanley, both based in New York, are leaning on expense savings from job cuts to improve profits, announcing plans in the first three months of this year to eliminate about 21,000 positions, or 1.8 percent of their combined workforce, according to data compiled by Bloomberg.

Whitney, 43, said last July in a Bloomberg TV interview that the banking industry would probably need to shed an additional 50,000 jobs to bring headcounts in line with revenue.

Even as second-quarter net income helped increase the biggest U.S. banks’ return on equity, a measure of profitability watched by shareholders, most remained historically low. ROE frequently exceeded 20 percent at banks including Goldman Sachs Group Inc. and Morgan Stanley before 2008.

Move Needle

Wells Fargo & Co.’s normalized return on equity rose to 14 percent in the second quarter, the highest since the three-month period ended September 2008, according to data compiled by Bloomberg, and JPMorgan reported 13 percent. Citigroup Inc.’s rose to 7.2 percent, the highest since the third quarter of 2007, while Morgan Stanley was at 4.4 percent and Goldman Sachs posted a ROE of 10.5 percent.

“So many of the banks are struggling with very low ROEs and the shareholders are not going to stand for it,” Whitney said. “This is not the type of returns on capital that investors are going to pay for.”

Whitney said she doesn’t see opportunities for firms to improve ROE through increased revenue alone, making cost-cutting inevitable.

“There’s only one way because structurally the revenues can’t move the needle,” Whitney said. “It has to come from expenses.”

Evercore Partners Inc.’s Ralph Schlosstein, speaking in the same interview, agreed that downsizing and improving efficiency are necessary to improve the biggest banks’ low rates of return.

“Substituting technology for people, that’s going to happen across the board,” said Schlosstein, 62, the New York-based advisory firm’s chief executive officer.

To contact the reporter on this story: Erika Waddell in New York at ewaddell1@bloomberg.net

To contact the editors responsible for this story: Christine Harper at charper@bloomberg.net; David Scheer at dscheer@bloomberg.net

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