The largest global investment banks face further cost reductions, like the job cuts JPMorgan Chase & Co. began this month, after a drop in first-half expenses failed to match a decline in revenue.
Pretax profit at the banking and trading units at seven of the nine largest firms fell in the first six months as costs for the group decreased less than 1 percent from the same period a year earlier, according to data compiled by Bloomberg. Revenue dropped 5 percent, driven by the worst first-half trading results since the financial crisis.
Banks have relied on cost-cutting in recent years as higher capital requirements and fixed-income trading revenue crimped by low interest rates eroded profit. JPMorgan, the biggest U.S. lender, is eliminating hundreds of technology-support employees at its corporate and investment bank, people with knowledge of the move said. Credit Suisse Group AG said last week it would cut expenses by exiting commodities trading and scaling back currency and rates businesses.
“You’re always overstaffed at the bottom and understaffed at the top,” said Jason Goldberg, a Barclays Plc analyst in New York who covers U.S. banks. “It’s a tough balance between cutting costs and wanting to have enough people around for when volatility and activity pick up.”
Most of the firms beat analysts’ estimates for second-quarter earnings, as investment-banking revenue climbed and fixed-income trading fell less than expected. Bank executives said trading picked up in June after volatility approached record lows in many markets in April and May.
The rebound hasn’t carried over into July, which more closely resembles the trading environments of April and May, Goldberg said. Executives including Jamie Dimon, chief executive officer of New York-based JPMorgan, have said they aren’t counting on a quick turnaround.
“We expect the challenges around volumes and volatility to persist in the near and medium term,” Anshu Jain, co-CEO of Frankfurt-based Deutsche Bank AG, said on a conference call this week. “I expect the headwinds to continue.”
Still, some executives including those at Goldman Sachs Group Inc. have said they’re wary of cutting too deeply and missing opportunities when trading rebounds.
JPMorgan’s job cuts began after expenses at its corporate and investment bank dropped 2 percent in the first half from a year earlier, while revenue fell 12 percent. UBS AG’s investment-bank costs jumped 6 percent, while revenue tumbled 11 percent, driven in part by a one-time gain in 2013.
Barclays yesterday reported that profit at its investment bank fell 50 percent as a 19 percent drop in revenue was countered by only a 2 percent decline in costs. The London-based bank has cut about 5,000 jobs this year, with about half of them at the investment bank, Finance Director Tushar Morzaria said on a conference call with analysts.
“Cost is the new battleground for our industry,” Barclays CEO Antony Jenkins said on the call.
Morgan Stanley, based in New York, was the only firm to cut costs at its investment bank while revenue increased. Charlotte, North Carolina-based Bank of America Corp.’s expenses jumped 4 percent at its global banking and markets units as revenue climbed 5 percent.
The cost-cutting and revenue figures were compiled by Bloomberg from Goldman Sachs and the investment-banking and trading divisions of Bank of America, Barclays, Citigroup Inc., Credit Suisse, Deutsche Bank, JPMorgan, Morgan Stanley and UBS. The figures may not be comparable between banks as they include different units in those divisions.
Spokesmen for the banks declined to comment or didn’t immediately respond to e-mails.
Some banks are in the middle of previously announced plans to cut expenses. Zurich-based UBS, Switzerland’s largest lender, said it achieved 300 million francs ($330 million) in net cost savings in the first half and will accelerate the pace to reach 1.4 billion francs by the end of 2015. Credit Suisse, also based in Zurich, said it has cut annual costs by 3.4 billion francs since 2011 and is on track to increase the savings to 4.5 billion francs by 2015.
The nine banks generated about $62 billion in trading revenue in the first half of 2014, down from about $84 billion in the first six months of 2010, data compiled by Bloomberg show. The firms cut a combined $613 million in costs in the first half from a year earlier.
Trading revenue at the banks has been an average of 49 percent higher in the first half of the year than the second half over the past four years.
Against that backdrop, spending is top of mind. Credit Suisse executives mentioned the words “cost” and “expense” more than 50 times on the bank’s conference call with analysts last week. “Growth” was used only 11 times.