At a management training conference for accountants I once attended, a motivational speaker asked everyone in the room to raise our hands as high as possible. Then he asked us to lift them a little higher -- which of course we managed, teaching us all about our capacity for always going further.
Cheesy or not, it's a lesson that seems to apply to investment bank budgets recently. After years of post-crisis cuts, with bank chiefs pledging bigger and bigger reductions, there's still room for something extra. "We can always do more," as Goldman Sachs boss Lloyd Blankfein said in February.
This is good news for investors. At Goldman, the biggest cost-cutting drive in years is now underway, according to Bloomberg News. This follows BNP Paribas's decision to eliminate up to 675 positions at its French investment banking unit, and Nomura getting out of the European equities business. Bank of America's Brian Moynihan said this week that there's further to go on expenses.
All of which reflects the weakness afflicting investment banking, with analysts estimating first-quarter revenue between a fifth and a quarter lower than last year.
While this spells misery for many bankers, the industry-wide and global nature of the cuts has one positive dimension for the new CEOs at Europe's troubled investment banks. It makes it much easier for any single bank to slash costs and headcount when everyone's at it.
Put another way, if the whole industry is cutting back in a big way, there's less chance of the dreaded "death spiral." That term, coined by former Barclays chief Antony Jenkins, describes the danger that if you reduce compensation at an investment bank, the best staff are often first out of the door to join a healthier rival. This in turn means your business performs less well so you have to cut more costs, and so on until it's all over.
But a benefit of all investment banks suffering and cutting costs is that even star bankers have fewer places to go, so the balance of power on compensation shifts in favor of the employers.
This is particularly true as institutions undertake so-called "vertical" cuts, effectively getting out of entire business lines -- like Nomura's exit from European equities or Credit Suisse's from distressed credit. If one bank clears out of a business completely, that limits the options of staff who might jump ship. It also means there are some talented people hunting for jobs if you want to replace your own.
Europe's big investment banks have struggled for the most part to lower cost as quickly as hoped. At Credit Suisse, the ratio of cost to income jumped from about 85 percent in 2014 to 111 percent last year, according to Bloomberg Intelligence. At Barclays, it stuck at about 81 percent. At Deutsche Bank, it increased from 88 percent to 116 percent. These are far higher than most Wall Street rivals.
Europe's banks will have trouble making much headway on improving this in the short term, given those flagging revenues. But further out, there's a glimmer of hope that the industry-wide cuts signaled by Goldman and others might end up helping Europe's struggling bank bosses. As the motivational guru would have us believe, they may be able to go further than they ever dreamed possible.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Nomura's equities business in Europe will be reduced to convertibles, equities execution (through the Instinet platform) and equity sales of Asian stocks.
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Duncan Mavin in London at firstname.lastname@example.org
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