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2015 was a very interesting year, indeed. The first half of the year looked like a return to better times with robust Q1 and Q2 earnings leading to strong hiring and a general sentiment that the industry was returning to a more normal rhythm not seen since the Credit Crisis. And then came Q3. Very weak Q3 earnings led to a rapid reassessment of the industry, and a quick capitulation for some banks that recognized that the fixed income market has shrunk significantly and won’t return to previous trading levels any time soon. Anemic ROE numbers were the result of fixed income businesses that were too large to support reduced revenue. Morgan Stanley had the worst Q3 of the major banks and was quick to act, reducing headcount by 1200 heads in fixed income, a 25% reduction. We’ve also seen recent layoffs at Credit Suisse, Bank of America, and Citigroup, and you just need to google bank layoffs to find discussions of serious layoffs planned at many other leading institutions, especially the European banks.
The Buy Side had a challenging year as well, though given the nature of the business, the results were much more varied. This NY Times article provides a good summary of the challenges faced this year for hedge funds. There’s some optimism that the recent Fed rate increase will bring a better environment for many funds as it spurs an increase in volatility.
New Golden Era?
Goldman on the other hand insists it won’t cut staff as outlined here in reaction to their 3rd Quarter results. And while the Fixed Income market has shrunk, the European banks have been steadily pulling out of investment banking, leaving the smaller market to fewer NY based investment banks. This pullback sets the stage for a new Golden Era of Wall Street for US banks according to William Cohan of Bloomberg.
Lack of Senior Hires
The compression in management ranks continued earlier this month at Bank of America. I heard but have not confirmed that the layoffs were all Managing Directors and Executive Directors. Even more telling is this recent factoid from Mike Whittaker at Citigroup. Within Citi’s IT division numbering 45,000 people, Citi hired only one Director and no Managing Directors over the past 2 years. A senior Director at Citi recently described Citi’s approach to executing big technology initiatives as, “Figure out the solution and PM it to completion.”
Disruptive technology is potentially around the corner for many areas of financial services. There are many players and the banks themselves are investing heavily in technology to avoid being displaced by upstart technology firms. While jobs have been reduced in some areas of trading systems, financial technology is a burgeoning field.
- Regarding the investment in technology, ex-Barclays CEO Anthony Jenkins:
- “banks are facing an ‘Uber moment’ that could reduce headcount by up to 50%.”
- “The incumbents risk becoming merely capital-providing utilities that operate in a highly regulated, less profitable environment"
- Banks aren’t standing still:
- “Fifty-eight percent of senior bankers polled by Temenos (a banking software company) said they plan to spend more on IT this year, the highest percentage since the survey began in 2008.
- Just under one-third of Goldman Sachs' employees are now engineers — 11,000
- If you don’t know what Blockchain is (the technology underlying Bitcoin), it’s worth looking into. See: Blythe Masters Tells Banks the Blockchain Changes Everything. Fascinating article, and a good look into how technology will change banking.