Citigroup Inc.’s announcement yesterday of plans to eliminate 11,000 positions in units spanning equities trading to consumer banking is the latest sign of strain from a market slowdown, stiffer capital rules and weak economic growth. Lenders around the globe are likely to trim more jobs if revenue doesn’t rebound sharply next year, analysts and recruiters said.
“The knives are sharpened and ready,” said Jason Kennedy, chief executive officer of London-based search firm Kennedy Group. “These institutions are too big for the business they are generating but they are still quite bullish that the market will return by mid-2013. Unless the markets picks up, there will be more cuts in the first half.”
Bank of America Corp. and HSBC Holdings Plc said last year they would cut 30,000 jobs, and UBS AG announced in October that it would fire 10,000 workers and largely exit fixed-income trading. Banks are under pressure to cut costs as they earn returns on equity that are lower than their cost of capital.
Cuts may continue as executives look to boost stock valuations amid poor revenue growth in capital-markets businesses. Investment-banking and trading revenue at the 10 largest global firms may climb 2.8 percent this year to $148 billion, 32 percent below 2009 and 13 percent below 2010, according to data from industry analytics firm Coalition Ltd.
Industry Transition
“The financial-services industry has been, for a number of years now, in a time of transition,” and firms are positioning themselves for a different environment, Greg Fleming, president of Morgan Stanley’s brokerage and asset-management businesses, said yesterday at the Bloomberg Link Hedge Funds Summit in New York. “That’s ongoing for everyone in the industry.”
Financial firms worldwide have announced more than 300,000 job cuts since the start of 2011, according to data compiled by Bloomberg.
Wall Street firms must slash pay and headcount and shed almost a third of their trading-business assets to earn even half the returns they once made, Sanford C. Bernstein analysts wrote in November. “This implies that the industry is likely to shrink,” the analysts wrote.
Global banking return on equity, or ROE, fell to 7.6 percent in 2011 from 8.4 percent a year earlier, “well below” the 10 percent to 12 percent average cost of equity, McKinsey & Co. said in an annual review of the industry in October.
“You have to see meaningful improvement in their ROEs” before the cost-cutting can abate, said Joo-Yung Lee, head of the North American financial institutions group at Fitch Ratings.
Book Value
UBS is alone among the 10 largest global banks in trading above book value, a level it reached after announcing job cuts. Firms such as Goldman Sachs Group Inc. and Barclays Plc traded at more than twice their book value in 2007.
Citigroup said it expects the moves to save it $2 billion in expenses over the next two years. Mike Mayo, an analyst at CLSA Ltd., said the job reductions were a “tremor” and an “earthquake” was needed by April. Nomura Holdings Inc.’s Glenn Schorr said some people may call the number “light.”
Citigroup “is really catching up with a lot of the other firms because most firms have done heavy restructuring in the last year an a half,” said Jeanne Branthover, head of the financial-services practice at Boyden Global Executive Search Ltd., a New York-based recruiting firm. “This is very much Citi addressing what they probably should have addressed a while ago but they had the wrong leadership.”
Citigroup’s Chief
CEO Michael Corbat, 52, took the top job at Citigroup less than two months ago with the departure of Vikram Pandit. The reductions announced by Corbat yesterday add to the 5,000 Pandit ordered earlier this year.
Other banks may wait until the new year to cut additional jobs. Morgan Stanley trimmed 4,000 employees, or 6.7 percent of staff, in the first nine months of the year, almost matching CEO James Gorman’s target of a 7 percent reduction. The firm doesn’t plan on making any additional cuts in 2012, a person briefed on the matter said.
“The cyclical pressures are real and we have responded by reducing cost and proactively managing our capital, and if the environment deteriorates further, we’ll take additional action,” Goldman Sachs Group Inc. CEO Lloyd C. Blankfein, 58, said at an investor conference on Nov. 13.
The six largest U.S. banks have reduced headcount by more than 24,000 over the 12 months ended in September. Deutsche Bank AG, UBS and Credit Suisse AG have cut an additional 6,000 in that time. Still, that amounts to just a 2.2 percent reduction in the group’s total number of employees.
U.K. Firms
The four largest U.K. banks have eliminated more than 37,000 positions in the 12 months ended in June. That represented more than 5 percent of their workforce. Branthover said she expects reductions to continue, if at a slower pace than Citigroup’s.
“We keep thinking it’s going to get better, but then something else happens,” Branthover said. “Nobody has said the worst is over, but what we see is that every one of our clients that we talk to have a strategy set for 2013 that’s essentially stay flat, replace as needed, only add on in places that are generating revenue.”
Employment in London’s financial-services industry, which is home to the European headquarters of global securities firms, may tumble to a 20-year low in 2013 as a slump in equity and foreign-exchange trading and mergers triggers job losses.
London Outlook
Positions in London’s City and Canary Wharf financial districts may fall to 237,000 in 2013, compared with 256,000 predicted six months ago, the London-based Centre for Economics and Business Research has said. That would be the lowest number since 1993 and down from 354,000 in 2007, the research firm said in November.
“I expect to see the global reduction in headcount in investment banking to continue,” said Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics. “There has been a structural change in investment banking. The investors don’t want it, the regulators don’t want it. Sales and trading is extremely leveraged and asset quality is going down.”