Rainmaker drought threatens to cut jobs for bankers

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Like the once high-flying stock markets, the value of investment bankers could be in the midst of a heavy crash. Their work has certainly dried up lately: industry fees were decimated in the second quarter.

Global banking executives lamented the costly war for talent in the early months of this year, but job cuts on Wall Street may now be imminent. The investment bank will be the dark cloud over earnings when U.S. banks begin reporting on Thursday. The war in Ukraine, rampant inflation and the prospect of a sharp rise in interest rates sent financial markets into a tailspin. Dealing desks for stocks, rates, currencies and some bonds made hay, but traders were left to watch the tumbleweeds.

“If investment banking revenue trends do not improve in the second half of the year, cost-cutting initiatives will take priority,” said Anke Reingen, banking analyst at RBC Capital Markets in London. Meanwhile, Rich Handler, the CEO of Jefferies Financial Group, is on high alert for good bankers who could be let go by rivals who “made bad choices in good times”, he told members of the staff in a note after the investment bank’s recent results. . He also warned them, however, that any underachievers or those not fully committed to Jefferies still risked being fired.

If the fate of some bankers turns bleak, the industry itself is to blame for some of the pain to come. Equity markets will be vulnerable to cuts after generating their own brief bubble in so-called blank check companies, or SPACs, last year. There was a boom in new listings in general in 2021, with global IPO fees nearly four times higher than the previous year, which was an improvement over 2019, according to Dealogic data. . The misguided SPAC boom brought in 26% of those fees in 2021 — and 50% of all IPO fees in Q1 2021 — after accounting for just 5% to 6% in the years leading up to the start of the infatuation.

Goldman Sachs Group Inc., Bank of America Corp. and others have already begun to stop advising the SPACs they put on the market after regulators announced a US crackdown. The show slumped to almost nothing this quarter. Fees for all equity transactions are expected to fall more than 70% in the second quarter compared to the prior year period, according to Dealogic data. Total investment banking fees are likely to drop 50% year over year.

The other area that really suffered was subprime credit, particularly private equity takeover financing. Big banks are likely to report heavy losses on buyout loans they were unable to sell or had to offload at heavily discounted prices. Only Bank of America gave numbers on that, saying in June that it expected losses of $100 million to $150 million on so-called suspended loan deals in the second quarter. The market deteriorated further before the end of the quarter, and the loss could be higher, according to analysts at JPMorgan Chase & Co. Barclays and Credit Suisse are also likely to suffer as they are more dependent on fixed income finance revenues. leverage than many of their rivals and have been named in several stalled deals. But most Wall Street banks are exposed, and the sector’s total losses could exceed $1 billion.

Despite the drought for rainmakers, overall bank earnings are still expected to be robust. Trading tables focused on macro commodities (interest rates, currencies and commodities) jumped. JPMorgan and Citigroup expect revenue to be up 15% to 25% in the second quarter from the year-ago period. In Europe, Deutsche Bank and Barclays should also benefit. In the US, traditional credit has also recovered strongly, consumers are spending and rising interest rates are expected to boost incomes. The collapse in the value of government bonds held by banks is expected to hurt, and many will want to set aside cash to cover bad debts if they expect economies to slide into recession. However, there were still few signs of consumer credit problems.

There is little reason to expect the markets to stabilize soon, as there are few signs that any of the global geopolitical and economic battles are about to be resolved. For big bank executives, trying to discern how many people they need and what they should be doing seems more difficult than at any time since the 2008 financial crisis. After that, many banks have took years to realize that the whole industry was in secular decline, with revenue steadily declining from 2010 to 2019. The financial market boom of 2020 and 2021, fueled by central banks, appears to have drastically reversed that . Even now, Citigroup analysts still expect total industry fees for the world’s 16 largest banks to be higher this year and next than most of the decade before 2020.

This optimism may prove difficult to maintain over the rest of the year. If many people are increasingly struggling with the rising cost of living, and unemployment also begins to rise, Wall Street leaders will soon be forced to make many more difficult decisions themselves.

More writers at Bloomberg Opinion:

• For Goldman in Texas, politics are inevitable: Paul J. Davies

• Buy now, pay later joins the club of subprime losers: Marc Rubinstein

• Banks prepare for a storm that may never come: Paul J. Davies

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

More stories like this are available at bloomberg.com/opinion

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