The share prices of the big American banks, which are mostlytrading below book value, tell the tale. And bank earnings for thesecond quarter, most of them to be reported next month, areexpected to underscore the gloom. Many on Wall Street say pinkslips are likely to follow. "If things don"t get better, then I would expectstaffing levels to come down for sure," said Alan Johnson,chief executive of Wall Street compensation consulting firm JohnsonAssociates, who estimated that banks may cut another 5 per cent oftheir workforce by year"s end. "When banks do that reassessment, it will go beyond just theshort-term economics. |
They"ll be asking, ‘Where is theglobal economy going? And is there going to be a recovery, or moreof a struggle than a recovery?"" Johnson"s estimate of 5 per cent cuts would translate toabout 40,000 layoffs in the United States, based on LaborDepartment data showing Wall Street employment at around 800,000.Though no formal announcements have been made, signs are appearingthat a culling has begun. Goldman Sachs Group Inc let go several dozen employees in itssecurities division this week, including some managing directors,in response to weak market conditions, a source familiar with thematter said. Fewer than 50 people were cut across the globe, thesource said. Morgan Stanley is likely to lay off a "modest" numberof employees in its investment banking and trading divisions,another source said. That source said exact numbers had not yetbeen determined but that most of the cuts would occur ininternational divisions.
Both sources spoke on condition of anonymity. Goldman and MorganStanley declined to comment on the matter. As Europe lurches from one crisis to the next - on Tuesday, Spainsaid that it is shut out of credit markets - and economic growthslows in the United States, the banking business has become tough.Major developing economies such as Brazil, China and India havealso been slowing, providing little relief. Trading volumes are low and merger activity has fallen, while lowinterest rates are translating into lower profits on lending. JPMorgan analyst Kian Abouhossein predicts a 32 per cent decline inglobal banks" trading revenue from fixed income, currency andcommodities during the second quarter, along with a 14 per centdrop from equities trading and a 17 per cent drop from investmentbanking.
So far this year, the global mergers and acquisitions market hasfallen 26 per cent from the same period in 2011, according toThomson Reuters data. Similarly, year-to-date global equityissuance is down 31 per cent and debt issuance has dropped 9 percent. The IPO market is in no better shape. Well-publicised difficultieswith Facebook Inc"s $16 billion mega-IPO on May 18 have onlyfurther damped interest in bringing IPOs to market, as has therecent slide in stock markets globally. A series of IPOs have beenpulled or delayed in Asia in the past two weeks.
Proceeds from initial public offerings are down 45 per centyear-to-date to $52.9 billion from a year ago. And that is afterthe Facebook IPO, one of the biggest ever in the United States. JMP Securities analyst David Trone, who downgraded Goldman, MorganStanley, JPMorgan Chase, Bank of America and Citigroup to"underperform" and cut estimates on May 21, said thebanking sector offers no place to hide these days. "It"s just the perfect storm: You"ve got zerorates which are unheard of, squashing net interest margins likenever before in history; the greatest regulation ever limitingfees, raising costs, demanding more capital; and then you"vegot a brewing economic disaster in Europe," said Trone.
"They"re getting hit on all fronts, really.There"s literally not one thing to be happy about." He said he expects further job cuts in the "singledigit" per cent range by year-end. Looking at profit per employee in the past few years will providelittle comfort to bankers. For example, six years ago, Goldman earned more than twice as muchmoney as it did in 2011, on lower revenue, and its return on equitywas six times as high. Goldman was able to generate those returnswith 11,000 fewer employees. "Many investors remind us that our 2011 revenues were moreconsistent with revenues that were generated six years ago, but ourheadcount is higher and our profitability is lower," ChiefFinancial Officer David Viniar said at an event in February."That is factually correct." Viniar said Goldman needs those additional employees for itsexpanded footprint around the world and its bigger client base.
Yetcompensation is the single biggest line-item cost for banks, apartfrom interest expense, and for that reason job cuts are thequickest and easiest way for Goldman and its competitors to boostprofits when times are tough. Skepticism about returns and valuations has been priced into biggerbank stocks for some time, with market values far below the statedvalue of assets on banks" balance sheets. Bank of America"s closing share price of $7.02 on Fridayrepresented just 35 per cent of stated book value of $19.83 pershare as of March 31. Citigroup and Morgan Stanley on Friday both closed at 41 per centof book value.
JPMorgan closed at 67 per cent of book value, whileGoldman closed at 69 per cent of that number. Of the six largest USbanks, Wells Fargo was the only one trading at a premium to bookvalue, being 19 per cent above it at $30.16. Frank Braddock, a financial adviser at JHS Capital Advisors, whichmanages $3 billion of investor assets, is warning his clientsagainst purchasing bank stocks even with that apparent discount. "At the end of the day they have got to generate earningsfrom loans and sales, and that"s just not happening,"said Braddock.
"For our clients, the risk in bank stocks isjust too big right now. Yeah they"re going to have to cutjobs, but how much can they afford to cut and how is that reallygoing to help their profitability long-term? They can"t cuttheir way to revenue growth.".
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