Will banks cut heads because of the coronavirus and yesterday's sell-off? Do bears defecate beneath the trees? Every market crash for the past two decades has led to finance redundancies. It's just a matter of time.
In the late 1990s, for example, the Asian financial crisis began in July 1997 and went on to December 1998. In the third quarter of 1998, Merrill Lynch posted a $900m related loss in its fixed income trading division. And in October 1998, it announced plans to cut 3,400 jobs or 5% of its workforce.
While ML's cuts were some of the most memorable of the Asian crisis, they weren't unique. In a reminder that smaller banks and boutiques can be more vulnerable to 'events' than large ones, Peregrine Investments Holdings Ltd., which had been one of Asia’s largest investment banks, and had 1,700 employees, filed for liquidation in December 1998 after making loans to Indonesia that could no longer be repaid.
The 'dotcom bust' subsequently played out between March 2000 and October 2002. After peaking on March 10 2000, the Nasdaq had lost 34% of its value by April. However, it wasn't until May 2001 that Goldman Sachs cut 12% of its investment banking employees. In July 2001, Goldman also dispensed with one third of its HR staff. Morgan Stanley announced plans to cut 1,500 staff in April 2001. Merrill Lynch cut 1,300 jobs in the first quarter of 2003. Between 2001 and 2003, Credit Suisse First Boston (the investment bank of Credit Suisse) cut headcount by a huge 23%.
More recently there was the 'great financial crisis' which began in the third quarter of 2007 and ended around the first quarter of 2009. Then, the layoffs began in earnest in November and December 2008. In November, Citi unveiled plans to cut 50,000 jobs. In December, Bank of America announced plans to cut 30,000 staff after acquiring Merrill Lynch, Credit Suisse announced 5,300 cuts, and Nomura said 1,000 people were going.
Will banking job cuts happen again? The current situation clearly isn't over yet, but even if you're buoyed by today's market bounce and by Deutsche Bank strategist Jim Reid's observation that intermittent financial panics are simply a fact of the system, some kind of fallout seems likely. Particularly as several banks were already planning cuts and operating on slender margins. Provisions for the virus alone will add to costs. UBS analysts observed today that European equities are now down 21% from their peak of 10 February, adding that: "This is one of the largest corrections in the last 30 years outside a sustained Bear market and has taken place in half the usual time."
The chart below, taken from the Office of the New York State Comptroller, suggests that job cuts at investment banks tend to lag events in the market by six to 12 months. While cuts may happen, therefore, don't expect anything too soon.
When they come, the best placed banks will be the most efficient. Market intelligence firm Tricumen, ranks Wells Fargo, JPMorgan and Goldman Sachs as the most efficient in M&A, ECM, DCM. Tricumen puts JPMorgan, Wells Fargo and Citi as the most efficient in fixed income trading, and it puts Goldman Sachs, Morgan Stanley and Bank of America as the most efficient in equities trading (with efficiency defined as revenues generated per full time front office employee). These may be the best places to sit out the coming year. Hold tight.
Photo by K. Mitch Hodge on Unsplash
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