- European investment banks will cut staff costs by at least a fifth experts estimate
- Comes after UBS's decision last week to cut 10,000 jobs showed a spotlight on a sector
European investment banks will cut staff costs by at least a fifth and shed tens of thousands of jobs in the next few years, consultants and recruitment experts estimate, as much tighter regulation and a weak economy prompts them to rethink their business models.
UBS's decision last week to cut 10,000 jobs has shone a spotlight on a sector that, five years after the financial crisis, is still trying to come to grips with its notorious inefficiency.
"Many trading businesses have been built around revenue maximisation -- cost management disciplines have played second fiddle," says Adrian Harkin, partner at KPMG.
"If you look at what the banks have announced after the financial crisis, it adds up to broadly 10 per cent of their cost base. But market sentiment is that costs will need to come down by at least double that to regain competitiveness."
Stephane Rambosson, managing partner at executive advisory search company Veni Partners, estimates that European banks will cut tens of thousands more jobs in the next few years as they seek to improve lacklustre profit levels.
European banks are suffering from cyclical issues such as a weak economy, less trading activity, higher costs of funding and a low interest-rate environment that all add to the structural difficulties that come from tighter regulation and make certain business areas uneconomic for all but the largest operators.
After more broad-based cuts in the past few years, a number of banks have this year reverted to more decisive measures to wind down subscale businesses. UBS will give up almost all of fixed income trading, eventually bringing down its overall workforce by more than a third from pre-crisis levels.
Another example is Japanese bank Nomura, which will cut several hundred jobs in its European cash equities and investment banking operations as part of a $1bn cost-cutting drive.
And the UK's Royal Bank of Scotland this year announced 3,500 job cuts as it shut down or sold its brokerage, cash equities and equity capital markets businesses and concentrated on areas such as fixed income and risk management instead.
City careers lose their glitter
A sharp drop in jobs in the financial services sector has prompted both graduates and investment bankers to re-engineer their careers, write Daniel Schäfer and Jennifer Thompson .
With the Centre for Economics and Business Research forecasting that more than 30,000 such jobs will go in the City of London this year, university graduates are starting to lose interest in what used to be seen as a glitzy path to riches.
"Interest in traditional investment banking roles has levelled off at Cambridge," said Gordon Chesterman, director of Cambridge University Careers Service. Although undergraduates looked at factors such as work-life balance, he said that job security also played a role.
Job opportunities in the UK's financial services sector are down by almost a quarter in the months from July to September compared to the previous year, according to eFinancialCareers, a global job network. In continental Europe, the number of finance jobs fell by 28 per cent.
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Some of Europe's bigger banks, such as Deutsche Bank and Credit Suisse, are mostly cutting costs across the board instead of targeting specific business areas, prompting analysts to question if bolder steps are needed across the sector.
"We are going to see a reversal of the pre-crisis overexpansion," says Jon Terry, a partner at PwC. "Those banks that are struggling will be more inclined to take more radical, 'big bang' action. Underlying that is the need for investment banks to concentrate on those areas where they can make money."
Such areas will be more sparsely spread in a world of much tighter capital rules. Incoming regulation -- such as CRD4, the European application of the Basel III capital rules -- will make some business lines such as fixed income trading only economically viable for larger banks or those with lower funding structures.
Analysts expect Credit Suisse, which like UBS is bound by particularly tough Swiss capital rules and which has also never made it into the top league of fixed income houses, to come under similar pressure to cut back as its larger domestic rival has. The bank is already working on a programme announced last year to cut 3,500 jobs, and insiders expect its plan to slash costs by another SFr2bn ($2.1bn) to trigger a reduction of at least 2,000 additional staff.
In other areas such as mergers and acquisitions or capital markets advice, which are not hit by higher capital charges but by a weak economy and depressed market sentiment, most banks are expected to keep their expertise but switch to younger, lower-paid bankers.
"We will see some churning where higher-paid bankers are going to leave and lower-paid people will be recruited for the same positions to make the business model work in that specific area," says Mr Terry.
But some of the biggest cuts will come in often inefficient back offices. Mr Rambosson at Veni Partners says: "One of the biggest problems is that the ratio between front and back office has exploded. In some areas it is at one-to-three or even one-to-four. These are huge fixed costs and it will need to change."
While the number of front-office jobs has gone down -- by 9 per cent at the 10 largest global investment banks since 2010, according to data by Coalition -- banks have added back-office staff in the past few years, particularly in areas such as compliance and risk.
But they are changing course as they have to find ways to improve their historically low returns. "Investment banks are finally moving towards a utility model in non-customer-facing areas, which is something that other industries moved to many years ago," Mr Harkin says.
Staff costs can account for up to 70 per cent at investment banks, a much higher level than at retail banks that set out to cut their cost levels two decades ago. Deutsche Bank, for example, plans to carve out 23 per cent of its infrastructure costs in the next few years.
While some of these jobs are being moved to offshore places such as eastern Europe and Asia, others will simply fall by the wayside as previously separate support functions are being centralised.
"There are two ways for investment banks to cut their high remuneration costs: firing people or replacing them with cheaper ones," says Mr Terry.