What do US investment banks' results say about the future?
So, you want to work for a US investment bank? Or, you already work for a US investment bank and want to continue doing so for the foreseeable future. What did last week’s results from Goldman Sachs. J.P. Morgan. Citi and Bank of America say about your chances of fulfilling your aspirations in 2015?
We’ve combed through US banks’ results, and have come to the following conclusions.
1. Investment banks are growing again, or not
Investment banks are expanding – but only if you work for the right ones. In the first quarter of 2015, revenues across Goldman Sachs were up 14% versus the first quarter of 2014. At J.P. Morgan’s corporate and investment bank they were up 8%. At Bank of America’s global banking business they were up 6%. At Bank of America’s markets business, they were down 6%. And across Citigroup’s Institutional Clients Group they were down 1%.
In other words, Goldman, JPM and BAML’s IBD business grew in the first quarter. The rest did not. Hiring is not, therefore, a foregone conclusion.
2. Only Goldman Sachs and J.P. Morgan are becoming more profitable
It was a similar story for profitability. At Goldman Sachs, profits rose 41% in the first quarter. At J.P. Morgan, they rose 19%. In Bank of America’s global banking business profits rose 6%, but in markets they fell 28%. In Citi’s institutional clients business they were down 1%.
Without higher profits, banks will struggle to make the case for extra headcount. Again, therefore, don’t expect the finance job market to be easy in 2015.
3. Banks are still cutting costs
Job losses aren’t all over. Marianne Lake, CFO of J.P. Morgan, reminded investors about J.P. Morgan’s plan to cut expenses by $2bn in 2017 relative to 2015: “You should assume a meaningful down-payment towards that $2 billion in 2015,” she said.
John Gerspach, Citi’s CFO said the bank has $700m of annual cost savings to “realize” in 2015. $200m of these were generated in the first quarter, which means there are $500m still to go. Gerspach said half the new cuts will come from compensation costs, suggesting that Citi will either pay less, or have fewer people.
4. M&A is massive, but it might be slowing
2015 is proving an incredible year to be an M&A banker. At J.P. Morgan, M&A revenues were up 42% year-on-year in the first quarter. At BAML they were up 51%. At Goldman they were up 41%. At Citi they were up 70%. Goldman Sachs CFO Harvey Schwartz said it was the strongest start to the year since 2007.
However, there were some indications that M&A might slowdown as the year progresses. At J.P. Morgan Lake said the second quarter is likely to be lower. At Goldman Sachs Schwartz said “there is room for increased M&A activity,” but that Goldman’s investment banking backlog has fallen since the end of 2014.
5. ECM bankers aren’t having a good year
Equity capital markets (ECM) bankers had a more equivocal start to the year. Revenues were down (23% at Citi), but up everywhere else (16% at JPM, 10% at BAML and 22% at Goldman). Citi’s ECM business clearly remains a weak spot. The bank may well engage in some staff ‘upgrading’.
6. Nor are DCM bankers
DCM revenues fell 24% at BAML and 36% at Goldman Sachs. However, they were up 16% at JPM and Citi respectively.
7. You don’t want to work in ‘spread products’
As we pointed out last week. fixed income products which are priced according to the difference in their yield and the yield of Treasuries (so-called ‘spread products’), didn’t do well in Q1. Both Bank of America and Citi are disproportionately reliant on trading credit and securitized debt and both banks saw a drop in fixed income sales and trading revenues in the first quarter. At BAML they fell 7%. At Citi they were down 11%.
2015 is not the year to be a credit or securitized debt trader. Schwartz at Goldman said investors and clients spent Q1 “evaluating” where the wanted to be, hence the lack of trading activity in these areas.
8. You do want to work in rates and FX
If Q1 was bad for spread traders, it was great for macro traders. Goldman Sachs said rates and currencies were “significantly higher
sequentially” and that both benefited from improved client activity and diverging central bank policies as the US Federal Reserve stops QE and the ECB ramps it up. After several very bad years, macro traders are back.
9. The outlook for markets businesses is ambiguous
After an OK first quarter, are sales and trading jobs looking up for the rest of 2015? Again, this depends upon where you work. At J.P. Morgan, Marianne Lake said the first half of the first quarter was, “particularly strong” but that the second half was, “somewhat lower”. At BAML, Brian Moynihan said March was the strongest month in the first quarter and that this strength has continued into April.
10. Patience can be rewarded
The macro trading resurgence underscores the importance of patience in a finance career. Just because your area isn’t in vogue now, that doesn’t mean it won’t be in future. Finance is a cyclical industry. What goes down will invariably come back up again.
Banks need to remember this when making layoffs. “Through this [difficult] part of the [fixed income] cycle, while you were beating us up, we were spending a lot of time focused on the clients and staying very-very committed to the businesses, and we are seeing it translate through,” said Goldman Sachs CFO Harvey Schwartz. of Goldman’s macro trading resurgence.
11. There are still some big regulatory and compliance hires to come
So, you thought investment banks’ regulatory and compliance hiring was over? You were wrong. John Gerspach, CFO at Citigroup, said the bank still has 4,000 of its 30,000 new control hires to go. Marianne Lake at JPMorgan said control costs are, “reaching a peak” and will soon stabilize – implying the bank isn’t quite there yet.
12. You’re don’t want to work for a bank that’s under-invested in its equities business
With equities increasingly traded electronically, success in equities trading requires a long term investment in technology. To be a big player in equities now, banks need to be a, “significant player,” said Schwartz at Goldman. They need to have “scale” and to be in “all business lines,” Schwartz added. They also need, “to have strong electronic capabilities” and to be, “geographically diverse.”
13. You don’t want to work for a bank that’s under-invested in technology
Equally, you don’t want to work for a bank that’s spent years scrimping on technology saving. Technology is a, “critical driver” at Goldman Sachs, said Schwartz. Technology investment is, “not something you can do in a short period of time,” he added. At Bank of America, CEO Brian Moynihan said the bank’s technology investment is, “constant.”
14. Quants are now being used for regulatory jobs
A whole new category of job has opened up for quantitative finance specialists: regulation. At Goldman, Schwartz said quants are now being used for, ‘dynamic capital management.’ Goldman has given weightings to Basel-III capital ratios, leverage ratios and the comprehensive capital analysis and review (CCAR) under Dodd Frank and constructed an algorithm that helps guide transactions and evaluate businesses over the long term, said Schwartz.
These kinds of quant roles look interesting. At Bank of America, Brian Moynihan said running an investment bank has become all about these kind of capital allocation decisions. The bank is determined to keep its investment banking balance sheet below $600m, said Moynihan. Tom Montag, president of global banking at markets, has to decide how to deploy this capital based on the bank’s risk appetite.
15. You need to work with big clients
If you work in sales and trading, it remains the case that you need to work with key clients. Banks are pulling back from dealing with ‘marginals’, This was a key part of the strategy unveiled in JPM’s recent investor presentation and Citi is going down the same route. – CFO John Gerspach said the bank has a goal of, “goal of continuing to gain wallet share with our target clients.”
16. Maybe asset management isn’t so hot after all
In theory, investment banks’ asset management divisions are the place to be. In reality, other areas had a stronger start to the year. At J.P. Morgan the corporate and investment bank out-performed the asset management business. At Goldman Sachs, asset management revenues increased a measly 1% year-on-year.
Goldman Sachs just did something very unusual in the first quarter. And it's good news if you want to work there.