The good news: You get to keep your job. The bad news: It’s about to get a lot more cutthroat.
A number of Wall Street investment banks have moved toward cutting swathes of traders in recent months, with Morgan Stanley set to be the latest to take the leap.
Credit Suisse in October announced it would shutter some trading businesses, echoing an earlier move by Swiss rival UBS.
In stepping out of certain markets, the banks paring back leave territory for others to claim. But the businesses they continue to operate in increase in importance.
The result: A handful of banks competing more aggressively than ever in each business line with their key clients.
“Even if ‘excess capacity’ is reducing, competition is fierce,” Huw van Steenis, head of European banks research at Morgan Stanley, told Business Insider.
There are cuts, and there are cuts
Broadly speaking, there are a three different types of cutting on Wall Street.
Banks can 1) cut staff equally across different divisions; 2) cut chunks of individual business lines or regions; or 3) cut the number of clients they deal with.
The aim is largely the same: to improve returns by cutting back on the resources hoovered up by underperforming units.
At many banks, the first kind of cutting — taking a bit of headcount or cost or risk out of each business line — began a few years ago. It leaves the bank with “optionality,” which is Wall Street-speak for keeping a toe-hold in case a line of business suddenly takes off.
But many of these business didn’t take off. Low volatility, low interest rates, and painful fines have now forced banks into swinging the ax at entire business lines, regions, and clients.
“Even if one has an absolute advantage in a certain area, it is more beneficial to focus on the area of greatest comparative advantage,” Mike Mayo, a banks analyst at CLSA, told Business Insider. “I would much rather have UBS focusing on wealth management and Morgan Stanley on equities, and JPMorgan focusing on FICC.”
FICC is fixed income, currencies and commodities trading – a part of the business that’s been particularly hard hit this year.
Credit Suisse said in a presentation in October that it would invest in certain business lines, including cash equities and equity derivatives. The Swiss company said it would “optimise” in other areas, which is the Wall Street way of saying that they’re going to try to do more with less.
And in macro products, it said it would largely exit the business in Europe, the Middle East, Africa, and Asia Pacific.
Deutsche Bank said in its investor presentation in October that it, too, would exit a number of businesses, though it will retain a much bigger fixed-income operation than Credit Suisse. The German bank said it would pull out of agency residential mortgage-backed security trading, cut back on emerging-market debt trading, and exit 10 countries.
The client is wrong
Deutsche Bank also said it would cut the number of clients that its global markets and corporate and investment-banking units deal with in half. It said in its presentation that 30% of the clients generated 80% of its revenues in 2014.
This kind of cutting — reducing not just number of businesses you operate in but the number of clients you deal with — has been in vogue on Wall Street in the past couple of years.
Daniel Pinto, chief executive of the corporate and investment bank at JPMorgan, said at a November presentation:
What we have done in the last few years, and we are really more and more focused in the last couple, we do a lot of work on client planning. We do a lot of work in really fine-tuning client profitability and … by having these two tools, really you can maximise the wallet or the profitability of those particular clients and really have a smarter dialogue with them.
Chop, chop, chop
Morgan Stanley could be about to move in a similar direction.
Bloomberg news reported Monday that the US bank could cut a quarter of its staff in fixed income, with The Wall Street Journal reporting later than the decision followed investor pressure to pare back the underperforming unit.
Brennan Hawken, a banks analyst at UBS, said in a note Monday that if Morgan Stanley cut a quarter of the FICC business, and rolled that capital into the equities or investment-banking divisions, it could boost firm-wide ROE by 125 basis points.
The result is a more competitive Wall Street, where each bank is playing to its strengths.
Here is Pinto at JPMorgan again:
When you decide to cut one piece, you are going to really over-focus on the other piece. So in certain areas, they are very competitive and they are not — for example, Credit Suisse in equities, even though they are deemphasizing fixed income, they are a very strong competitor in equities, so they are a big competitor in many, many areas.
In short, if you’ve rearranged the bank’s strategy around a couple of core businesses, you’re going to fight for your life in those areas.
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