Are you earning $300k+ in salary working for a major investment bank? Do you have big spending habits? A big mortgage? An expectation that this will continue in perpetuity?
Investment banks' third quarter results are your wake-up call.
At this moment in the 21st century, investment banking is not a growth industry. It is an industry in decline. With the exception of Citi and JPMorgan and BofA (just), revenues and profits shrunk at every bank in the third quarter. And with the exception of Citi alone, revenues and profits shrunk universally in the first nine months of this year.
In most cases, Citi excepted, profits have fallen faster than revenues in 2019. Margins are being eroded. And, after years of talking-up superior investor returns and increasing return on equity, shareholders are being squeezed. Goldman Sachs' return on equity went from 13.8% in the third quarter of 2019 to 9% in the most recent quarter. At UBS's investment bank, the return on attributed equity went from 15.3% to 6.6%.
There are good reasons for this. So far this year, for example, Goldman Sachs has invested $450m in projects like Marcus, Apple Card and transaction banking, all of which are expected to improve RoE in future; UBS had a good quarter last year (making for challenging comparables) and is realigning its business and investing in 'digital transformation'. However, the fact that the phenomenon is industry-wide suggests a wider, most systemic malaise.
The new normal has not gone unnoticed by the bête noire of banking CEOs everywhere - Mike Mayo, head of U.S. large-cap bank research at Wells Fargo. Last week, Mayo upbraided Morgan Stanley CEO James Gorman on the bank's poor third quarter, asking how confident Gorman was that revenues will grow faster than expenses in future. Citi CEO Mike Corbat got similar treatment. Citi said restructuring was over two years ago, said Mayo, but its overall return on average tangible common stockholder's equity is still below market; what does Corbat plan to do about that?
The two CEOs were noticeably riled by Mayo's observations. "You're right," Corbat replied, adding that he and his CFO are "competitive" and "intense" people who are "completely focused on this." Gorman retorted that, "If we are in a business where we are growing expenses faster than revenues long term we are not going to have a good business.” Morgan Stanley is "maniacally focused" on ensuring revenues grow faster than costs, Gorman assured the analyst.
Basically, it's a touchy subject.
Most European banks have yet to report for the third quarter (it's happening next week), but as the charts below show, costs are the number one issue as we go into the final straight of this year. Every bank is investing in technology. And every bank is talking-up the importance of investing in electronic trading infrastructure if they're to have any hope of staying in the game.
In the circumstances, if you're on a high salary in a business that's static, you're going to loom large on the radar as a big fixed cost that's ripe to be plucked.
UBS is taking this approach. Yesterday, CEO Sergio Ermotti announced plans to extract CHF100m in costs from the investment bank on an ongoing basis. Most of that CHF100m will come from headcount, said Ermotti. And most of the headcount removed will be senior staff. Material risk takers at UBS earned combined salaries and bonuses of $1.8m last year (and salaries alone of CHF618k). At least 50 are likely to be shown the door.
UBS isn't the only bank pruning its high earners. HSBC is doing the same and Goldman Sachs has parted company with numerous partners. A salary that runs into multiple six figures is a nice thing to have. It's also an easy win as banks try to cure their malaise.
Revenue and profit growth in the third quarter Revenue and profit growth in the first nine months
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