Disappointing earnings reports from JPMorgan Chase and Morgan Stanley have set the stage for a tense summer on Wall Street as bank executives grapple with whether to reduce staffing levels.
A decline in investment banking fees had always been expected this year after a record haul in 2021, but bankers were still hoping for an above-average performance, telling investors as recently as January that deal pipelines were healthy.
However, the slowdown has been worse than anticipated. Results on Thursday from JPMorgan and Morgan Stanley failed to meet analyst expectations in large part because of a dearth of equity issuance in 2022. The downturn follows a rush of initial public offerings and listings by special purpose acquisition companies last year.
Morgan Stanley chief executive James Gorman told analysts the bank’s “ultimate weapon” to manage a slowdown is pay. The firm said it had cut pay and bonuses by 16 per cent year-on-year in the division that includes its investment bank. JPMorgan said the equivalent expense line at its corporate and investment bank fell 2 per cent in the second quarter.
Banks have so far been hesitant to consider broad headcount reductions to match the decline in deal flow, citing the need for sustained investment in their franchises to retain talent and maintain market share. But tepid demand might force their hand, said Chris Marinac, director of research at Janney Montgomery Scott.
“Putting a positive face on it for today can work, but that doesn’t last for ever,” he said, adding that cost-cutting programmes could be communicated to staff in the autumn.
Bankers are already reporting early signs of belt-tightening.
Some teams at Goldman Sachs this summer have stopped taking interns out for team drinks to save money, according to people familiar with the matter. The bank has also paused hiring some replacements for bankers that have left this year, the people said.
Meanwhile, a few prospective hires at Credit Suisse have been waiting several weeks for their formal offer letters, according to people involved in the hiring process.
Credit Suisse and Goldman declined to comment.
“We might see freezes in some skill sets or some areas where the banks no longer have a need for additional talent,” said Jan Bellens, global banking and capital markets sector leader at EY.
In a memo to staff and clients earlier this month, Jefferies chief executive Rich Handler and president Brian Friedman said the investment bank would “remain on high alert for great talent”.
But they added: “People who underperform, are not fully committed, have lapses in judgment regarding ethics or who are not constantly reinventing themselves and growing, will always be at risk.”
At JPMorgan, executives said they did not have any immediate plans to cut staff but also refused to rule out future headcount reductions.
“This is a business with a famously elastic expense base and we will obviously adjust that as we always do,” chief financial officer Jeremy Barnum said.
JPMorgan reported investment banking revenues of $1.35bn for the second quarter, down 61 per cent on a year earlier, while at Morgan Stanley they were $1.1bn, 55 per cent lower than the same quarter in 2021.
The drop-off has been particularly acute on equity capital markets desks as stock market listings have dried up. At JPMorgan, fees from equity underwriting in the second quarter were $245mn, down 77 per cent from about $1.1bn a year earlier. Revenues from equity underwriting at Morgan Stanley in the quarter were $148mn, down 86 per cent year on year.
One bright spot has been sales and trading with revenues from this business rising at both banks as investors traded heavily amid volatile financial markets.
Citigroup reports results on Friday, with Goldman Sachs and Bank of America following on Monday. European banks, which have less flexibility to reduce pay because of bonus cap rules, disclose earnings later in July.
David Konrad, an analyst at Keefe, Bruyette & Woods, said it was “logical” to expect some lay-offs this year but that he was not predicting “major swings”.
“I think management still feel like they’ve got a shot at the back half of this year,” he said.
Nevertheless, some bankers are bracing for the ritual cull of low-ranked performers later in the year. It is a normal occurrence on Wall Street but one that was less severe since the start of the coronavirus pandemic due to the unprecedented level of dealmaking.
“For the last two or three years banks just haven’t been doing significant reductions in forces or big lay-offs,” said Stefan Pillinger, managing director at recruitment firm Pinpoint Partners.
“If you were a bottom 20 or 30 per cent performer you probably got a bad bonus but you wouldn’t be laid off.”
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