The offices in downtown New York are filled with employees of successful Internet companies nowadays, instead of financiers – just like in the crisis of 2008-2009, banks are cutting their staff.
The world’s largest banks are experiencing another wave of staff reductions and layoffs, the largest seen in the current period of “post-crisis”. However, the reasons haven’t changed – while banks have better liquidity conditions now, employees are still being laid off to reduce costs and shut down business, either to lower risks or comply with requirements from regulators. The aggravation of the debt crisis in Europe has also put pressure on the financial sector.
A Race for Survival
Investment banks alone are planning to save about $10-12 billion by laying off employees, cutting wages, or reducing non-core assets over the next two years. These grim forecasts were released by experts from Morgan Stanley and Oliver Wyman, the international management consulting firm. The funding for investment banks, as seen on the balance sheets, is being reduced by $1 trillion as well, or 7% in the next two years.
Commercial banks are also trying to save money by cutting back in some of their less-profitable projects – most are now withdrawing from foreign markets, and European banks are trying to adapt to the higher Basel-3 capital requirements. Many banks are also being force to pay, by order of the court, because of their pre-crisis activity in the mortgage market. Deutsche Bank, the largest bank in Germany, assessed the risks of these payments at €3 billion, and its annual report assessed future payments at €2,2 billion.
In January, the Royal Bank of Scotland announced that it would be cutting 3,500 jobs over the next three years – most of these layoffs will occur in 2012. This applies to employees of both local and foreign bank branches. RBS is also restructuring the company on a large scale, and as part of that, it is preparing to sell the mergers and business acquisitions from the Hoare Govett brokerage division, some of their less-profitable assets.
The U.S. bank, Citigroup, announced late last year that, because of declining revenue, it will be cutting 4,500 jobs, approximately 1.7% of their total staff. “The financial services sector has been facing an incredibly hostile operating environment – there is an unprecedented combination of uncertainty in the markets, a long-term slowdown in developed economies, and the most significant changes in regulators’ requirements that I have ever seen,” says Vikram Pandit, the Chief Executive Officer at Citigroup.
Brian Moynihan, the President and CEO of Bank of America previously announced that the company would be laying off 30,000 employees (within the retail division and the technical departments) over a period of several years. And in 2011, large banks fired a combined total of 200,000 people, as compared to 58,000 in 2010 and 174,000 in 2009.
No Changes on the Eastern Front
The “Financial East” is suffering less from the crisis, but the effects are still there. The largest bank in the United Arab Emirates, Emirates NBD, is planning to cut 500-700 employees, or 15% of its staff. And the decrease in real estate prices from 2008-2009 had a negative impact on the bank’s balance sheet, a fact that is leading the bank to continue cutting costs. The third-largest Australian bank, ANZ Bank, is planning on cutting 1,000 jobs as well – the financial sector in Australia is experiencing difficulties due to the slowing local economy and the increasing costs of borrowing money from other countries.
Almost every month, HSBC reports its withdrawal from another market. In February, for example, it announced its intention to withdraw from the retail market in Japan. The bank also decided to curtail its activities in South Korea and Thailand. A month earlier, the bank announced that it would be shutting down its offices in Costa Rica, El Salvador, Honduras, and Columbia, as well as its previous intention to concentrate on major Latin American markets. In March, HSBC promised to curtail its activities in Slovakia by the end of the third quarter, and a program was created with the intention of reducing the bank’s staff, which includes firing 30,000 employees. It was announced in February that 11,000 employees already left the company.
KMPG experts believe that British banks must actively continue reducing costs, even at the expense of their personnel. “The year turned out to be more severe than any of us expected, and banks are going to have to work hard to turn things around,” said Michael Beale, a representative of KMPG. “From where we stand, we see cost reductions continuing, which inevitably points to employee cuts.”
The aggravation of the crisis seriously affected capital markets and, subsequently, investment banks. “Survival meant success for investment banks last years. If banks were able to simply raise their funds in stock or in the bond market, and get through their various merger & acquisition deals, that was considered a success,” commented Joseph D. Giarruputo, a Global Finance publisher.
The Asian division of the Goldman Sachs Group presented its parent company with an unpleasant surprise – losses, for the first time in three years. Reducing the cost of shares in their portfolio led to a reduction of income equivalent to 46% in 2011. Goldman Sachs has already cut 2,400 jobs around the world.
New York, one of the world’s biggest financial centers, felt a physical decline in bank activity: the volume of office rentals in Manhattan, in the first quarter of 2012, was only 5.7 million square feet (530,000 square meters) in total, the lowest figure in almost three years. This preliminary data was reported by Bloomberg (who cited Studley, a commercial real estate firm). Only the growth of IT and media companies prevented the further decline of the rental market, say Studley experts, particularly the demands from Internet giants, such as Google.
According to Studley experts, the so-called “creative” industry –communications, services, fashion business, and education and information technology – had average rent results about 42% higher than the financial sector, after the crisis in 2007. From 2000 to 2006 though, the picture was different – financier demands exceeded the demands of creative companies by 19%.
The Russian Oasis
After the collapse of the financial markets in summer and autumn of last year, there were a lot of discussions about layoffs in Russian investment banks. The first to be affected were local analysts in global bank subsidiaries. The shadow of the next wave of the crisis brought confusion into the ranks of financiers, including insurers. The “ANCOR Banking and Financial Services” study, published in January, revealed that, although 45% of those participants employed in the financial market were considered suggestions from labor market companies, many were not willing to change jobs because, in the event of a crisis, most new employees are laid off.
But the trend has not moved onto a massive scale as of yet – instead, the most concerning news is the freezing of the investment banking sector of the market, which was most affected by external conditions, in the second half of last year. Hovhannes Hovhannisyan, a strategist at “Troika Dialog”, says that Russia is the most risky market among developing countries, as it usually has a stronger reaction when there are uncertainties in the economy. After easing tensions with Greece, though, the situation can be compared to general anesthesia, the expert adds.
Alexander Zakharov, the Head of International Equity Sales at “FINAM” reported that layoffs in the investment banking sector last year were about 10%, which is not a “big deal”. However, most companies have stopped hiring new employees, say market participants. Often, the professional responsibilities of a laid-off employee were distributed among a group of colleagues – the exceptions were market players who needed to replace an entire team or those who decided to take advantage of the situation and hire more employees for a smaller paycheck.
According to Zakharov, this trend will continue in 2012, but the emphasis will change. Companies are beginning to reveal both expensive employees and directions which bring in less income. As a result, there can be “single” layoffs of well-paid employees. And due to the closure of the capital markets last year, areas of corporate finance bring in less income. As for the stock market, companies have ceased holding IPOs almost entirely. Naturally, the opening of the bond market allows skilled, fixed income professionals feel relatively secure in their position.
Now, Russian financiers rely mostly on the rising labor market, due to a break in the global financial markets and good growth prospects. At the same time, there is still no hope for investment bankers: if insurance companies reported an increase in their number of employees, traders and investment companies reported reductions in their staff.
Author: Elena Shushunova