Investment banking slowdown raises fears of Wall Street belt tightening


Disappointing earnings reports from JPMorgan Chase and Morgan Stanley set the stage for a tense summer on Wall Street as bank executives grapple with whether to cut staff.

Lower investment banking fees had always been expected this year after a record high in 2021, but bankers were still hoping for above-average performance, telling investors as late as January that deal pipelines were healthy. .

However, the downturn was worse than expected. Thursday’s results from JPMorgan and Morgan Stanley fell short of analysts’ expectations largely because of a dearth of equity issuance in 2022. The slowdown follows a rush to 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 downturn is compensation. The company said it cut salaries and bonuses by 16% year-on-year in the division that includes its investment bank. JPMorgan said its corporate and investment bank’s equivalent expense line fell 2% in the second quarter.

Banks have so far been reluctant to consider broad workforce reductions to cope with declining deal flow, citing the need to sustainably invest in their franchises to retain talent and maintain market share. But lukewarm demand could force their hand, said Chris Marinac, director of research at Janney Montgomery Scott.

“Putting a positive face today can work, but it won’t last forever,” he said, adding that cost-cutting plans could be communicated to staff in the fall.

Bankers are already signaling the first signs of a tightening of the belt.

Some Goldman Sachs teams this summer stopped taking interns out for a team drink to save money, according to people familiar with the matter. The bank has also suspended the hiring of some replacements for bankers who left this year, the sources said.

Meanwhile, a few potential hires at Credit Suisse have been waiting weeks for their formal offer letters, according to people involved in the hiring process.

Credit Suisse and Goldman declined to comment.

“We could see freezes in certain skill sets or in certain areas where banks no longer need additional talent,” said Jan Bellens, head of global banking and capital markets at EY.

In a memo to staff and clients earlier this month, Jefferies chief executive Rich Handler and chairman Brian Friedman said the investment bank “will remain on high alert for top talent.” .

But they added: ‘People who underperform, aren’t fully engaged, have ethical misjudgments, or don’t constantly reinvent themselves and grow, will always be at risk.’

At JPMorgan, executives said they had no immediate plans to cut staff, but also declined to rule out future cuts.

“This is a business with a reputedly elastic expense base and obviously we will adjust it as we always do,” said chief financial officer Jeremy Barnum.

JPMorgan reported investment banking revenue of $1.35 billion for the second quarter, down 61% from a year earlier, while at Morgan Stanley it was $1.1 billion , i.e. 55% less than in the same quarter in 2021.

The decline was particularly acute in equity markets, as stock market listings dried up. At JPMorgan, stock underwriting costs in the second quarter were $245 million, down 77% from about $1.1 billion a year earlier. Equity underwriting revenue at Morgan Stanley in the quarter was $148 million, down 86% year-over-year.

A bright spot was sales and trading, with revenue from this activity increasing at both banks as investors traded heavily in volatile financial markets.

Citigroup publishes its results on Friday, followed by Goldman Sachs and Bank of America on Monday. European banks, which have less flexibility to cut wages due to bonus cap rules, report earnings later in July.

David Konrad, an analyst at Keefe, Bruyette & Woods, said it was “logical” to expect layoffs this year but he did not foresee “major changes”.

“I think management still feels like they have a chance for the second half of this year,” he said.

Nevertheless, some bankers are preparing for the ritual elimination of lower-ranking performers later in the year. It’s a normal occurrence on Wall Street, but less severe since the start of the coronavirus pandemic due to the unprecedented level of trading.

“For the past two or three years, banks simply haven’t made significant headcount reductions or big layoffs,” said Stefan Pillinger, chief executive of recruitment firm Pinpoint Partners.

“If you were in the bottom 20 or 30 percent, you probably got a bad bonus, but you wouldn’t be fired.”


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