Lean pickings for Europe’s bankers

London — A mix of global economic unease and geopolitical uncertainty means optimism is in short supply among bankers from the City of London to Frankfurt’s “Mainhattan” financial district.

Even rainmakers renowned for seemingly conjuring deals from nowhere are struggling to see ways to work their magic and drag investment banking revenues out of the doldrums.

Finance executives, consultants and headhunters interviewed by Reuters predict subdued deal flows, modest bonuses for most and heavy job cuts in 2024.

Fabrizio Campelli, head of corporate bank and investment bank at Deutsche Bank, said that 2023 “will ultimately be one of the lowest corporate finance fee pools in modern history”.

The $2,669bn of deals struck so far in 2023 globally is the lowest since 2005, Dealogic data shows, while in the Europe, Middle East and Africa region, the $616bn of deals that have been completed is the lowest since 2004.

It is not only corporate deal making that is on the back foot. Banks are wary profits will come under pressure from tighter regulation, including tougher capital requirements dubbed the “Basel endgame”, which are set to be rolled out by global regulators from 2025.

While consumer lending has boomed due to central bank policy moves, margins are now in retreat as interest rates peak and competition for deposits intensifies.

“Overall, the outlook for the next few years for banks is flat revenue,” said Ronan O’Kelly, partner and head of corporate and institutional banking for Europe at consultant Oliver Wyman.

Cost cuts

Banks have already turned to cost cuts to try to weather the downturn, which in a people-intensive business means job losses.

Global growth is set to fall from 2.9% in 2023 to 2.7% in 2024 before picking up in 2025, the Organisation for Economic Co-operation and Development said on Wednesday.

“Cost [cutting] is the biggest single lever that banks can pull to bring returns to where they should be,” O’Kelly said.

Barclays is weighing cutting up to 2,000 back-office jobs in addition to layoffs across its UK retail, corporate and investment bank, Reuters reported, while rival Lloyds has put 2,500 jobs at risk. Challenger Metro Bank said it could axe as many as one in five jobs.

Major headcount contractions are also expected at UBS and Citi amid big restructurings.

Workers’ unions, however, say banks are overstating their problems after some reported record profits in 2023.

Dominic Hook, national officer at Britain’s Unite, said he was fed up with them “pleading poverty”.

“The short-term approach of slashing workers, offshoring and outsourcing services has been shown to fail everyone from local communities to small businesses,” he said.

Bonuses

The dearth of activity means bonuses for 2023 are likely to disappoint, though some banks may be more generous to retain talent in case of a sharp rebound, with Goldman Sachs among those weighing hikes despite a dismal 2023.

“At relatively quiet times like these, it is still important to have the best people who are ready for when the market picks up again,” said Vis Raghavan, CEO for the Europe, Middle East and Africa region and co-head of global investment banking at JPMorgan.

Morgan McKinley’s London employment monitor showed a 31% fall in financial services vacancies year on year in the third quarter, though some 52% of UK financial firms still plan to hire in the next six months.

One of those predicting an uptick in business in 2024 is Stephane Rambosson, co-founder of headhunter Vici Advisory.

“Activity should be up next year, so if you don’t pay your best people you risk losing them,” Rambosson said.

To reward the bankers who do remain, Deutsche Bank CEO Christian Sewing has called on the EU to consider following Britain’s lead by removing caps on variable compensation.

Santander chair Ana Botin told an event last week that such reforms would help banks to better align staff remuneration with shareholder returns.

Volatility

Wars in Ukraine and the Middle East and tension between the West and China have led to caution in boardrooms, slowing investment and deal making, while putting all but the most pressing refinancings on the back burner.

“It’s not a terrible time to be a banker but you can’t keep everyone busy and as productive throughout the cycle,” JPMorgan’s Raghavan said.

“That said, there’s $6-trillion in debt that needs to be refinanced over the next two years and banks will be doing that work, but that is just flow, and the alpha is not in the flow,” he said, with “alpha” a measure of banks’ moneymaking advantage over competitors.

Looming elections in the US, India and Britain in 2024 are compounding the corporate inertia.

While London, Europe’s leading finance hub according to the Global Financial Centres index, is partly through reforms to boost its competitiveness after Brexit, recent political ructions have done lasting damage, several bankers said.

Though uncertainty can stymie activity, it can also lead to market volatility that can boost trading teams, which could provide a welcome lift for banks in 2024.

“Volatility in the wider world ... can benefit the [trading] business in terms of client demand, risk spreads — so that can be good for the business,” Oliver Wyman’s O’Kelly said.

While some bankers expect a tough 2024, others sense an opportunity for European banks from the Basel endgame.

US banks could be forced to release $15bn-$20bn in revenues that could be snapped up by rivals, according to an analysis by Oliver Wyman, with about half of those expected to be captured by other international banks.

So what is the forecast from the rainmakers?

“While the market has been slow, it’s not without promise. It’s like a spring you’re pushing down ... when it pops up, it tends to do so with a lot of energy,” Deutsche’s Campelli said. 

Reuters