Radical cost cutting is all the rage in investment banking as reports of massive layoffs at UBS
US-listed shares of UBS jumped nearly 20% in the first five trading days after the Swiss banking giant announced it would shed as many as 10,000 jobs and wind down the bulk of its fixed income trading operations. On Monday, Barclays PLC
According to the Goldman report, UBS is targeting a 57% reduction in RWA, Royal Bank of Scotland
Deutsche Bank's cost-cutting plan, announced in mid-September, also sparked a rally in the shares, lasting a few days and adding 10% to the German bank's market cap. Since then, however, the shares have moved sideways. RBS's cost cutting was announced in January. It also caused a big jump in the shares, though they gave up those gains in May before bouncing back in September.
What all this means so far, other than seemingly short-lived share price pops and out-of-work traders, remains to be seen.
JPMorgan analyst Kian Abouhossein argued in a November 5 report that the revenue opportunities from UBS's pullback would be "immaterial," for competitors--about $1.5 billion - $2 billion annually to be divided among six investment banks Abouhossein considers in the top tier. These include JPMorgan Chase
As a result, Abouhossein prefers second tier fixed income trading houses Credit Suisse
For Abouhossein, however, Deutsche Bank's announced restructuring doesn't rate a mention.
By contrast, Societe Generale analyst Dirk Hoffmann-Becking held up Deutsche Bank as a restructuring model, even as he upgraded UBS in a Nov. 1 report.
"The cost savings program is actually larger than the one at UBS relative to the overall cost base and obviously a lot less disruptive," he writes.
Hoffmann-Becking sees large potential revenue gains in fixed-income trading for investment banks as UBS effectively shuts down, led by JPMorgan (13.2%) Citigroup (11.8%) and Bank of America (9%). At the same time, however, he undercuts that projection by proclaiming himself "deeply skeptical of top-line driven investment cases in investment banking," adding "we assume zero revenue growth in all three investment banks we cover." Those three are Deutsche Bank and UBS, both of which he recommends, and Credit Suisse, on which he has a "hold."
Bernstein Research also takes on the restructuring in global investment banking in a November 15 report, combining the efforts of six analysts. While the report diagnoses the problems facing the industry, most of which boil down to tougher regulations, it has little to say about who will come out ahead.
"Choosing global winners and losers remains challenging because the capital markets banks do not face a level playing field. While Basel capital rules appear to be converging around the world, national regulations and potential new operating prohibitions differ," Bernstein's analysts write.
This is a cop-out. Just because the playing field is uneven doesn't mean Bernstein's analysts can't pick the winners. They list their recommendations: "Outperform" on Goldman, Morgan Stanley, JPMorgan, Citigroup, HSBC
Bernstein's analysts appear to differ from the others, however, in believing that the spoils left over after the defeated players leave the field will be worth having.
"As capacity is removed from the business, pricing should slowly improve," the Bernstein report states.
Still, this impossible-to-quantify Bernstein hunch is hardly something on which to trade. The best advice, as always, may be to stay away from investment banks altogether. Short-term traders will nonetheless try and guess who is going to be next to announce a major restructuring, since that has proven to lead to a jump in the share price for several companies.
That will be challenging, however, since analysts can't seem to agree on who has announced a restructuring and who hasn't. Remember that Soc Gen analyst Hoffmann-Becking loves Deutsche Bank's restructuring, while JPMorgan's Abouhossein doesn't mention it. And while JPMorgan's Abouhossein sees potential for Credit Suisse and Morgan Stanley to make further commitments to restructure, Bernstein's analysts put those banks in the "already announced" group.
"Already Credit Suisse, UBS, RBS, Goldman Sachs and Morgan Stanley have established expense initiatives which directly or indirectly cut back staff expenses in trading, and nearly every major capital markets firm has announced a plan to mitigate growth in risk-weighted assets," states the Bernstein report.
Most important, ultimately, will not be which bank says it is restructuring, but which actually pulls it off. A former C-suite executive at one of the above-mentioned banks recently told me winding down fixed income positions is far easier said than done. It may take years to wind down certain positions--indeed, look at Citigroup's Citi Holdings unit--and it is difficult for companies to resist the temptation to make use of the trading expertise they have on hand for the wind down to make new bets in the meantime.
All this talk of restructuring, in other words, may amount to relatively little in the end.