Time flies when you are having fun, but investment bankers could be forgiven for thinking merriment passes at the speed of light. Last year, the hiring party rapidly descended into redundancies. What are the chances of the festivities resuming in 2005?
Slim is the unfortunate answer. In the face of weak equity markets, a declining dollar and twin US deficits, there is cause for despondency. Vasco Moreno, director of research at Keefe Bruyette & Woods, an investment bank, believes economic conditions make imminent hiring unlikely. He said: "It's difficult to see much investment banking recruitment in 2005."
The year begins with a hangover. At the end of 2004, Deutsche Bank, Commerzbank, Dresdner Kleinwort Wasserstein, Credit Suisse First Boston and JP Morgan cut jobs. Many of those concerned have yet to be informed of their fate. Deutsche is expected to spend two years sacking some 2,000 investment banking staff. To make matters worse, additional cuts may be announced in the next few months. Davide Taliente, a director at Mercer Oliver Wyman, the consultancy, believes more are needed. He said: "Second-tier banks have trimmed. Many have not trimmed enough."
Taliente said corporate finance departments were overstaffed by as much as 15% to 20%, and cash equities divisions by 5% to 10%. Michael Moran, chief executive of Fairplace Consulting, an outplacement provider, said redundancies in cash equities were likely. He said: "Banks have stuck with equities in the assumption things would get better. They haven't. This year will be a time for strategic decisions."
Nevertheless, while banks retrench in some areas, they will go on hiring in others. As corporate financiers and cash equities salespeople send out their CVs, specialists in niche areas, such as programme trading, prime brokerage, structured products, leveraged finance and high yield, are likely to have headhunters knocking on their doors.
One headhunter specialising in structured products search said demand for people to work with derivatives, such as single tranche collateralised debt obligations, was growing strongly. He said: "It's an area that had very few people in it a few years ago; now everyone and his dog wants to be active there. This year will be very, very busy: the orders are already pumping in."
CSFB's plans, announced last month, focus on leveraged finance, structured products, securitisation, M&A and initial public offerings. Bear Stearns is in a three-year programme to add 200 to 300 people, mostly in structured finance. Barclays Capital plans to hire 2,000 staff in 2005, many in derivatives.
Nomura intends to make additional equity derivatives appointments. In 2004, it hired 24 people to its European team. Mike Fullalove, head of product development and fund derivatives, said the bank planned another 25 equity derivative hires in 2005. "We've recruited for product development and structuring in Europe. This year, we plan to hire for European sales, and in the US and Asia," he said.
Calyon and SG will be among those hiring in high yield. Tim Hall, head of non-investment grade debt at Calyon, said the bank would add 10 to 12 people initially, with the possibility of others to follow. Ian Fisher, global head of debt syndicate at SG, said the bank would hire seven to eight people in high yield this year.
Recruitment plans are shaped by the expectation that conditions in 2005 should match those in 2004. Fullalove said poor volatility and low interest rates were likely to continue driving demand for equity derivatives. Hall said low interest rates should also favour robust high-yield issuance.
Michael Johnson, the newly recruited co-head of leveraged finance at BNP Paribas in London, said leveraged finance would remain strong this year and that IPOs would also make a comeback. He said: "In 2005, we are likely to see more receptive equity capital markets and more interest from trade buyers." Johnson is looking for three senior and two junior people for his team in the first quarter.
Second-tier banks are likely to lead the hiring in 2005. Europe's universal banks are eager to broaden their products. Hall said Calyon's move into high yield would help make the most of the bank's balance sheet. He said: "In nine out of 10 cases, the banks underwriting the high-yield offerings are also creditors to the issuing company."
James Freeman, president of Freeman & Co, a US banking consultancy, said second-tier banks were hiring to build a transatlantic presence. Barclays Capital is expected to make appointments in the US, while Bank of America and Bear Stearns are set to hire in Europe.
Staff shortages in high yield are driving up hiring costs. "It's a challenging labour market," said Hall. A similar scenario is playing out in synthetic products, where lower spreads are driving out margins, as chronic staff shortages boost salaries. "There will be increasingly desperate scrabbling and generous deals to bring in new people," said one headhunter in the area.
While second-tier firms scramble for the likes of derivatives structurers and salespeople, recruitment at bulge-bracket banks is likely to be sedate by comparison. Alan Johnson, managing director of Johnson & Co, a Wall Street pay consultancy, said leading US banks were not the irrepressible optimists they once were. He said: "Banks were always looking for an excuse to hire. This time they are looking for an excuse to wait. It's a big change. I've watched this industry for years and I've never seen anything like it."
Now that fun has gone, it may be some time before it returns.