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Financial services recruitment has shifted into a low gear after a promising first half.

Conversations with recruiters suggest no one is going bust, but neither is anyone replete with business. A survey by the Association of Executive Search Consultants shows new mandates in financial services fell 5.1% in the first quarter.

Guy Davies, managing director responsible for the equity, investment banking and asset management business at Hogarth Davies Lloyd, likened the hiring climate with that of 1997, describing it as a bit of a non-event.

"The market hasn't performed as we had expected at the start of the year: there's no real theme developing. We're very busy, but the business is spread across a broad cross-section of product areas with some of the business being new hires, some strategic and some upgrading," he said.

Simon Vaughan Edwards, an equities recruitment specialist at Alexander Mann said: "It's relatively quiet although we continue to be busy with specific upgrades across all functions."

What went wrong? According to the Boston Consulting Group, the first quarter of 2005 was the best for equities trading since 2001, when revenues rose 24% on the last quarter of 2004. HSBC revealed plans to add 100 people for equity research and hired Paddy Burrows from Deutsche Bank as global head of equity syndicate.

Since then equities markets have run out of steam and recruiters said banks such as HSBC had become more cautious. In research published last month, Credit Suisse First Boston analysts said European trading volumes fell in April and warned of the possibility of worse to come for equities divisions as weakened hedge funds paid less in fees.

The dearth of hiring is not restricted to the equities sector. Despite a handful of moves by bankers such as Michael Vereker and Giuseppe Bivona from Morgan Stanley, and Nick Wiles from JP Morgan Cazenove, recruiters said corporate finance hiring is down on last year. Jonathan Baines, a director at Whitehead Mann, which last week announced pre-tax losses of 19.6m (€29m), said hiring had mostly been a question of filling in gaps. "There has been little fundamental growth," he said.

Even junior corporate financiers, who were flavour of the month last year, appear to be going off the boil: jobs pages are no longer overflowing with advertisements for experienced associates.

James Heath, managing director of Greenwich Partners, a search firm specialising in junior appointments, said: "It's steadied off. There's still a need for high-quality junior candidates, but it's not rising exponentially like last year."

Vasco Moreno, director of research at Keefe Bruyette and Woods, the financial services specialist investment bank, said poor fixed-income markets were likely to be the icing on the lacklustre hiring cake. Fixed income was coming down, said Moreno; equities and corporate finance were unlikely to rise in counterbalance.

Ellen Yaffe, a fixed-income specialist and head of markets at the Rose Partnership, a London search firm, said most fixed-income businesses were right-sized already. She said: "Institutions are mostly taking the opportunity to shore up teams and fill holes." Hence, Royal Bank of Scotland and Barclays Capital, which announced fixed-income hires last year, have been less in the news in the past six months.

Within the fixed-income sector, Yaffe said most activity was centred on complex derivatives.

"The move into derivatives continues to be a big theme: most banks are hiring people who can create value-added high margin products," she said.

However, Russell Clarke, a director at recruitment firm Mantis Partners, said the emphasis for derivatives hiring had changed: last year banks were interested in structurers; this year hybrid salespeople were top of banks' shopping lists.

There are a few other bright spots on the horizon. Vaughan Edwards forecast Bank of America would start building an equity derivatives team. After Citigroup recently hired a team of corporate brokers from ABN Amro Hoare Govett, retaliatory hires are inevitable.

Some UK corporate finance headhunters even point to Germany as a potential source of activity, although this is disputed by their German counterparts. Andreas Weik of Hofmann Heads said the Frankfurt market was dead; Jürgen Merkel of MB Consulting said banks were selectively staffing up in the German mergers and acquisitions sector in anticipation of an upturn in the sector.

If banks have not hired already, recruiters said they were unlikely to boost numbers in the next months. The first half of the year is the busiest recruitment period, said Vaughan Edwards at Alexander Mann; thereafter people have accrued more substantial bonuses and banks are less willing to buy them out.

This did not hold entirely true in 2004, when institutions such as Barclays Capital and Nomura continued hiring through to December. But few are expecting an Indian summer this year. Analysts at Credit Suisse First Boston describe the investment banking industry as entering a soft patch; JP Morgan and Morgan Stanley have warned of lower than expected profits.

Now may be the time for Europe's financial services recruiters to book a long holiday.

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