Even though 2010 will hopefully be as good as the best bits of 2009, not everything will be quite as zesty as last year. Some things may even be worse.
Here's what we expect to deteriorate over the next 12 months:
1) Fixed income, currencies and commodities
While commodities are still likely to be hot
in 2010, the same cannot probably be said for fixed income. By the third quarter of 2009, banks like SocGen and BNP Paribas were already blaming narrowing fixed income spreads for narrowing margins in their fixed income division.
The danger in 2010 is that as spreads narrow and fixed income profits become more elusive, banks motivated to take additional risk in search of profits comparable to 2009. Analysts at Bernstein Research don't expect things to be that bad, however. They're predicting 'solid numbers' from credit trading in 2010 on the grounds that credit spreads remain historically wide, zero interest rates are encouraging retail investors to move cash into the credit markets and insurance companies are repositioning their portfolios in the wake of the crisis.
Some hiring is expected in the fixed income area in early 2010. Expect both UBS and RBS to be on the lookout for talent. Just don't expect as much hiring as in 2009.
2) Hedge funds in London
In what is undoubtedly a slightly hysterical take on the likely fallout of the European Commission's ever-evolving alternative investment fund managers' directive, it's been suggested that every single hedge fund could leave the European Union if the regulations go ahead.
With London home to over 80% of Europe's hedge funds, Mayfair would clearly be the biggest loser were this dire prognosis to come to pass.
Hedge funds' penchant for Geneva was already evident in 2009, with BlueCrest Capital Management and Brevan Howard both opening satellite offices in the city. However, while a slow demise is possible, a wholesale decampment in 2010 is not particularly probable.
"What people are missing is that it's rather difficult to move something that's already established. It's more that the majority of new start-ups won't be in London," says John Godden of hedge fund advisory company IGS Group. "It won't necessary have much of an impact next year, but it will have a huge impact in three to five years' time."
Regardless of whether FICC revenues fail to match the peaks of 2009, 2010 looks likely to be a year in which it becomes less easy to generate big profits.
Blame regulation. The FSA is pushing for strengthened capital requirements, including higher capital for banks' trading books in 2010, a combination which is expected to result in UK-based banks needing an additional 29b of trading capital by 2011.
At the same time, the Basel Committee has raised the prospect of restrictions on leverage ratios and countercyclical capital requirements.
In September 2009, JP Morgan analysts produced a report predicting that various regulatory initiatives (eg. Stressed VaR capital limits, OTC post trade transparency and securitisation capital charges) could reduce ROE from 15% to 11% by 2011. In order to remedy this, they predict banks will need to a) reduce costs per head, b) reduce headcount, and c) reduce equity allocated to the investment banking business. See the (large) table below for more information.
Source: JP Morgan
4) Commercial property
According to the Bank of England, 2010 will see a mass sell off of commercial property at distressed prices, while this could be good news for distressed real estate investors such as Clavis Walden Investments (established August 2009), London & Stamford Max Property, or Orchard Street Investment Management, it's unlikely to do many favours to banks' balance sheets.
According to Bloomberg, Standard & Poors expects banks will need to writedown 23bn of real estate loans between 2009-2011, with losses rising to 37bn in the event of a "stress scenario."
5) RBS (again)
If 2009 was a bad year for RBS, 2010 may yet be worse. There's a possibility that the bank will be obliged to cut its bonus pool for global banking and markets staff to 500m following the bonus tax (one third of the level initially posited by the executive committee). This would unquestionably result in an exodus of staff and extreme difficulties filling the new holes and those that already exist.
Analysts at KBW are predicting a more than 20% reduction in revenues at RBS Global Banking and Markets division by 2011.
6) London (again)
2010 will the year that the 50% higher rate of income tax kicks in. It will also be the year in which the threshold for pension tax relief will be lowered and, in the words of the BBC, the rich will be "taxed until their pips squeak." According to calculations by the Chartered Institute of Taxation, someone earning 200k a year and making 20k a year contributions to their pension scheme, will pay an additional 19.4k in tax next year, bringing the total to 87k.
Combined with the bonus tax, European legislation, and an expected increase in banker bashing in the run up to the election, none of this is likely to do much for London's image as a nice hospitable centre for financial services.
7) Guaranteed bonuses
The G20 has done away with multi-year guaranteed bonuses of the kind never previously paid by Goldman Sachs, but favoured by small and up-and-coming organizations who needed to lure staff through their door.
These organizations may suffer as a result. On the other hand, they may find ways around the issue by framing guarantees that are not quite guarantees - eg. Promises to pay X if certain performance requirements are met. Lawyers say agreements of this kind are popular already.
8) Job hopping
While there's undoubtedly a lot of pent up dissatisfaction with existing positions and much demand to find something new and more exciting, once the initial rush of job changes has taken place in 2010, there's a possibility that staff turnover in financial services will settle into a lower equilibrium longer term.
This is because a) longer bonus deferrals may make people more inclined to hang around waiting for payouts earned in good years, b) longer bonus deferrals may make buying banks less inclined to buyout all that deferred stock, c) it's not clear how clawbacks will be treated in buyouts - should deferred bonuses subject to clawback provisions be purchased at face value?
None of this will deter banks from laying out what's needed to induce star performers to move, but it may have an impact lower down the curve.
9) Corporate finance boutiques
On one hand, 2010 is looking great for corporate finance boutiques: M&A is expected to rise and many have prepared for the predicted upturn by scooping up disaffected talent from investment banks. Analysts at KBW describe boutique advisory firms as, "the key beneficiaries of the consolidation and dislocation on Wall Street," and predict, "reasonably strong revenue and earnings growth in 2010, if not robust growth as we move into 2011."
However, when KBW analysts talk about boutiques, they're referring to the Lazards, Evercores and Greenhills of the world. Life may not be as sweet for smaller houses, caught between the ever increasing number of boutique competitors and banks' ability to attract deals with the promise of financing.
One boutique's willingness to sell out to Nomura may be indicative of the problems facing boutiques.
"We've had very difficult markets for M&A over the past 18 months. Lots of new boutiques have been set up, but those that don't have a strong position, either competitively or in terms of cost structure, are in trouble," a partner at one boutique told us.
10) Investment banking careers
There's been no sign of it yet (at a presentation in October at the LSE, banks' graduate recruiters said they'd had more applications than ever before this year), but the declining appeal of banking careers must be coming. Constraints on cash bonuses mean banking is no longer a route to unadulterated riches. It is also one of only a few careers (animal experimentation/MP)
which it is dangerous to confess to in the presence of strangers.