Rarely has a year been anticipated with such trepidation. Eschatological Mayan prophecies aside, there’s a clear reason to be fearful about the coming 12 months. If the eurozone somehow holds together and markets are somehow becalmed, 2012 could be ok. If it the eurozone doesn’t hold together and there’s a messy fissuring of the single currency, 2012 could be considerably worse than 2008.
There was an indication of precisely how the Eurozone might be sustained in the week before Christmas, when the ECB deployed its ‘big bazooka’ and lent €489bn for three years to 523 banks at an interest rate of 1%, without being particularly stringent about the collateral.
The Wall Street Journal promptly pointed out that most of this money will probably be used to roll over the €360bn of unsecured bonds that banks have becoming due in the first three months of next year. The hope, however, of people like President Sarkozy, will be that banks put the ECB’s cash injections to work by buying eurozone government debt. “Each state can turn to its banks, which will have liquidity at their disposal,” he suggested in mid-December.
This may yet prove wishful thinking. As Spiegel noted out, the ECB’s free cash and willingness to accept sub-par collateral could actually deter banks from buying government bonds, which are perceived as toxic for their balance sheets.
Either way, with the eurozone crisis imparting an unpleasant odour to proceedings, 2012 is hard to call. “The ongoing macro crisis inEuropeis the obvious swing factor,” says Darko Kapor, a partner at financial services analysis firm Tricumen. “These days, market sentiment seems to change on a dime; a prolonged period of optimism (or calm) could easily see a recovery in businesses that are typically depressed in volatile markets.”
The other issue for 2012 will be the long term revenue potential of investment banks under new regulatory capital requirements and with lower leverage. Banking revenues in 2011 were down substantially. In 2012, every bank will be trying to establish whether this is the new secular run rate or whether the previous 12 months were merely an aberration. If they decide upon the first, hiring will be very limited and additional job losses likely.
With these clear caveats, here are our predictions for 2012. This is where revenues and opportunities should, hopefully, be solid no matter what.
1. Flow fixed income trading (FX especially)
As UBS helpfully explained during its investor day, flow fixed income trading is still, ‘attractive’ or even, ‘very attractive.’
Headhunters say this could even result in hiring in businesses like FX. “If you look at FX trading, it’s one of the businesses that will be least hit by regulatory change,” says Christian Robbins, managing director of search firm Nicholas Scott. “If you’re working in a vanilla flow asset class – like flow rates or FX – there will be demand for you on the street,” he predicts.
In the event that one of the many eurozone break up scenarios comes to pass, there could even prove far more demand for FX traders in future: additional currencies will require additional resources.
2. Prime broking
Prime broking is another area that looks fairly bulletproof going into 2012. Various banks, from RBS, to Credit Suisse and JPMorgan have declared an interest in expanding their prime broking businesses next year, while Cantor has announced its intention of launching a prime services business in Europe.
In this April 2011 interview, Philippe Teilhard, global head of prime brokerage, at Newedge, helps explain the appeal: “For a long time prime brokerage was a cottage industry with very high returns coupled with the trading revenue made from the bank’s trading operations,” said Teilhard. “I think it is becoming much more of a competitive model, more of a fee business and more industrial with operating margins going down. Prime brokerage is growing in size, stature and scope. Now it is not about being just an equity prime broker. It is about delivering a non-conflicted global access product for clients whilst being a safe keeper of different types of assets such as cash, securities, margin assets for derivatives and the like – all of this across multiple instrument types such as securities, listed and OTC derivatives. It is a much wider range.”
Recruiters predict hiring. “All areas of prime brokerage will be big next year,” says Peter Harwood of Engage Search.
3. Central clearing
As with prime broking, so with central clearing. In 2009, G20 leaders agreed that, “All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end 2012 at latest.”
Progress in the EU has been delayed by disagreements over whether non-EU market participants will have unfettered participants to EU markets, but the issue is expected to be resolved in early 2012.
Many banks have already launched OTC clearing services and much of the hiring will be technology-related, but this is likely to remain an area of focus next year. “Central clearing will be an area of focus,” assures Harwood.
4. Electronic trading
Also hot, almost no matter what, will be electronic trading. As spreads decline, success in equities will be all about capturing flow and flow will be all about leading in electronic trading. “It’s a race to arms in the technology space,” says Hugo Sugden, a director at GQR (Global Quant Recruitment).
This appears to be confirmed JPMorgan, which, for example, has an ‘electronic build-out underway’ and plans to increase electronic trading revenues by 200% between now and 2015 (to $500m).
5. Senior management
As 2011 progressed, an increasing number of senior bankers called it a day. Goldman’s head of financial sponsors left after 25 years. So did Credit Suisse’s chairman of investment banking.
Expect a lot more of this once bonuses have been paid out. Anecdotally, we hear that a lot of senior bankers are fed up: there’s no fun left in banking, pay is falling, revenues are falling, regulation is rising, and they want to get out. Needless, to say this could prove a good thing for mid-ranking people who will finally get promoted.
Forget net headcount growth. 2012 will be all about banks reducing or maintaining headcount, whilst swapping out existing staff for better ones.
Most headhunters expect to make their 2012 revenues from this kind of upgrading. UBS-post bonuses will be a favourite hunting ground. So will RBS from the outset. Top performers from both banks will be skimmed off by rivals. Some businesses are in more need of upgrading than others.
7. Compliance and regulation
As with 2011, so with 2012: regulation, regulation and regulation will be the words next year. Goldman Sachs fired the gun on regulatory hiring in December, when it poached Martine Doyon, a specialist in European market rules from the FSA.
“The amount of regulation in 2012 from the FSA, the ESMA in Europe and the SEC in the United States that will impact the UK financial services industry will remain high,” points out recruitment firm Barclay Simpson, citing MiFID II, the Retail Distribution Review, the Capital Requirement Directive and the Alternative Investment Fund Management Directive among the legislation looming next year. Consultants, compliance specialists and regulatory accountants who can interpret and implement the new legislation will remain popular.
High yield may not do well in 2012, but some areas of DCM (UK investment grade) could be fine. Numis, for example, plans to expand its UK DCM offering next year in order to take advantage of UKcorporates’ need for funds.
The Financial Times pointed out in December that UK investment grade issuance rose 41% in 2011, even while eurozone issuance collapsed.
9. Financial Institutions Group bankers
2012 will be a year of deleveraging and disposals. Morgan Stanley analysts predict that European banks will deleverage to the tune of €1.5-2.5bn. FIG bankers are going to be very, very busy. Expect private equity funds and hedge funds to develop a sudden interest in individuals with FIG investment expertise as they buy up banks' assets.
10. Cash bonuses, with caveats
We’re going out on a limb here and predicting that more banks will be offering more in the way of cash bonuses in 2012. Cash has the advantage of allowing banks to control future costs more accurately. It's also cheaper – individuals in receipt of cash will generally accept lower payoffs. Credit Suisse, for example has already let it be known that it will be paying up to £172k in cash for 2011, versus a mere £33k previously.
However, before anyone gets too excited, we're expecting these increased cash bonuses to come with conditions. Think Jefferies, which is paying more cash and simultaneously threatening to claw it back from anyone leaving for a rival within the next 20 months. You may get more cash, but you'll lose it if you move.
11. Russian banks
Russian banks could also be hottish in 2012. We seem to have been here before, but both VTB and Troika have said they’ll be hiring next year. Troika has declared that it wants to add 25-100 people.
VTB wants to hire 100 bankers outside Russia, increasing its international staff by 25% and to open offices in Turkey and Bulgaria.
12. Liquidity management
We predict all things related to liquidity management will be hot.
As JPMorgan’s banking analyst Kian Abouhossein helpfully points out, a new global liquidity coverage ratio is being introduced on January 1st 2015, but banks will likely be obliged to adhere to it by the end of 2012 or 2013.
Liquidity management and regulatory capital specialists will almost certainly be hot as a result. See point 7.
2012 will also be the year of 'solutions'. UBS highlighted this in its fixed income strategy presentation: FICC credit solutions were deemed a 'very attractive' business for the future. As we pointed out in November, Goldman Sachs has also identified 'risk management solutions' as a very important area for 2012.
'Solutions' businesses mean different things to different banks and can simply be a proxy for the creation of tailored derivative products. Loosely, however, solutions businesses are about tailoring products to help corporate or financial clients deal with risk. Given that 2012 looks likely to be a particularly risky year, it's easy to see why solutions might be popular.