If you work in an investment bank, anxiety is excusable. There’s a whiff of Schadenfreude in the air as pundits compete to predict all manner of imminent disasters. Meredith Whitney was at it again yesterday: this is the worst it’s ever been, Whitney proclaimed – banks are behind the curve when it comes to making redundancies; they need to catch up.
Yesterday’s ‘RBS Markets Investor Roundtable’, attended by John Hourican, RBS CEO of Markets and International Banking, and Peter Nielson, CEO of RBS Markets, was therefore illuminating. RBS has an investment bank that has already cut headcount 29% since the end of 2010. It has an investment bank that is removing 3,000 people in 2012 alone, and that now plans to eradicate an additional 300 positions to cut costs further. RBS can’t be accused of prevarication when it comes to redundancies.
Hourican and Nielson spoke at length on the future of investment banking headcount in general and their plans for RBS. These were the key points.
1. Investment banks are ‘existentially challenged’
Until it demonstrates that it can deliver an adequate return on equity, RBS Markets will remain, “existentially challenged” said Hourican and Nielson.
2. Forget growth and forget hiring to grow: it’s all about strategic tightness and consolidating strengths
The cost base at RBS Markets is on a, “very firm downwards trajectory,” said Hourican and Nielson.
In the new reality, Hourican said RBS has no intention of “pushing into new areas.” It will instead be “locking down” the areas it’s already strong in.
“These are interesting times,” Hourican said: “We’re reinventing our business with a lower cost base.” RBS will be focusing on its competitive advantages and building on its strengths, he added: there is going to be, “very little new involved.”
3. Forget banks’ “strategic tourism” and the associated guaranteed bonuses
In the past, banks were involved in what Hourican describes as, “strategic tourism.”
This is over and although Hourican didn’t say so, it has implications for banking careers.
As banks hunker down and refuse to develop new areas, there will be fewer opportunities for people to move from successful, established teams to start-up teams at rival banks.
In the past, these new teams were an important source of guaranteed bonuses and generous compensation arrangements as tourist banks sought to secure experienced people to build the new business. Now, the implication is that experienced people will either have to stay where they are or to move from one established team to another, in which case the pay premium will be less pronounced.
4. We’re in a risk and compliance employment bubble , which will deflate over the next two years
Echoing our interview with Klaus Woeste, head of financial services people change at KPMG, Hourican said that we’re currently in a situation of inflated compliance and risk employment and that this will not last.
Regulation has “eaten up” much of the cost efficiencies that might otherwise have become visible in the P&L, said Hourican.
In 2011, RBS invested heavily in change, business re-engineering and IT and data centres, he said. Now, costs are being diverted to regulatory and compliance issues. Headcount costs related to regulation and compliance will remain high for the next two years, but will come down thereafter. Nevertheless the ratio of back office to front office staff will remain stable at 2:1.
Woeste's verdict appears correct therefore: if you want to move into a regulation or compliance role, don’t wait too long.
5. The true cost savings from reduced headcount and reduced compensation won’t be visible for a while
Deferred bonuses are obscuring the cost savings banks have already made, said Hourican. Only when past deferrals have been worked out of the system will it become apparent just how much compensation has fallen.
6. The low interest environment is adversely impacting banks’ revenues from hedging activities
An analyst asked Hourican and Neilson if clients’ demand for hedges had fallen as a result of low interest rates. They agreed that it had.
“Hedging is a far less large piece of the business than it used to be,” said Neilson. Clients who used to hedge frequently are now delaying the need for hedging products until interest rates rise.
7. RBS wants to “rebuild” its “people platform”
On slide 12 of its presentation, RBS talks about “rebuilding the people platform” for global markets. On slide 26, it elucidates: rebuilding the people platform will include ‘transformational leadership programmes’ for middle managers, ‘refreshing and emboldening’ the graduate and junior levels, reducing management layers, and simplifying reporting lines.
8. Areas of focus
Within markets, RBS’s key areas of focus are: rates, FX, DCM and asset backed products.
Like other banks, RBS aspires to build a “low touch” electronic fixed income trading platform.