2016 has not been gentle to investment banks. The first quarter was tough and the second quarter - with the exception of some U.S. banks' fixed income divisions, was tougher. Almost every bank has a cost cutting programme. Most banks are struggling to maintain revenues in key businesses and many are struggling to generate a healthy return on equity and are trading below book value.
So, where should you work now? That all depends upon your perspective.
- Based upon the EBA stress tests, you should work for Scandinavian banks
The chart below (from Deutsche Bank), shows European banks' core equity tier one capital ratio under the adverse scenario used by the European Banking Authority (EBA) stress tests.
According to the EBA, the best capitalized banks are all Scandinavian. Helpfully, therefore, the Scandinavian banks have been hiring. The worst capitalized banks are Barclays and SocGen, although Barclays claims there are mitigating factors.
Based upon KBW's forecast RoE and current price to tangible book value, you should work for Goldman Sachs, J.P. Morgan or UBS
Alternatively, if you want to work for a bank that has investors' confidence but isn't set up for a terrible fall because investors' are over-confident, Goldman Sachs, J.P. Morgan and UBS look like good bets.
As the KBW chart below shows, UBS and Goldman Sachs are both trading almost exactly at book value: investors have priced them just right. Both are also expected to a double digit return on equity by 2017.
J.P. Morgan is priced at 1.25x book value, reflecting investors' partiality to the stock. It undoubtedly helps that J.P. Morgan is expected to generate a 12% return on equity in two years' time.
By comparison, the banks in the bottom left of the chart are not for the faint-hearted. Deutsche, RBS, Barclays and Credit Suisse are all trading well below book value and are all expected to generate a fairly feeble return on equity by 2017. Unless things change, they may be forced to have a strategic rethink.
Based upon current cost ratios and cost cutting programmes, you should work for Citi's Institutional Clients Group (ICG) business
In 2016, almost every bank is cutting costs. Not every bank is doing so successfully - yet.
The charts below show 1) each bank's cost-revenue ratio for the first half of 2016 compared to the first half of last year, and 2) each bank's declared cost cutting programme.
With the exceptions of Barclays, Bank of America Global Markets, and Credit Suisses's IBD division, every investment bank saw its costs increase as a proportion of revenues in the first half of this year. So much for cost cutting.
Sometimes there were semi-mitigating circumstances: Deutsche Bank's global markets business suffered a goodwill impairment; BNP Paribas had to spend more on compliance; Deutsche Bank and Goldman Sachs had to spend money on restructuring charges (and, in the case of Deutsche, it's making external IT contractors into members of staff).
Even so, the implication is that - unless things change - banks will need to cut costs harder and faster soon. The exception here seems to be Citi, which doesn't have a cost target in its ICG business and has already achieved one of the lowest cost ratios in the business. Barclays' investment bank also looks pretty good, although Barclays does have a cost cutting programme underway. UBS says it's finished cost cutting in its investment bank, but it may need to rethink this as costs rise as a percentage of revenues.
Based upon Q2 revenues, you should work for J.P. Morgan's equities trading business
J.P. Morgan has spent the past few years focusing on growing its equities sales and trading business. That investment seems to have paid off: it had the virtue of being the only bank to increase revenues year-on-year in equities in the second quarter.
By comparison, Barclays, Deutsche Bank, Goldman Sachs and UBS all had dreadful second quarters in equities sales and trading. In the case of Barclays, this can be partially excused by the complete closure of its Asian equities business.
Based upon Q2 revenues, you should work for J.P. Morgan's fixed income trading business
In both equities trading and fixed income trading, J.P. Morgan far outperformed the rest. J.P. Morgan CFO Marianne Lake said the bank's fixed income division benefited from "a spike in volatility and volumes across all classes," with the rates business particularly strong. You want to work in J.P. Morgan's rates business, basically.
By comparison, the second quarter performances in fixed income sales and trading at Deutsche Bank and Credit Suisse look pretty woeful. Deutsche Bank made various excuses for the poor performance of its fixed income business, some more feeble than others.
J.P. Morgan's banking analysts suggest a pattern in second quarter fixed income revenues. Banks that have a big corporate business and that deal directly with corporate clients did ok. Banks that rely upon investors and other banks to place trades, didn't.
Based upon Q2 revenues, you should work in M&A at Bank of America
Lastly, Christian Meissner deserves a pat on the back at Bank of America. The U.S. bank did far better than its peers in M&A in the second quarter, and didn't do too badly in equity capital markets or debt capital markets either.
Once again, Deutsche Bank looks abnormally bad. Deutsche CEO Marcus Schenck said the bank's dire performance in M&A in the second quarter was because deals were postponed and that things should pick up in the third quarter once they go ahead.