By Paul Clarke
Of Financial News
When the coronavirus struck, the world's biggest banks were united in promising to pause any staff-cutting plans. That's about to change.
The potential optics risk of stripping out jobs during the height of economic uncertainty is now outweighed by banks' need to cushion the financial blow of the pandemic.
"Banks are facing the double headwinds of increased loan impairments and a prolonged lower interest rate environment that will impact revenues," said Gary Greenwood, a bank analyst at Shore Capital. "Their highest cost base is staff, so the most logical thing to do is to cut more jobs."
Deutsche Bank AG's six-week job cut hiatus is over now that lockdown restrictions have been lifted, while Credit Suisse Group AG CEO Thomas Gottstein told Swiss newspaper NZZ that it could "get by with fewer staff" after Covid-19 and that its investment-banking unit had "optimization potential."
HSBC Holdings PLC paused a plan outlined in February to chop 35,000 employees. The bank is now coming under pressure from its board to make even deeper cuts than that, the Financial Times reported last month. A person close to the bank told Financial News that the removals have yet to restart. An HSBC spokeswoman declined to comment on the report.
Bankers, analysts and headhunters are predicting deep cuts in the second half of 2020, pressure on pay and an increased focus on automation and shifting roles to cheaper locations as the fallout from the coronavirus crisis weighs on already struggling banks.
Banks were given some breathing space in the first quarter after they cut more than 2,800 jobs, according to Coalition, which tracks the 12 biggest investment banks. This six-year high was almost entirely within European banks, said Amri Shahani, research director at the firm. The second quarter has been a different picture, with headcount largely remaining flat, aside from a little natural attrition, he added.
"With a few exceptions, almost every European investment bank needs to cut costs, and that's likely to be through headcount reductions in the second half," Mr. Shahani said. "European banks have become more vulnerable through the crisis, while U.S. investment banks continue to play last man standing and are unlikely to make deep cuts."
Deutsche Bank's Sewing said at its annual investor meeting that he was likely to cut more senior managing directors after reducing their number by 13% over two years. But at a conference on May 26, he said that the bank would be more careful about stripping out revenue generators and won't "sacrifice its front office capabilities" in the investment bank.
Pausing planned job cuts can be costly. Noel Quinn, chief executive of HSBC, told analysts during its first quarter earnings call that the redundancy hiatus delayed cost savings of about $380 million, while Deutsche's quick back-track on job cuts was a necessary step to keep on top of its cost-cutting targets, the bank's boss Christian Sewing told its annual general meeting on May 20.
Banks will be wary of cutting too deep, particularly those already losing ground to the competition, for fears that any benefits would be lost by the resulting slump in revenues, according to one partner at a large consulting firm who didn't want to be named because of client sensitivity.
"The first quarter proved that markets businesses need a certain scale to take advantage of volatility, so if banks cut too deep there's a danger of leading to a prolonged negative effect on the top line, which offsets the benefits of cost-cutting," he said.
"We were operating with a skeleton crew," added one director in equities at a European bank. "The crisis has taught us that maybe we cut a bit too deep."
The issue isn't just one for European banks.
"We expect it to happen," Stephane Rambosson, chief executive of banking headhunters Vici Advisory, said of potential looming both in Europe and the U.S. "The European banks are challenged, while U.S. banks haven't been able to execute their typical cuts throughout this year, which means a need to scale back. I expect it to be more around the junior MD level."
One senior investment banker at a large U.S. firm added that performance is a factor as well as costs: "As politically unsavory as it is to cut jobs during a pandemic, the reality is that we've been left with a bit of dead wood."
"U.S. banks are desperate to hire, but they need to cut the underperformers first, which they've been unable to do because of the pandemic," said one headhunter who works with large investment banks. "The working from home arrangements have exposed a lot of lazy or sub-par people, so banks have quietly been identifying who to cut when they're able to."
And banks may be more likely to get creative with staffing--as during the crisis some units outperformed others, leading to a shifting of priorities over resources.
"Banks will certainly commit to the job cuts they have already outlined, but it's questionable whether they will start new cuts," said the management consultant. "We're more likely to see some experimentation with headcount--increased use of offshore locations, moving people into new teams or sectors, while the sales teams of banks' markets divisions are more easily trimmed than traders."