With banks such as UBS, Credit Suisse, HSBC and Barclays Capital slashing their headcounts by record numbers in a bid to keep costs down, Gemma Godfrey, Credo Capital’s Chairman of the Investment Committee, tells Euromoney that this could hurt the banks’ profits.
“Most banks have previously cut jobs in order to stem losses or for consolidation, but not this time,” says Godfrey. “High capital requirements are now making banks more stable but less profitable, while regulation is making banks less flexible. While net profits are substantially down from before, headcount eats into the bottom line.”
Yesterday, UBS revealed that it would axe 3,500 jobs - about 5.3% of the workforce - as part of a programme that was announced on July 26 this year. The job losses are part of UBS’s plans to eliminate expenses of about SFr2 billion from its annual costs by the end of 2013. It intends to do this through redundancies, as well as natural attrition and further real estate rationalisation.
The cuts are not as severe as anticipated - estimates had run as high as losses of 5,000 people. About 45% of the reduction will come from the investment bank, 35% from wealth management and Swiss bank, 10% from global asset management, and 10% from wealth management Americas. The final number of redundancies is subject to employee consultation.
Swiss rival Credit Suisse also announced it will axe 2,000 jobs – about 4% of the bank’s workforce – after profits slumped. The bank said it would save SFr1 billion.
Other banks, such as Goldman Sachs, HSBC and Morgan Stanley have also revealed plans to cull jobs. However, HSBC is using the 30,000 axed jobs to boost profits instead of lessening losses, despite its pre-tax profits rise.
“Cuts to banks’ workforces also mean that it wipes out most of the results of aggressive expansion movements, following the false bubble in the markets post-credit crisis,” says Godfrey.
“However, this is by far the most sensible way to pare back on costs and it is not surprising to the market. In fact, a lot of the market sees this as a positive step, rather than a desperate bid to claw back at cash. However, it is unlikely the banks profitabilities will return to pre-credit crisis levels.”
Godfrey believes restrictions on bonuses have not only led to increases in fixed salaries and an inflexible cost base, but they have also failed to solve many of the wider issues the financials face.
“While high capital requirements are making jobs stable and job cuts are keeping costs down, these measures have done nothing to solve the problem of exposure to struggling EU economies, for example,” says Godfrey.
“Global bank exposure to Portugal, Italy, Greece and Spain (PIGS) is more than 15% of global GDP, with French banks being the largest holders of Greek debt. Funding needs are not being satisfied and the high capital requirements are not boosting confidence to encourage lending.”
Read more about bank profitability:
Banking isn’t working
Many of the world’s leading banks are struggling to cross a key threshold in their business – where their return on equity exceeds their cost of equity. That’s only likely to get worse as their capital requirements rise. The hopes of the industry are based on an improvement in market conditions. Right now, it’s struggling to make a convincing case for itself.