12/27 10:42
Morgan Stanley, Other Investment Banks See No Rebound (Update2)
By Christine Harper
New York, Dec. 27 (Bloomberg) -- Morgan Stanley, J.P. Morgan Chase & Co. and other securities firms say there will be fewer investment bankers a year from now as the industry extends a two- year revenue plunge of 40 percent.
``The odds are we've got another tough year ahead of us,'' Stephan Newhouse, co-president of Morgan Stanley's institutional securities business, said in an interview. ``No one anticipates a dramatic return to the levels we saw in 1999 and early 2000.''
About $260 billion has been wiped off the market value of the top 10 securities firms since the end of 2000, a record year for the earnings of firms selling bonds, stocks and advice on mergers. That's more than the combined current value of Citigroup Inc., Goldman Sachs Group Inc. and Merrill Lynch & Co.
Mergers declined 29 percent this year to the lowest level since at least 1998, leading to a drop in sales of securities used to finance acquisitions, Bloomberg data show. Global share sales dropped 17 percent; international bonds fell 13 percent.
Investment banks have reduced their head count by 15 percent in two years, according to Ted Moynihan, a consultant at Oliver, Wyman & Co., which advises financial services companies on strategy. Merger bankers were hardest hit, with as many as 25 percent cut in 2001 and another 25 percent in 2002, he said.
Cutbacks at securities firms -- totaling some 100,000 employees worldwide in the last two years -- haven't been deep enough, some bankers say. Staff reductions have not kept pace with revenue declines.
Shares Decline
``The economic environment will remain difficult next year, and the investment- banking environment may not be substantially different from what we've seen in 2002,'' Walter Gubert, chairman of the investment bank at J.P. Morgan, said in an interview. ``The third-tier players are going to have to exit, and that may reduce capacity.''
Securities firms' shares fell today. Morgan Stanley had dropped $1.16 to $40.32 by 10:40 a.m. New York time. Goldman Sachs shed $1.01 to $68.54, J.P. Morgan lost 39 cents to $24.06, and Citigroup declined 64 cents to $35.38.
Credit Suisse Group, the parent of Credit Suisse First Boston, dropped 1.6 percent to 30.1 francs ($21.50) in Swiss trading, extending its decline this year to 58 percent -- the biggest fall among major securities firms. Lukas Muehlemann was replaced as CEO of Switzerland's No. 2 bank in September.
Some medium-sized banks have already shut securities units, or exited markets where they lost money.
Closing Businesses
FleetBoston Financial Corp., the seventh-biggest U.S. bank, closed its Robertson Stephens Inc. investment bank. ABN Amro Holding NV, the largest Dutch bank, shut down its U.S. equities business. Societe Generale SA, France's third-largest bank, closed its Asian equity sales and research business.
``For a lot of banks it's difficult to admit they're going to close down,'' Bob Diamond, head of investment banking and asset management for Barclays Plc, said in an interview. ``What we're seeing now is they're reducing footprint. That's a step toward folding back into domestic markets.''
Even the top 10 publicly traded investment banks as ranked by their position in global league tables -- such as Merrill Lynch, J.P. Morgan, and Credit Suisse First Boston -- may seek mergers to reduce costs, some bankers said.
``There will be fewer top-tier players,'' said Morgan Stanley's Newhouse. ``Firms that are in distress will be looked at as opportunities by people who want to fill in their geographical footprints or product lines.''
Goldman Sachs was the top-ranked firm for mergers and stock sales this year, and Citigroup's Salomon Smith Barney division was first in bonds, Bloomberg figures show.
Revenue Slides
Goldman's revenue from takeover advice and underwriting still fell 26 percent, and the company eliminated 2,938 jobs -- 13 percent of the total. Both Goldman and Citigroup shares have lost more than a fifth of their value this year.
Firms have also trimmed costs by reducing pay. Bonuses were eliminated altogether for many bankers, and they were cut about 50 percent on average this year, headhunters and bankers said.
Goldman's compensation and benefits fell to 41 percent of revenue at the end of November, from 50 percent three months earlier, according to the company's earnings report. Merrill Lynch had cut the ratio to 51.1 percent by Sept. 27, from 53.6 percent a year earlier.
The cost reductions are beginning to buoy earnings. Goldman, Merrill and Lehman Brothers reported profit gains for their most recent quarters.
Cost Reduction
Some firms are concerned about cutting too much. Morgan Stanley, which last week reported its ninth consecutive drop in profit, reduced fourth-quarter compensation expenses by 19 percent compared with 27 percent at Goldman.
``This is not like a manufacturing industry where you can shutter plants and then simply start them up again when demand picks up,'' Morgan Stanley's Newhouse said.
Not everyone is convinced the outlook is gloomy.
Sanford C. Bernstein & Co. analyst Brad Hintz said this month that U.S. brokerage firms will begin to see a slow recovery in 2003. Seth Waugh, Deutsche Bank AG's chief executive for North and South America, said he expects revenue to improve next year.
``People were surviving for the last six months, now they're starting looking around and saying `We've done what we can on the cost side, what can we do on the revenue side?','' Waugh said. ``I'm positive we're going to have a better 2003 than 2002.''
In a further boost, the 10 largest securities firms reached a $1.4 billion settlement with U.S. regulators last week that will end probes concerning allegations they misled investors by recommending shares of investment-banking clients.
Most banks are tempering any optimism.
``Our best guess on the environment is a very muted recovery through most of the year, accelerating toward the end of the year,'' David Viniar, Goldman's chief financial officer, said after the firm reported fourth-quarter results last week.
``Of course, that was (also) our best guess a year ago,'' Viniar said.
quote.bloomberg.com |
