The pay and job slashing by big investment banks could mean a lack of capital to use for investments, or a lack of trust int he banks to handle that capital.
Citigroup Inc. (NYSE:C) slashed its investments bonuses in the fourth quarter of 2012. The news comes in the wake of a tough earnings report, which was revealed yesterday. The company’s fourth quarter 2012 results was far below the expectations of investors, and hurt confidence in what had been seen as one of the strongest domestic banks.
In a statement today, Citigroup Inc. (NYSE:C) said that bonuses in its European and Asian investment divisions were down by 20% on average, while bonuses in its US based branch of the same division were reduced by an average of 10%. The cuts in bonuses follow similar decisions at many of the world’s major banks.
Barclays PLC (LON:BARC) (NYSE:BCS), and Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) both cut overall compensation by around 20% in their investment banking divisions in the fourth quarter of 2012. Lowered returns, particularly from investments, spurred the move in the European banks as it did in the American ones.
Morgan Stanley (NYSE:MS) and Goldman Sachs Group, Inc. (NYSE:GS) are both planning to lay off large numbers of investment bankers this year, another sign of lean times in the industry. The problems in the industry are those cited by so many others, increased regulation, higher costs, European instability and slow US recovery.
The investment banking industry is hurting right now, and in order to make it the sector has made a group decision to slash bonuses and employment. The problem is that as compensation gets lower, particularly at the entry level, the less talent the industry is going to attract. That could mean a problem down the line.
For now, however, the industry is simply trying to boost profits, in an arena of falling revenue, the only way to maximize profit is to slash costs. That’s been the strategy for a couple of years now, and a lot of the time it resulted in healthy profits, but it is certainly kicking the can down the road.
Revenue at Citigroup’s European securities and banking division bled 11 percent of its revenue in 2012, while its Asian equivalent shed 2%. Revenue at its North American counterpart fell by around 19 percent, an extremely disappointing result, and one that does not bode well for the firm’s investment future.
Investment banking has been changed deeply by the financial crisis, and it probably has a great deal further to go before that change ends. While deep cuts in bonuses may seem like a good thing to many Americans fed up with the stories of bankers receiving prohibitive bonuses in recent years, the loss of revenue in the industry seems to indicate a lack of trust, or a lack of capital.
A lack of trust in investment banks as money managers would not be the worst thing, there are several other options for investors, none of them structurally better or worse. If the problem with investment banking is, however, a lack of capital in the industry, 2013 could be a bleak year indeed.