First quarter economic numbers are out in the U.S. with very disappointing news. Adding to this, strategists are sending messages there is not a economic recovery program which can change the current situation leaves Wall Street in a serious predicament.
Forthcoming Wall Street banker job cuts are looking probable since global economic numbers are impacting potential earnings for any capital raising and lending.
The response from investors, consultants and analysts is that they are seeing banks showing revenue declines as customers have less earnings to bring into their accounts.
With jobless claims of 383,000 reported last month and dismal reports of a mere 69,000 new jobs created, the income loss deficit is now impacting major banking institutions. We see this certainly from the fact that the ADP report showing private-sector payrolls only increased 133,000 in May. Giving businesses less to extend to their employees who in turn have less to place in their bank accounts.
Bank of America (BAC) stock share posted a 7percent increase for today, however the past month has experienced a 20 percent decline. Fifth Third Bancorp (FITB) posting a 3 percent gain today and also a 14 percent decline over the past month. Wells Fargo & Company (WFC) posted a similar gain of over 1 percent today and a monthly decline of over 9 percent.
“If things don’t get better, then I would expect staffing levels to come down for sure,” said Alan Johnson, chief executive of Wall Street compensation consulting firm Johnson Associates, who estimated that banks may cut another 5 percent of their workforce by year’s end.
“When banks do that reassessment, it will go beyond just the short-term economics. They’ll be asking, ‘Where is the global economy going? And is there going to be a recovery, or more of a struggle than a recovery?'”
This past week Goldman Sachs Group Inc (GS) let go several dozen of their securities division employees, including managing directors resulting to a little less than 50 employees cut world wide.
Morgan Stanley (MS) source released news today that they will lay off a “modest” number of employees in their banking and trading divisions and will also occur in their international divisions.
DISCOURAGING SECOND QUARTER FIGURES
China, India, Brazil and Spain is experiencing poor banking business performances resulting in one crisis leading to the next and in this case one quarter to the next. All of which have led to lowered trading volumes, lower interest rates on loans all of which translate to lower lending profits.
JPMorgan analyst Kian Abouhossein predicts a 32 percent decline in global banks’ trading revenue from fixed income, currency and commodities during the second quarter, along with a 14 percent drop from equities trading and a 17 percent drop from investment banking.
With lower lendable profits margins has led to a decline in global acquisition and merger markets for global financial services. Since the second quarter of 2011 global equity issuance is down 31 percent, global mergers and acquisitions market declined 26 percent, and debt issuance has dropped 9 percent.
Facebook’s $16 billion IPO introduction lowered interest by investors including others bringing IPOs to the market. Proceeds from offerings are down 45 percent to date with $52.9 billion from the previous year.
The underperformance of Bank of America (BAC.N), Fifth Third Bancorp (FITB), and JP Morgan Chase (JPM) has resulted in their cutting their estimates on May 21.
“It’s just the perfect storm: You’ve got zero rates which are unheard of, squashing net interest margins like never before in history; the greatest regulation ever limiting fees, raising costs, demanding more capital; and then you’ve got a brewing economic disaster in Europe,”said JPM Securities Analyst, David Throne.
“They’re getting hit on all fronts, really. There’s literally not one thing to be happy about.”
He said that he expects there will be “single digit” percent job cuts before the end of the year.
Goldman Sachs was able six years prior to 2011 to produce equity returns six times higher due to 11,000 fewer employees. Chief Financial Officer David Viniar in February mentions “Many investors remind us that our 2011 revenues were more consistent with revenues that were generated six years ago, but our headcount is higher and our profitability is lower.” He said also “That is factually correct.”
Viniar said their additional employees are needed for expanding their world client base. Employee compensation though represents their single most expense cost for banks and job cuts will represent their easiest method for Goldman to boost their competitors profits.
Bank of America’s closing share price of $7.02 on Friday represented just 35 percent of stated book value of $19.83 per share as of March 31.
Citigroup and Morgan Stanley on Friday both closed at 41 percent of book value. JPMorgan closed at 67 percent of book value, while Goldman closed at 69 percent of that number. Of the six largest U.S. banks, Wells Fargo was the only one trading at a premium to book value, being 19 percent above it at $30.16.
Financial advisors are now sending warning messages to their clients against purchasing additional bank stocks even with the discounts, including Frank Braddock, Financial Adviser for JHS Capital Advisors.
“At the end of the day they have got to generate earnings from loans and sales, and that’s just not happening,” said Braddock. “For our clients, the risk in bank stocks is just too big right now. Yeah they’re going to have to cut jobs, but how much can they afford to cut and how is that really going to help their profitability long-term? They can’t cut their way to revenue growth.”