Most big US banks have now reported their results for the first quarter, and they weren't at all bad.
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If you're a candidate looking for a new banking job or a recruiter looking for a new client, there's reason to hope that the hiring outlook is improving. However, there is also reason to believe that it won't improve that much yet.
The positives are as follows:
Banking is back
As predicted by JPMorgan's European banking analysts before Q1 results were out, combined revenues across the investment banking division ( and equity and debt capital markets) rebounded year-on-year in the first quarter. At Bank of America, for example, investment banking fees were up 35% in the first three months.
The fine first quarter prompted Morgan Stanley to proclaim that it's now hiring opportunistically as deals get done. "The need to execute on cross-border M&A is here," said Morgan Stanley CEO Ted Pick. "I’m feeling good about this being early to mid-cycle for the classic investment banking capital markets business around the world," Pick added, pointing out that clients need to adjust to the supply chain disruptions caused by "two wars" and that financial sponsors and corporates are likely to get into bidding wars.
At Goldman Sachs, CEO David Solomon was also bullish. Solomon said the new cycle is being driven by AI, which will encourage dealmaking and capital-raising for the next five to ten years.
At Bank of America, Brian Moynihan said growth is being driven by the mid-market, where the bank now has over 200 bankers, compared to just 15 in the pre-pandemic days of 2018.
It's been great for some fixed income revenues
Revenues from trading and financing fixed income, currencies and commodities (FICC) at Goldman Sachs rose 10% year-on-year in the first quarter, driven by mortgages, structured lending, FX and credit trading.
Goldman CFO Denis Coleman said Q1 was a "very benign operating environment" with "good opportunities to risk intermediate on behalf of clients across geographies, across asset classes.
"Credit spreads were tightening, equity valuations were going up, and that provides a tailwind to our performance across portions of our global banking and markets business as well," Coleman added.
Macro trading revenues were less healthy, however. At Citi they were down 20% year-on-year.
Profits are back
Banks are making money again. Profits across Goldman Sachs rose 28% year-on-year in the first quarter. In Morgan Stanley's institutional securities business, they rose 24% over the same period.
The return on equity in Goldman Sachs' banking and markets business was a very healthy 18%. "There's no way to shade this. It was a strong quarter for Global Banking and Markets," declared Solomon.
In the circ*mstances, it might be expected that banks will start hiring again. And yet, before anyone resigns without a job to go to, it's worth outlining the reasons why optimism could also be premature.
Banks are still cutting jobs
Banks may be saying all the right things, but they are also cutting costs.
Citi, for example, has now cut 7,000 jobs, but it wants to cut 20,000 in total. 5,000 of those are to come from technology and support functions. Goldman Sachs cut 900 people between December and March; Morgan Stanley cut 400 people across the bank in Q1; Bank of America cut 650. HSBC and Morgan Stanley are currently cutting in Hong Kong.
This was not, therefore, a growth quarter for headcount. Banks are still engaged in "digital transformation" as technology and AI create opportunities to cut jobs. Morgan Stanley said cryptically that it wants to increase operating leverage in the "higher brackets" of its securities business.
Geopolitics
Although Pick said that the "two wars" are driving dealmaking, they are also encouraging caution. In his investor letter, released before Iran's bombing of Israel, Jamie Dimon remarked that, "Recent events, however, may very well be creating risks that could eclipse anything since World War II — we should not take them lightly."
Expansion in this environment is likely to be cautious.
M&A revenues are still low, other businesses are not thriving
The revenue recovery is not universal. In investment banking, it's limited to the equity and debt capital markets (DCM) businesses. In equities sales and trading, revenues increased only marginally. In fixed income sales and trading, revenues were up at Goldman but down elsewhere, as macro revenues suffered.
Jane Fraser, Citigroup CEO observed that revenues were "low across the street." Fraser said she was,"cautiously optimistic,” which didn't really sound all that bullish.
Deals were simply brought forward
Even in the areas of investment banking that did well in the first quarter, there were intimations that things weren't great. JPMorgan CFO Jeremy Barnum said, "quite a high percentage of the total amount of debt that needed to be refinanced this year has gotten done in the first quarter."
Fixed income revenues might not be sustainable
Even at Goldman Sachs, where fixed income sales and trading revenues were strong in the first quarter, there was caution that it might not endure. "I certainly wouldn't say this was what we'd expect to be an average quarter," said Solomon. Mean reversion may follow.
Barnum was more optimistic. But although he said higher markets revenues "seem to be the new normal" and that markets revenues have seemingly "stabilized at meaningfully above what was normal in the pre-pandemic period," he confessed there's some apprehension that there could be "downside" in the future.
People are being moved internally
Instead of hiring externally, banks are inclined to fill gaps by moving people internally. Bank of America has been doing a lot of this, for example, and it's not clear how many of its 185 new mid-market bankers joined from elsewhere.
There's still a staff overhang
Banks cut staff when investment banking revenues fell in 2022, but they didn't cut staff in proportion to the decline. Coalition Greenwich says operating margins in the investment banking division were 34% in 2019, but just 19% last year. As revenues recover, banks will want to get back to historic margins instead of hiring and adding cost.
Hiring is very targeted
To the extent that investment banking talent is being hired this year, it's only in key areas. At Citi, for example, the focus is mostly on "high growth sectors" like healthcare and technology.
Writedowns are becoming an issue
The commercial real estate monster is still lurking in the corner. At Bank of America, non-performing loans in the banking division went from $1bn in the first quarter of 2023 to $3bn in the first quarter of 2024, contributing to a 23% decline in net income in the business over the same period.
It's a long term play
Even the most bullish banking CEOs are admitting that a single strong quarter is not a sign of summer. "I am quite bullish about the full investment bank capability for those that have a global reach," said Pick at Morgan Stanley, before adding that, "it could take several years and have some lumpiness along the way. But I think the next three, four, five years will be quite active."
The capital rules are coming
Lastly, as they currently stand, the incoming Basel III capital rules will cause problems for US banks, and for their trading businesses in particular. Writing in this month's investor letter, Jamie Dimon said the new rules stand to increase capital requirements by 50% for major US banks and that this would discourage those banks from engaging in market making (sales and trading) activity.
Banks will be hesitant to invest until the rules are finalized.
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