Investment banks face huge lay-offs as downturn bites

The IPO market is closed. The M&A market is closed. In the City it has become a question of where, not if, the axe will fall

It is beginning to dawn on City folk that the dearth of mergers, acquisitions and stock market flotations so far this year will, before long, have to result in lay-offs. With no sign of activity picking up, the question is no longer whether there will be job losses, but where, and how savagely, the axe will fall.

It is beginning to dawn on City folk that the dearth of mergers, acquisitions and stock market flotations so far this year will, before long, have to result in lay-offs. With no sign of activity picking up, the question is no longer whether there will be job losses, but where, and how savagely, the axe will fall.

Investment banking is what is known as a highly operationally geared business - another way of saying that the cost base has to rise and fall directly in proportion to the level of business activity. When the markets were booming last year, corporate financiers were in huge demand among banks, which were keen to garner fees from floating technology companies spawned by the internet revolution. Banks were having to pay incredible salaries, generally accompanied by guaranteed bonuses, just to retain the staff. Those guaranteed bonuses are now coming back to haunt many banks.

In preparing budgets for 2001, it seems some institutions were betting that the long-awaited revival in the new issues market - which has been on its knees since last summer - would come sooner rather than later this year, in response to interest rate cuts. But the markets have continued to fall, despite rate cuts both here and in the US. By the same token, falling stock prices and volumes have seen commissions from equity trading dwindle.

"The situation is the complete reverse of last year," said one corporate financier yesterday. "The retail punter who kept the markets up last year is nowhere to be seen - unless he's a seller. We are nearly a quarter of the way through the year and institutions are just sitting on a lot of cash and not doing anything with it. There have to be some severe cutbacks. Our budget was based on January being 30 per cent above last year - although I don't know what they were smoking when they came up with that figure."

Another senior banker said: "We're probably looking at employee numbers in investment banking contracting by 10 per cent to 30 per cent globally."

Said another: "No one wants to make the first move, but sooner or later vanity is going to have to be put to one side. There's nothing in the pipeline, and headhunters who couldn't find you staff last year are now offering whole teams of people."

Some bankers reckon that corporate activity in general was down over 50 per cent year-on-year in January alone. With investment banks typically commanding cost-income ratios as high as 80 per cent, belts are now being tightened.

Many employees in investment banks have been disappointed by the cheques they have received in the annual February bonus round, in particular those at ABN Amro, the Dutch bank that reported lacklustre results last week. One employee said: "[ABN] seems to want to be a top five bank but also pay peanuts. It wants to have its cake andeat it."

A puny bonus cheque is usually the best way to encourage staff to leave of their own accord, thereby eliminating the need to make redundancies involving large pay-offs. But lay-offs have already taken place this year. Merrill Lynch - renowned for taking rapid action when the boom times end - embarked on a cull of analysts across all sectors.

At the root of the problem is the spread of a wait-and-see policy among fund mangers regarding the US economy. They have decided to sit on cash until it becomes clear whether the recent US rate cuts succeed in averting a prolonged recession, which may not be until this summer. With flotations having a long lead time, that has left bankers preparing for the worst.

"Investment banks are now wondering whether to plan for a three-month downturn, or an 18-month downturn," said one headhunter yesterday.

David Sedgwick, chief executive of Schroders, the UK fund manager, said yesterday: "If the US economy starts to turn mid-year on the back of US rate cuts, people may turn positive."

Still, we have yet to see announcements of huge job losses. If things are so quiet, why the delay?

One problem is planning. In theory. it should be easy to prune two members from a 10-strong team. In practice, it is fraught with difficulty. The value tied up in new issues and mergers and acquisitions teams resides in long-term relationships beyond the bank. And bankers are wary of repeating a mistake made by Merrills when the Asia crisis hit four years ago. Merrills sacked about 7 per cent of its workforce, only to hire them back within months when the crisis showed signs of abating.

But on this occasion, few bankers are optimistic that the downturn will be shortlived. "No one wants to cut 5 per cent of their staff, only to have to cut another 5 per cent a few weeks later," said one senior banker. "Making the selection is hard, and each time you are bound to get it wrong. Better to cut 10 per cent in one go after some careful consideration.

"Everyone is waiting for someone else to make the first move, and when it comes, it will be like a dam breaking."