Redundancies: FICC primed for cuts

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Leading banks are slashing jobs. FICC looks likely to bear the brunt.

Job cuts among the leading global investment banks are coming through thick and fast, and could accelerate.

Despite a decent third quarter, investment banking revenues remain under pressure and the focus on cost-cutting is acute.

The reasons for this are clear.

First, the amount of business that clients are transacting has fallen sharply. Income from sales and trading of fixed-income securities, currencies and commodities has slowed markedly, while institutional investors remain skittish about a long list of macro economic tail-risks, not least the eurozone crisis and the US’s fiscal cliff. Such concerns have also hit equity trading, issuance and M&A advisory hard.

Second, new regulations on capital and liquidity are attacking banks on two-fronts: reducing their returns on equity, while forcing them to accelerate balance-sheet reduction and cutbacks on trading.

Given this, the 10 largest global investment banks have this year reduced their front-office staff in sales and trading, advisory and capital markets by 4%, according to Coalition, a research firm. Back-office cuts are set to be even higher.

Heading into the fourth quarter, no one should be surprised if a fresh round of job cuts is announced on top of those already from Bank of America Merrill Lynch, Barclays, Credit Suisse, Daiwa Securities,  Deutsche bank, Nomura, Royal Bank of Scotland and UBS, among others.

Looking closer at where those cuts might come, the once highly profitable FICC division is a prime target for downsizing and consolidation, particularly in sales. Total FICC revenues across the 10 largest investment banks reached $50 billion in the first half of this year, according to Coalition, down 12% against the first half of 2010.

The second quarter was particularly difficult, with FICC revenues of $18 billion, down almost 44% quarter on quarter, and around 18% year on year. Third-quarter revenues are expected to follow this trend, according to JPMorgan.

Coalition predicts that the fixed-income divisions at the 10 banks it covers will have 6.5% fewer staff at the end of the year compared with the first half.

FICC divisions are, indeed, being reshaped. Product-sales silos are being torn down and two roles merged into one.

Take macro-rates and credit sales, for example. Banks are engaging in simple cost-cutting whereby the best salesperson of the two products covering a single institutional investor, such as a Pimco, keeps their job, while the other, more often than not, the credit salesperson, is chopped.

With investor demand for credit so high, cash bond distribution is seen as a function that, ultimately, the derivative sales desk can handle. Time will tell if this pays off. In the meantime, investor clients might feel underserved.