Traditionally fat expense accounts on Wall Street are about to get slashed as major banks set out to cut spending and staffing because of weaker markets and new regulation that will cut into their profits.
Goldman Sachs Group Inc plans to cut as much as US$1 billion in non-compensation expenses — costs not directly linked to salaries, bonuses and benefits — over the next 12 months, a person familiar with the matter said on Friday.
“We will turn over every rock,” the source said.
The bank, which currently employs about 35,400 staff around the world, will also review staffing levels and job cuts are “certain” to come over the next months, the source added, though the bank has not set a specific target.
Goldman Sachs declined to comment.
Trading desks across Wall Street are feeling the heat as new regulation forces banks to shut down some business lines, such as trading for their own account, or to reduce staffing in other areas — such as derivatives trading — which are set to become more streamlined and automated.
Bankers say it is still too early to tell what the precise impact of the new regulations will be, with many of the final rules still far from completion.
However, they acknowledge that no matter how the regulatory debate plays out, profitability across the sector will fall and that the days of double-digit return on equity — a key measure of banks’ profitability — are likely over.
A recent fall-off in trading volumes across major markets, which weighs on trading profits, is not helping matters.
“If volumes continue to stay where they are or get slower, and we think they are going to stay that way, then we would have to make some changes whether it be the capital, the headcount or to other expense items,” Goldman Sachs finance chief David Viniar told investors in April, after the bank reported a 72 percent drop in first-quarter earnings.
Over at Morgan Stanley, finance chief Ruth Porat aims to cut non-compensation costs by US$500 million on an annualized basis by next year, and targets double that from 2014.
In a presentation earlier this month, Porat said the bank had been going over its costs with a fine-tooth comb to identify potential savings — involving everything from BlackBerry use to consolidating legal entities.
“The next leg of this effort is a much deeper dive,” she said at the time.
Morgan Stanley also plans to cut the number of brokers in its wealth management unit beyond the 300 brokers that were eliminated in the first three months of the year, largely by pruning low performers among its formidable force of nearly 18,000 financial advisers.
The bank, which has said it wants to build up trading operations despite the overall weaker environment in that area, spent US$2.4 billion on non-compensation expenses in the first quarter, up 13 percent from a year earlier. Compensation and benefit costs fell 2 percent to US$4.3 billion in the period.
During the same time, Goldman Sachs spent US$2.6 billion on non-compensation costs, up 23 percent on the year, while its compensation and benefits bill shrank 5 percent to US$5.2 billion.
JPMorgan Chase & Co’s investment bank has no new cost initiatives beyond its usual push to reduce for technology and other non-compensation items, said an executive at the firm who did not have approval to speak about the subject publicly.
Since banker and trader bonuses are based on how much revenue they generate, compensation generally declines when business slows. JPMorgan’s compensation expenses in its investment banking division in the first quarter were 40 percent of revenues, at the top of the target range of 35 percent to 40 percent executives announced earlier this year.
Expenses and staff levels are under review at other major banks as well.
Bank of America Corp is planning “significant” layoffs within the next two weeks, said sources familiar with the banks’ plans.
Bank of America declined to comment, as did Deutsche Bank. Representatives of Credit Suisse and UBS did not immediately return calls seeking comment.
Some experts caution that not all is doom and gloom on Wall Street, saying fears of large-scale job cuts may be overblown.
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