The largest US and European investment banks are expected to cut staff and pay in their advisory and underwriting teams in 2023 as revenues continue to weaken.
Advisory and capital markets underwriting revenues have declined since the beginning of 2022 and hit a new low in the first quarter, according to the latest available market data. First-quarter investment bank revenues fell 22% year over year to $24.3 billion — the weakest first quarter since 2016 and the lowest three-month period since the third quarter of 2018, Refinitiv data shows.
Banks were left with too many employees and too little business after a sharp drop in M&A and capital markets issuance activity in 2022, coming off the record highs reached in the previous year. In 2023, the industry must readjust amid a more challenging and uncertain environment, sector experts said.
Banks did not react fast enough to their "declining fortunes" in 2022 and are still working on cutting head count to match weaker revenue levels, Alan Johnson, managing director of compensation consulting firm Johnson Associates, said in an interview. The industry is "pretty cautious" about underwriting and M&A business due to the weak economy and the uncertain market environment so far in 2023, he said.
Johnson Associates expects investment bank incentive pay in 2023 to be flat to down 10% year over year. Incentive pay across major US banks in 2022 declined between 20% to 30% on average, depending on the line of business.
The largest year-over-year drop was observed in capital markets underwriting teams at 45%, while advisory teams' incentive pay declined by about 20%, Johnson Associates data shows.
Pay for performance
Revenue-generating front-office staff at the advisory and underwriting units of the 12 banks fell 4% in 2022, compared to 1% declines in both the fixed-income, currency and commodities trading and the equity trading units of the banks, Coalition Greenwich data shows. Head count reduction across advisory and underwriting units was observed from the second quarter of 2022 onward on the back of dropping revenues, the research company, which is part of S&P Global Inc., said in its latest investment banking index report.
The decline in head count and bonus pay will widen the compensation gap between the strongest and weakest performers on investment banking teams, Logan Naidu, CEO of London-based recruitment consultancy Dartmouth Partners, said in an interview.
Amid the business boom in late 2020 and 2021, the spread between Tier 1 and Tier 3 performers' pay had become fairly narrow as banks were aiming to keep everyone happy, Naidu said. With the job market tightening now as business volumes fall, that spread will grow with banks focusing on top performers. Weaker performers will either get less or no bonus pay and could be let go or leave of their own accord, Naidu said.
Staffing challenge for banks
The challenge for banks is to find the right staffing balance as the market could turn again in 2023, Naidu noted. The first-quarter turmoil could be a short-term bump in the road, driven by "natural market softening in the cycle" and weakened investor confidence after the collapse of Silicon Valley Bank in the US and the state-arranged merger of Credit Suisse and UBS in Europe, he said. Yet it could also be the start of a longer-term, six-to-nine-month recession as inflation remains high, Naidu said.
Federal Reserve officials expect the banking sector developments in March "to weigh on economic activity, hiring, and inflation," according to minutes from the latest joint meeting of the US Federal Open Market Committee and Fed governors. The extent of the impact is still uncertain, the US officials said.
To manage staffing challenges in 2023, big banks will likely "cut back dramatically on hiring" and rely on natural attrition and selective layoffs to trim excess head count, Alan Johnson said. According to Johnson Associates' estimates, overstaffing at major investment banks currently stands at about 5%.
Revenue drops extend into Q1
Investment banking revenues in 2022 dropped across major European and US banks, with French institutions being the only ones to book revenue growth, data compiled by S&P Global Market Intelligence shows.
Equity capital markets (ECM) underwriting revenues — generated from initial public offerings, follow-on public offerings, rights issues and other equity issuances — fell the most across the board, according to figures released by banks that report the results separately from debt capital markets (DCM) and advisory revenues, the data shows.
In the first quarter of 2023, ECM underwriting revenues fell 11% year over year to $3.4 billion, the slowest opening period since 2019, according to Refinitiv. DCM underwriting revenues also dropped 11%, while M&A advisory revenues slumped 37% in the first quarter, the Refinitiv data shows.
Coalition Greenwich is a research company owned by CRISIL, which is part of S&P Global Inc.