Under the "trading shortage", Wall Street investment banks are brewing a third wave of layoffs, and Chinese employees have also been affected

A number of well-known Wall Street investment banks have reported layoffs since last year, but around May this year, the second wave of layoffs came again, Goldman Sachs, Morgan Stanley, JPMorgan Chase, Credit Suisse, UBS. But that's not the end of the day.

According to Yicai, it learned from a number of headhunters and practitioners in the investment banking department and research department of international investment banks, due to the dismal global primary market, the "transaction shortage" has seriously affected the profitability of investment banks, so the third wave of layoffs may still be inevitable in the future. IBD (Investment Banking Division), which had expanded significantly earlier, was the hardest hit area, from novices to managing directors.

It is worth noting that although some of the layoffs in investment banks involve China operations, they mainly affect personnel in Hong Kong.

A number of top investment banks have significantly cut staff and cut costs

A number of foreign media reported that due to the sluggish trading environment, Goldman Sachs is considering a new round of layoffs. According to people familiar with the matter, the company is studying cutting up to 250 people in the next few weeks, and some managing directors and partners will be affected. Another source said the timing of the layoffs could not be determined, but could occur within weeks.

For these "hands-on" investment banks, this is actually the third round of layoffs in less than a year. Goldman Sachs laid off hundreds of employees in September last year and about 9,1 more positions in January. At the end of March, Goldman Sachs had 3200,3 employees, down 4% from the end of last year.

As it takes longer for trading volumes to pick up, Wall Street banks are taking a fresh look at costs. Goldman Sachs CEO David Solomon reportedly said at a private gathering of company executives in January that he was wrong not to lay off sooner. Goldman Sachs unveiled a $1 billion cut plan in February, with $2 million coming from earlier layoffs and alternative hiring restrictions.

Goldman Sachs' most profitable business is investment banking, which has had a brilliant two years in 2020 and 2021, but has since slowed significantly, which is closely related to the challenging global macro environment. Investment banking sector revenue in the first three months of 2023 fell 3% year-on-year. In addition, Goldman Sachs' second-quarter earnings from equity and fixed income trading fell more than 26% year-over-year.

In fact, layoffs are commonplace in U.S. investment banks with a "wolf culture", such as Goldman Sachs, which conducts such reviews every year, but suspended during the coronavirus pandemic, and the ultra-low interest rates and the big bull market that began in 2020 have pushed some institutions to expand against the trend. Today, in the face of a federal funds rate of up to 5% and depressed primary market trading, layoffs and throttling seem inevitable.

The widespread new round of layoffs comes against the backdrop of Wall Street's downturn in the first few months of 2023. M&A activity got off to its weakest start in 10 years, curbing income from fees earned by investment banks. According to Dealogic, global M&A deals fell 48% to $5151.2022 billion compared to the same period last year. As early as 2023, this trend was already very clear, but at that time, many bankers hoped that the situation would improve in <>, but it backfired.

Morgan Stanley, which has not moved before, has also recently reported layoffs, which once exploded on social platforms - it is reported that Morgan Stanley will cut about 3000,<> positions this month. The agency told reporters it would not comment. However, some relevant headhunters told reporters that the personnel involved this time ranged from managing directors to analyst-level personnel, covering ECM (equity capital market), M&A (mergers and acquisitions), corporate finance and other fields. Among them, China business is also involved, mainly concentrated in Hong Kong's medical, TMT and other groups.

Globally, Morgan Stanley's first-quarter equity sales and trading revenue fell 14% year-over-year, while fixed income trading revenue fell 12% to $25.8 billion.

JPMorgan Chase, another top U.S. investment bank, is also cutting jobs, but by a relatively small amount, about 500 positions. The headhunter told reporters that the operation may not be over.

Recently, JPMorgan announced that it would lay off about 1000,5 employees after hastily acquiring First Republic Bank, which is headquartered in California. JPMorgan said at the time that it had fulfilled its commitment to First Trust Bank employees to clarify the employment status of employees within 1 days of the completion of the transaction on May 30.

J.P. Morgan said: "The vast majority of First Trust Bank employees will be placed to work at J.P. Morgan – either during the transition period or full-time. "Workers in transitional roles will be employed for up to 12 months, and employees who are not offered a new position will receive two months' pay and benefits, and will receive a lump sum payment and ongoing benefits. J.P. Morgan has approximately 30,<> employees worldwide.

Bank of America also plans to have about 40 Asian employees internally transferred to other departments (different regions or different business lines) to avoid direct layoffs. It is reported that the 40 employees are mainly junior employees, more than half of them are based in Hong Kong, China, mainly engaged in Chinese capital market related business, and a few are involved in global capital market business. The business adjustment was due in part to a contraction in Bank of America's Chinese mainland volume.

In addition, UBS suddenly announced the acquisition of Credit Suisse earlier, and personnel issues have also become a focus. According to the reporter, although the two institutions are still operating as independent entities, most Credit Suisse employees may need to leave, and UBS may also see a small number of layoffs.

The global market environment remains tough

If you want to ask whether the situation in 2023 will be better than in 2022, the answer may be no - interest rates are still high, economic growth has not picked up, and the only difference may be that there is an additional hot thread - artificial intelligence.

As far as the trend of macro interest rates is concerned, the Fed has raised interest rates by 500 basis points in the past year or so, which has led to a sharp surge in financing costs and directly led to the contraction of secondary market valuations, which in turn has led to the compression of primary market valuations and the sharp contraction of trading volumes.

However, it is difficult for interest rates to fall significantly in the short term. In the early morning of June 6, the high-profile Fed interest rate decision will be announced, and Wall Street Journal reporter Nick Timiraos, known as the "Fed soundboard", said last week that the Fed will skip the rate hike in June and prepare to increase it later.

However, because the road to fighting inflation is not smooth, even if the Fed waits and sees for the time being in June, there may still be 6~1 interest rate hikes after that. Goldman Sachs research shows that U.S. used car auction prices have still risen substantially in recent months, and used car prices are expected to increase by 2% month-on-month in the May CPI report. In addition, the alternative indicator of housing rent growth accelerated in April, increasing by 5.3% year-on-year (4.2% in March). Continued price increases on new leases are likely to keep housing inflation high in CPI and PCE. However, Goldman Sachs expects PCE housing inflation to fall from the current 3.3% to 1.1% in December 8 and to 4.2023% in June 12.

The primary market situation remains grim. "In fact, investment banks have been laying off employees for more than half a year, and they have laid off many rounds every few weeks. At present, PE financing is difficult, there is no transaction, and investment banks have no business to do. A Hong Kong financial industry headhunter told reporters.

In fact, last year, the primary market was already full of pessimism, and the delisting risk of Chinese concept stocks, the "killing valuation" of the global secondary market, and the risk of recession all led to a sharp slowdown in business volume, and this year has not significantly improved. This directly affects the investment banking business – mergers and acquisitions, leveraged financing, IPOs, etc.

Some private equity fund sources told reporters that there are mainly several major problems - most PE is difficult to sell the companies they hold under the current market conditions, because the market is too bad, the valuation of the companies acquired by PE is currently unacceptable to the market, and some companies are not willing to carry out a down round. For example, some industry insiders said that in 2021, the private placement valuation of most software companies was 100 times recurring revenue (ARR), and now it is a high valuation to have 10 times ARR in the market, and it is more difficult to cash out through IPO.

Another problem is the current poor economic situation and the scarcity of truly high-quality projects, coupled with high financing costs. This means that the investment risk is much higher than in previous years, and investment institutions will demand higher IRR (internal rate of return), which makes institutions more picky about projects.

The more critical problem is the difficulty of financing. For primary market funds, new funds are difficult to raise. Given geopolitical risks, some Asian investment projects are also difficult to obtain financing from the United States. In contrast, investors in the Middle East, Southeast Asia and other places have a relatively higher risk appetite for such projects.

Source: Yicai Author: Zhou Ailin